Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Express your opinion in the following cases: (5×2=10 Marks June 2008)
a) Mr. Balaram Sharma is a retired employee of a company. The company provided him 7 years pension in lump sum and deducted TDS on whole amount in the year of receipt on the ground that remuneration income is liable for tax on cash basis. As a tax consultant, you are required to judge whether the action of the company to deduct TDS on whole amount in the year of receipt is justifiable?

b) Directors of M/s MN Company Ltd. were paid 5% of company‟s profit before tax during the year as profit incentive and showed the distributed amount in the accounts as promotional expenses. Comment in line with the provisions of Company Act 2063.
a) The income from remuneration is liable for tax on cash basis as per Section 22 of the Income Tax Act 2058. Pension is the income from remuneration as defined Section 8 of the same Act. Based on this, pension received Mr. Balaram Sharma is liable for TDS on whole amount at the time of receipt. However, Section 3 of the Income Tax Act deals with the imposing tax on income. As per this section, Income Tax is imposed on yearly basis of income. Supreme court on the issue of Past employees of Nepal Rastra Bank vide case no. 2677, decided on 2064/04/23 that Income Tax on pension income should be calculated on yearly basis. Thus, action of the company to deduct TDS on whole amount in the year of receipt is not justifiable.

b) As per Section 91 of the Company Act, 2063 the full-time working directors of a company can be paid a maximum of 3% of profit after tax as incentive through a special resolution at the Annual General Meeting of the company. As per the Act any amount paid in excess of 3 % of profit after tax is recoverable from the directors. Further, such distribution is an appropriation of profit and the amount is not allowed as deductible expenses for income tax calculation.

In the given case, the directors were paid 5% of company‟s profit before tax and shown as expenses deductible for income tax purpose. Now, the company has to re-calculate the maximum amount of money that can be paid to the directors after adjustment of income tax figures. The excess amount paid should be recovered from the directors.

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