CAF-2 · Chapter 8
Income from Business - Part Two MCQs with Answers
15 multiple-choice questions on Income from Business - Part Two 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 is explicitly EXCLUDED from the definition of a "depreciable asset" under Section 22 of the Income Tax Ordinance, 2001?
- A) A) Tangible movable property used for business
- B) B) Structural improvement to immovable property
- C) C) Unimproved land
- D) D) An asset used only partly for the derivation of business income
Show answer & explanation
Answer: C) C) Unimproved land
"Depreciable asset" includes tangible movable property, immovable property, or structural improvement to immovable property. It explicitly excludes unimproved land.
Question 2
What is the prescribed normal depreciation rate for computer hardware, monitors, and allied items under the Third Schedule?
- A) A) 10%
- B) B) 15%
- C) C) 20%
- D) D) 30%
Show answer & explanation
Answer: D) D) 30%
According to the Third Schedule, the normal rate of depreciation for computer hardware including printers, monitors, allied items, and aircraft is 30%.
Question 3
Which of the following assets is ELIGIBLE to claim the Initial Allowance of 25% under Section 23?
- A) A) Second-hand plant and machinery previously used in Pakistan by another business.
- B) B) Office furniture and fittings.
- C) C) Newly imported manufacturing machinery.
- D) D) A road transport delivery truck used for distributing the company's goods (not plying for hire).
Show answer & explanation
Answer: C) C) Newly imported manufacturing machinery.
Initial allowance is available on eligible depreciable assets. It specifically excludes road transport vehicles not plying for hire, furniture and fittings, plant or machinery previously used in Pakistan, and immovable property. Newly imported manufacturing machinery is fully eligible.
Question 4
XYZ Ltd purchased a luxury vehicle (a passenger transport vehicle not plying for hire) for its CEO for Rs. 10,000,000. What cost will be considered for calculating the depreciation deduction?
- A) A) Rs. 10,000,000
- B) B) Rs. 7,500,000
- C) C) Rs. 2,500,000
- D) D) Rs. 5,000,000
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Answer: B) B) Rs. 7,500,000
The cost of a depreciable asset being a passenger transport vehicle not plying for hire is restricted and shall not exceed Rs. 7.5 million for the purposes of calculating depreciation.
Question 5
A manufacturing company purchased and installed a new machine for Rs. 1,000,000 during the tax year. Assuming the normal depreciation rate is 15%, what is the total deduction (Initial Allowance + Normal Depreciation) allowed in the first year?
- A) A) Rs. 400,000
- B) B) Rs. 250,000
- C) C) Rs. 362,500
- D) D) Rs. 150,000
Show answer & explanation
Answer: C) C) Rs. 362,500
Initial allowance = 25% of 1,000,000 = Rs. 250,000. The WDV for normal depreciation is the cost minus initial allowance (1,000,000 - 250,000 = 750,000). Normal depreciation = 15% of 750,000 = Rs. 112,500. Total deduction = 250,000 + 112,500 = Rs. 362,500.
Question 6
A motor vehicle costing Rs. 2,000,000 is used 60% for business and 40% for the personal use of a director. Normal depreciation is 15%. What will be the Written Down Value (WDV) carried forward to the second year?
- A) A) Rs. 1,820,000
- B) B) Rs. 1,700,000
- C) C) Rs. 1,880,000
- D) D) Rs. 2,000,000
Show answer & explanation
Answer: B) B) Rs. 1,700,000
The WDV is computed on the basis that the asset has been solely used to derive business income. Total depreciation is Rs. 300,000 (15% of 2,000,000). Even though only 60% (Rs. 180,000) is allowed as a deduction against business income, the full Rs. 300,000 is deducted from the cost to find the WDV. Carried forward WDV = 2,000,000 - 300,000 = Rs. 1,700,000.
Question 7
A depreciable asset (machinery) previously used in Pakistan was exported to the USA. The original cost was Rs. 35 million and its WDV at the time of export was Rs. 28 million. What is the gain or loss on disposal for tax purposes?
- A) A) Rs. 7 million gain
- B) B) Rs. 7 million loss
- C) C) Rs. 0
- D) D) Rs. 35 million gain
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Answer: A) A) Rs. 7 million gain
Where a depreciable asset used in Pakistan is exported, the consideration received shall be treated as exactly equal to the cost of the asset (Rs. 35 million). Gain = Consideration (35m) - WDV (28m) = Rs. 7 million.
Question 8
Alpha Ltd acquired a secret formula (an intangible) to be used in its business. The useful life of this intangible cannot be ascertained. Over how many years will this intangible be amortized for tax purposes?
- A) A) 5 years
- B) B) 10 years
- C) C) 15 years
- D) D) 25 years
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Answer: C) C) 15 years
Under Section 24, an intangible which does not have an ascertainable useful life shall be treated as if it had a normal useful life of exactly fifteen (15) years.
Question 9
An entity incurred Rs. 800,000 on feasibility studies and trial production before the commencement of its commercial business operations. Under Section 25, how will this pre-commencement expenditure be treated for tax purposes?
- A) A) It will be fully deducted in the first year of business.
- B) B) It will be amortized at 20% per annum on a straight-line basis.
- C) C) It will be amortized at 15% on a declining balance basis.
- D) D) It is a capital expenditure and is not allowed as a deduction.
Show answer & explanation
Answer: B) B) It will be amortized at 20% per annum on a straight-line basis.
A person shall be allowed a deduction for any pre-commencement expenditure at the rate of 20% per annum on a straight-line basis (over 5 years).
Question 10
Mr. Ahmed purchased a commercial shop for Rs. 6,000,000 to use as his business office. He paid the entire amount in physical cash. Under Section 75A, what are the tax implications of this cash transaction?
- A) A) The asset will not be eligible for depreciation.
- B) B) The amount will not be treated as cost for computing capital gains on future disposal.
- C) C) He will have to pay a penalty of 5% of the FBR value or DC rate (whichever is higher).
- D) D) All of the above.
Show answer & explanation
Answer: D) D) All of the above.
Under Section 75A, purchasing immovable property > Rs. 5 million in cash means it is ineligible for depreciation, the amount is not treated as cost on disposal, and a 5% penalty applies.
Question 11
A company purchased a solar plant for Rs. 10,000,000. The Provincial Government voluntarily provided a non-taxable subsidy of Rs. 2,000,000 specifically for the installation of this plant. What is the cost of the asset for computing tax depreciation?
- A) A) Rs. 10,000,000
- B) B) Rs. 12,000,000
- C) C) Rs. 8,000,000
- D) D) Nil
Show answer & explanation
Answer: C) C) Rs. 8,000,000
Under Section 76(10), the cost of an asset does not include the amount of any grant, subsidy, or assistance received, except to the extent to which the amount is chargeable to tax. Thus, 10,000,000 - 2,000,000 = Rs. 8,000,000.
Question 12
A company acquired machinery using a foreign currency loan. Before the loan was fully repaid, the exchange rate increased, increasing the company's Rupee liability by Rs. 500,000. How is this exchange loss treated for tax purposes?
- A) A) Allowed as a normal business expense in the income statement.
- B) B) Added to the cost of the depreciable asset in the year of occurrence.
- C) C) Ignored for tax purposes.
- D) D) Deducted from the equity of the company.
Show answer & explanation
Answer: B) B) Added to the cost of the depreciable asset in the year of occurrence.
If a liability under a foreign currency loan increases or decreases due to exchange rate fluctuations, the difference shall be added to or deducted from the cost of the asset in the year of occurrence for the purposes of depreciation.
Question 13
A company acquired a software license (an intangible) on 1st April 2026 (falling in Tax Year 2026) for Rs. 365,000. The useful life of the software is 5 years. What is the amortization deduction allowed for Tax Year 2026? (Assume 365 days in the year and 91 days from 1 April to 30 June).
- A) A) Rs. 73,000
- B) B) Rs. 18,200
- C) C) Rs. 36,500
- D) D) Nil
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Answer: B) B) Rs. 18,200
The formula for part-year amortization is A x (B/C). A (Full year amortization) = 365,000 / 5 = 73,000. B (Days used) = 91 days. C = 365. Therefore, 73,000 x (91/365) = Rs. 18,200.
Question 14
If a depreciable asset is disposed of during a tax year, what is the rule regarding the normal depreciation deduction for that specific year?
- A) A) Full-year depreciation is allowed.
- B) B) Proportionate depreciation based on the exact days used is allowed.
- C) C) 50% of normal depreciation is allowed.
- D) D) No depreciation deduction is allowed in the year of disposal.
Show answer & explanation
Answer: D) D) No depreciation deduction is allowed in the year of disposal.
Section 22 strictly states that where a person disposes of a depreciable asset in any tax year, no depreciation deduction shall be allowed for that year.
Question 15
To improve accessibility, a company built a ramp for persons with disabilities at its office entrance. The cost of the ramp was Rs. 200,000. What is the prescribed rate of depreciation for this ramp under the Third Schedule?
- A) A) 10%
- B) B) 15%
- C) C) 50%
- D) D) 100%
Show answer & explanation
Answer: D) D) 100%
The Third Schedule provides a 100% depreciation rate for a ramp built to provide access to persons with disabilities, provided the cost does not exceed Rs. 250,000 each.