CPA › Advanced Taxation › Tax investigations
Back to Unit

Tax investigations

Unit: Advanced Taxation

Premium Topic Resources

Sign in to download the full Topic PDF and enable offline revision mode.

Login to Access
Join the community! 550+ students upgraded in the last 24 hours. Limited Discount Seats Available

April 2025

 1 Questions
Question 5c
​ ​ ​ ​ ​ ​​Patrick Ouma has not been filing his income tax returns for the last three years of operation. He recently received a notice of assessment from the commissioner of taxes showing taxable income of Sh.180,000 and Sh.460,000 for the years ended 31 December 2023 and 31 December 2024 respectively.

He has provided the following details:
1.
The following account balances were outstanding in the respective years: 
2023 Sh
2023 Sh
Trade debtors 
862,500
970,000
Bank balance 
107,000
(304,600)
Trade creditors 
402,000
203,800
Cash in hand 
80,000
110,000
Inventory
309,100
602,400
2.
The following statement of financial position was provided for the year ended 31 December 2022: 
 Sh.“000”
 Sh.“000”
Non-current assets:
Furniture and fittings 
800

Motor vehicles
6,900
7,700
Current assets: 
Inventory
406
Debtors
960
Bank balance
804
Cash in hand 
150
2,320
10,020 
Financed by:
Capital (1 January 2022)
7,000
Net profit for the year 
1,680
8,680
Non-current liabilities: 
Mortgage loan 
500
Current liabilities: 
Creditors
840
1,340
10,020
3.
The following is the summary of expenses incurred during the years: 
3
2023 Sh.“000”
2023 Sh.“000”
Rent expenses 
340,000
260,000
Electricity
120,000
60,000
Motor vehicle expenses 
130,000
292,000
Telephone expenses 
45,000
78,000
Drawings of goods per month 
10,000
18,000
Purchase of furniture and fittings
-
58,000
4.
The principal repayment on mortgage loan amounted to Sh.10,000 per month. Mortgage interest was charged at the rate of 12% per annum on reducing balance basis.
5.
The following was agreed with the Revenue Authority:
  • Capital allowance at Sh.300,000 per year.
  • 60% of rent and electricity related to business while only 40% of motor vehicle and telephone expenses related to business.

Required:
(i).
Using suitable computations, advise Patrick Ouma on the action to take.
(ii).
Evaluate FOUR reliable sources of information the revenue authority could use to prove their case against Patrick Ouma.


Answers and Explanations are locked.

Login to View Answer

December 2024

 1 Questions
Question 2a
​​Bright Star Electronics Enterprise is a small business operating in the retail sector. The business has experienced steady growth in sales over the years. The owner, John Irungu handles most of the financial and accounting tasks. The revenue authority has noticed discrepancies in the tax returns over the last two years where there are significant variations in the reported income and expenses. The business has also claimed several large deductions that appear unusual for the size of the business. These red flags prompted the revenue authority to issue a notice of tax audit. John Irungu has engaged you as a tax agent to assist him in this matter: 

Required: 
 (i) Explain to John Irungu THREE objectives of a tax audit initiated by the revenue authority. 

(ii) Analyse THREE responsibilities of a tax agent to the client during the tax audit process.


Answers and Explanations are locked.

Login to View Answer

August 2024

 1 Questions
Question 1c
​ ​John Mwema owns a private logistics company which he has been operating for the last six years. Recently, the Revenue Authority conducted an in-depth examination of his tax returns due to inconsistencies in his reported income, expenses, assets and liabilities over the past three years. 

The following information was reported by John Mwema and later amended by the Revenue Authority: 

Reported figures by the logistic company:

Year
Gross income
Business expenses
Personal expenses
Living expenses
Assets
Liabilities
-
Sh.
Sh.
Sh.
Sh.
Sh.
Sh.
2021
4,000,000
3,200,000
500,000
300,000
10,000,000
2,000,000
2022
4,500,000
3,600,000
600,000
400,000
11,000,000
2,500,000
2023
5,000,000
4,000,000
700,000
500,000
12,000,000
3,000,000

Assessed figures by the Revenue Authority after in-depth audit findings: 

Year
Gross income
Business expenses
Personal expenses
Living expenses
Assets
Liabilities
-
Sh.
Sh.
Sh.
Sh.
Sh.
Sh.
2021
4,500,000
2,900,000
600,000
400,000
11,000,000
1,800,000
2022
5,000,000
3,200,000
700,000
500,000
12,000,000
2,300,000
2023
5,500,000
3,500,000
800,000
600,000
14,000,000
2,800,000

The corporate tax rate is at 30%. 

Required: 
(i) Determine the additional taxable income for each of the years ending 31 December 2021 to 31 December 2023. 

(ii) Compute the total back duty tax liability that John Mwema’s Logistics Company Ltd. owes Revenue Authority for the three years. 


Answers and Explanations are locked.

Login to View Answer

April 2024

 2 Questions
Question 5b
​​The revenue authority is mandated to actively investigate potential violations of the tax laws and regulations and related financial frauds and schemes. 

Required: With reference to the above statement, analyse the procedure followed by the revenue authority tax officers in conducting a particular tax investigation.


Answers and Explanations are locked.

Login to View Answer
Question 5a
​​Explain FOUR initiatives undertaken by the revenue authority in your country to entrench ethics and integrity in administration of tax.


Answers and Explanations are locked.

Login to View Answer

December 2023

 1 Questions
Question 3a
​​Tax investigation involves inquiries into a taxpayer’s affairs where the revenue authority has reasonable cause to believe that a taxpayer is not tax compliant. In relation to the above statement, describe FOUR circumstances that could trigger tax investigations.


Answers and Explanations are locked.

Login to View Answer

August 2023

 3 Questions
Question 5b
​​Tax risks are broadly classified into specific and generic categories. 

 Analyse TWO types of risks in each category.


Answers and Explanations are locked.

Login to View Answer
Question 3b
​ ​ ​ ​ ​ ​​Nalo Ltd. started a small merchandise business on 1 January 2022. The company did not maintain a set of complete records and as such has not filed income tax returns for the year of income 2022. The Revenue Authority has sent the company a demand notice of Sh.2,200,000 as the tax due for the year 2022. 

The company director has approached you and requested that you assist in ascertaining the correct tax liability and also advise him on whether to object the demand notice. 

The following details have been availed: 

1.
Analysis of the bank account for the year ended 31 December 2022 revealed the following:

DR 
CR 
 Sh.
 Sh.
Balance brought forward 1 January 2022 
1,940,000
Fixtures and fittings (cost) 
366,000
Cheques from customers
1,299,200
Suppliers of goods 
1,392,000
Refund from suppliers
83,530
Bank charges 
29,600
Rental income
1,040,000
Delivery van at cost 
1,000,000
Sale of fixtures 
96,000
Salaries and wages
1,060,000
Cash sales
8,816,000
Computers at cost 
480,000
-
-
Rent and rates 
124,000
-
-
Electricity
116,000
-
-
Telephone and postage 
125,800
-
-
Refunds to customers
74,250
-
-
Computer software cost 
120,000
-
-
Balance carried forward
8,387,090
-
13,274,730
-
13,274,730
2.
Other information obtained from the books of accounts included: 
 1 January 2022 Sh.
 1 December 2022 Sh.
Inventory
4,320,000
2,250,000
Suppliers of goods
478,200
239,200
Trade debtors
348,000
960,000
Accrued electricity
66,000
116,000
Lorry
1,400,000
1,400,000
Prepaid wages and salaries
320,000
140,000
Rent and rates owing  
45,000
17,000
3.
All non-current assets were acquired in the course of the year. The cost of fixtures sold was Sh.220,000.
4.
Opening and closing inventories were undervalued and overvalued by 20% and 10% respectively.
5.
Cash purchases amounted to Sh.2,400,000. All sales and purchases are inclusive of value added tax (VAT) at the rate of 16%.
6.
The business issued credit notes of Sh.34,800 for goods returned by credit customers and received discount from suppliers of Sh.52,000.

Required:
(i)
Prepare a statement showing the correct adjusted taxable income and tax payable (if any) for the year ended 31 December 2022.
(ii)
Advise the director on the action to take on the demand notice.



Answers and Explanations are locked.

Login to View Answer
Question 1c
​​Summarise FOUR signs that may point to tax fraud in a business entity.


Answers and Explanations are locked.

Login to View Answer

December 2022

 3 Questions
Question 2c
​​Darubini Ltd. is under tax investigation by the Revenue Authority, accused of obstructing/hindering the investigation officer in the exercise of his function. 

 Highlight FOUR aspects that may constitute obstruction in the above case.


Answers and Explanations are locked.

Login to View Answer
Question 1b
​​Consider the following hypothetical case:  
Axe Ltd., incorporated in your Country, signed a service agreement to provide marketing and liaison services to the related non-resident entities located in the United Kingdom (UK). Under the agreement, Axe Ltd. was to be compensated off cost plus mark-up basis. The related non-resident entities executed separate agreements with distributors of their products who they invoiced directly. The revenue authority imposed value added tax (VAT) on the above marketing services provided by Axe Ltd.  
 
On the other hand, Axe Ltd. argued that the marketing support services enhanced brand awareness of the products sold by the non-resident entities in your country. On this basis, the services were exported, hence zero-rated. 
 
The above case has been bought before the tax tribunal. 
 
Required: 
Discuss factors that the Tribunal might consider in ruling in favour of Axe Ltd.


Answers and Explanations are locked.

Login to View Answer
Question 1a
​​The tax law envisages various approaches and levels of resolving tax disputes, including the administrative decisions, quasi-judicial process involving tax appeals tribunal (TAT), formal judicial process involving the High Court or appeal to the Court of Appeal and alternative dispute resolution. Some of the relevant laws include the Tax Procedures Act, Tax Appeals Tribunal Act and other relevant tax laws. 

Required: 
With reference to the above statement and quoting relevant tax provisions, explain the application of each of the following in tax disputes settlement: 

(i) Tax appeals tribunal. 

(ii) High Court. 

(iii) Court of Appeal.

(iv) Out of Court settlement.


Answers and Explanations are locked.

Login to View Answer

August 2022

 1 Questions
Question 5c
​ ​ ​ ​ ​ ​​John Malih has been trading as a sole proprietor for the past 4 years. The revenue authority suspects that the business has been involved in tax fraud since it commenced operations. 

The firm has submitted the following records since its operations from 1 January 2018 to 31 December 2021:

1 January 2018
31 December 2018
31 December 2019
31 December 2020
31 December 2021
Sh. “000” 
Sh. “000” 
Sh. “000” 
Sh. “000” 
Sh. “000” 
Business premises 
144,000
160,000
172,000
152,000
160,000
Plant and machinery
68,000
72,000
87,000
82,000
92,000
Motor vehicles (commercial) 
22,000
24,000
24,000
26,000
24,000
Inventory
9,000
11,200
16,200
22,000
14,800
Trade receivables 
7,690
8,630
8,600
7,800
8,200
Private residence 
16,400
32,400
32,400
32,400
32,400
Trade payables 
14,900
19,200
20,400
18,100
15,200
Bank loan 
22,400
21,800
19,400
7,900
18,900
Loan from a friend 
1,580
1,320
1,180
1,690
1,020
Mortgage loan 
7,800
7,800
7,800
7,800
7,800
Cash
7,400
9,600
7,800
8,260
8,840

Additional information: 
1.
During the year ended 31 December 2021, a motor vehicle was disposed of for Sh.2,600,000 (cost was Sh.2,000,000).
2.
 Interest on mortgage was at a rate of 15% per annum on reducing balance basis. The maximum mortgage interest allowed is Sh.300,000 per annum.
3.
His personal expenses for each of the four years were as follows:
Year
Sh.
2021
340,000
2020
178,000
2019
296,000
2018
162,400
4.
Ignore capital allowances. 
 
Required: 
Determine the taxable income of John Malih for each of the four years ended 31 December 2018, 2019, 2020 and 2021. 


Answers and Explanations are locked.

Login to View Answer

April 2022

 1 Questions
Question 1a
​ ​ ​​The following facts relating to a hypothetical tax case in your country have been presented to you. The case related to the applicability of withholding tax on interest accrued in the audited books of a taxpayer.

1.
Ale Ltd. entered into an agreement with a contractor under which it agreed to pay interest on any contractual fees paid late. A number of payments due to the contractor were delayed and incurred interest. The interest was not actually paid but the obligation to pay was accrued as a liability in the respondent's books.
2.
As interest is a business expense, Ale Ltd. expensed it as a tax deductible item thereby reducing its corporation tax liability. The revenue authority undertook an audit and demanded payment on the withholding tax on the accrued interest. Following the demand, Ale Ltd. filed the matter before a tax tribunal.
3.
The revenue authority claimed that by recognising accrued interest as a liability in its books of account, Ale Ltd. acknowledged that interest was credited to the account of the third party and therefore fell within the definition of the term "paid" under applicable tax laws.
4.
At the tax tribunal, Ale Ltd. presented the following arguments:
  • The term "paid" in tax law can only mean delivery of money and discharge of settlement.
  • Since Ale Ltd. neither settled the outstanding contractual fee nor paid any interest charged, even though the interest was recognised as a liability in its books of account, no withholding tax was due for that transaction.
  • As per tax laws, tax is withheld upon payment of the expenses thus payment is a necessary pre-requisite for withholding tax to apply.
  • The settlement of an obligation may be through receipt of cash, cheque or other mode of settlement or discharge and an accrual is therefore not a discharge of a debt. Payment denotes the discharge of a debt or liability and it was premature for the revenue authority to demand payment of the withholding tax before the actual payment of interest. By doing so, the revenue authority clearly exceeded its powers.

Required:
As a Certified Public Accountant and tax expert, you have been engaged by the revenue authority to counter the arguments by Ale Ltd. for consideration by the Tax Tribunal. 

Prepare your professional opinion making reference to the facts above, applicable tax laws and decided tax cases to support your position. 
 


Answers and Explanations are locked.

Login to View Answer

Pilot December 2021

 3 Questions
Question 5c
​​In case of back duty the tax department will reject the accounts presented to them and will advise the taxpayer to provide another set of accounts prepared by a reputable firm of auditors. Where presentation of accounts is not possible, the taxpayer’s income could be computed through capital statements. 

Required: 
Explain other circumstances under which capital statements are applicable in computation of income.


Answers and Explanations are locked.

Login to View Answer
Question 5b
​​Customs audit is the process of verifying that the business is in compliance with the customs legislation through the examination of books and records of a business to prevent commercial fraud. 

In relation to the above statement, explain the objectives of a customs audit.


Answers and Explanations are locked.

Login to View Answer
Question 2c
​ ​​The management of Bituls Ltd. has received a notice from the Commissioner for Domestic Taxes stating that the company is subject to the income tax rules on thin capitalization. The management intends to object to the Commissioner’s directive and have approached you for advice. 

An extract of the company’s statement of financial performance revealed the following:

Sh.“000”
Goodwill
43,500
Land
220,000
Plant and machinery
310,000
Office equipment
146,250
Inventory
88,890
Accounts receivable
97,890
Bank balance
29,210
Ordinary share capital
445,000
Share premium
53,000
Profit and loss
(42,300)
10% loan
1,650,000

Supporting your answer with suitable computations, advise the management of Bituls Ltd.: 

(i) On the possible outcome of its objection. 

(ii) The interest tax shield due to Bituls Ltd. based on your advice in (c) (i) above. 


Answers and Explanations are locked.

Login to View Answer

December 2021

 1 Questions
Question 5b
​ ​ ​ ​​Linda Obari has been operating a retail business since year 2016. She has not been maintaining proper books of account over the years and is therefore under investigation by the revenue authority. 

The following details were obtained from her business records:

31 December 2016
31 December 2017
31 December 2018
31 December 2019
31 December 2020
Sh.
Sh.
Sh.
Sh.
Sh.
Equipment
2,345,670
2,391,840
2,395,350
2,210,000
2,285,000
Investment in shares
300,000
150,000
270,000
320,000
325,000
Bank balance
3,000
4,500
6,000
7,000
7,500
Inventory
-
303,000
540,000
620,000
685,000
Debtors
-
180,000
450,000
720,000
830,000
Building
-
2,050,000
2,050,000
2,050,000
2,050,000
2,648,670
5,079,340
5.711,350
5,927,000
6,182,500
Financed by:
Capital
2,648,670
2,844,340
3,254,350
3,239,000
3,263,500
Bank loan
-
1,425,000
1,566,000
1,716,000
1,866,000
Creditors
-
810,000
891,000
972,000
1,053,000
2,648,670
5,079,340
5,711,350
5,927,000
6,182,500

Additional information:
1.
Personal expenses:
31 December 2017
31 December 2018
31 December 2019
31 December 2020
Sh.
Sh.
Sh.
Sh.
Repairs of house
172,000
-
180,000
-
House manager salary
259,000
302,000
344,000
358,000
Cash withdrawn from bank account 
192,000
220,000
300,000
340,000
School fees
228,000
-
-
-
House expenses
163,000
331,600
356,000
382,000

2

Non-business income:
31 December 2017
31 December 2018
31 December 2019
31 December 2020
Sh.
Sh.
Sh.
Sh.
Rental income
182,000
166,560
120,000
218,000
Interest from bank deposits
    2,750
  14,970
  20,000
  22,000
3.
For the year ended 31 December 2017, salaries paid to Linda Obari's husband by the business amounted to Sh.312,000 and this was increased every year by 15%.
4.
She received Sh.360,000 in cash as inheritance in the year 2019 from her late father.

Required: 
(i)
Compute Linda Obari's correct taxable income or loss for the years ended 31 December 2017 to 2020.
(ii)
Describe the factors that a revenue authority considers in ascertaining the adequacy of living expenses under back duty investigations. 


Answers and Explanations are locked.

Login to View Answer

May 2021

 1 Questions
Question 5a
​​The Tax Authority in your country has appointed you as a tax auditor for digital services in Abacus Ltd. 

Describe three specific operational aspects in Abacus Ltd. that would constitute evidence of existence of digital services in the company.


Answers and Explanations are locked.

Login to View Answer

November 2018

 1 Questions
Question 5a
​​One of the steps in a tax audit process is the preliminary review of a taxpayer's file. 

(i) Outline three reasons for the preliminary review of a taxpayer's file. 

(ii) Summarise three other activities that should be undertaken before the commencement of the tax audit.


Answers and Explanations are locked.

Login to View Answer

November 2017

 1 Questions
Question 4b
​ ​ ​ ​​Peter Chawawa started a retail business on 1 January 2011. He has not been filing income tax returns for the six years to 31 December 2016. 

An investigation of his affairs revealed the following

1
The balance sheet of the retail business as at 31 December 2011 was as shown below:
Sh. "000"
Sh. "000"
Fixed assets:
Premises
2,000
Furniture and fittings
1,000
Motor vehicles
500
3,500
Current assets:
Stock
250
Debtors
160
Bank balance
81
Cash in hand
9
500
Total assets
4,000
Capital: 1 January 2011
3,000
Net profit for the year
300
Drawings
(500)
2,800
Mortgage loan
1,000
Creditors
200
4,000
2
He constructed an extension to the premises in year 2015 at a cost of Sh.625,000.
3
The following account balances were outstanding in the respective years as shown below:
2012
Sh.
2013
Sh.
2014
Sh.
2015
Sh.
2016
Sh.
Trade debtors
173,000
190,000
208,000
230,500
253,000
Bank balance
109,000
194,000
281,000
409,500
(32,000)
Trade creditors
230,000
241,000
253,000
272,000
291,500
Cash in hand
10,000
10,000
10,000
10,000
10,000
Stock
255,000
302,500
332,500
366,000
402,500
4
He withdrew goods worth Sh.5,000 per annum from the business for his personal use.
5
The principal repayments on each mortgage loan amounted to Sh.250,000 per annum from 31 December 2012. The mortgage interest paid in each of the four years ended 31 December 2012, 2013, 2014 and 2015 amounted to Sh.100,000, Sh.75,000, Sh.50,000 and Sh.25,000 respectively.
6
 His wife opened a savings account in a commercial bank in year 2012. The balances in this account after crediting the interest earned were as follows:
2012
Sh.
2013
Sh.
2014
Sh.
2015
Sh.
2016
Sh.
Savings account
300,000
900,000
100,000
725,000
750,000
Interest earned
25,500
75,500
90,000
70,000
60,000
7
His living expenses and wear and tear allowances were agreed with the revenue authorities as follows:
2012
Sh.
2013
Sh.
2014
Sh.
2015
Sh.
2016
Sh.
Living expenses
300,000
400,000
450,000
500,000
600,000
Wear and tear
155,500
130,500
109,000
73,000
157,000


Required: 

Compute the annual taxable income of Peter Chawawa from year 2012 to year 2016.


Answers and Explanations are locked.

Login to View Answer

November 2016

 1 Questions
Question 2a
​​Mr. S. Bora has been running a retail business since 1 January 2011. He had not been maintaining proper accounting records. The revenue authority provided an estimated tax assessment and penalties of Sh.84,000. He is planning to appeal against the assessment and has availed the following information to you to assist in filing supportive documents for the appeal.

Assets and liabilities:
 Year ended 31 December:              
2011
Sh.
2012
Sh.
2013
Sh.
2014
Sh.
2015
Sh.
Household property
480,000
560,000
380,000
400,000
450,000
Computers office
-
-
150,000
105,000
180,000
Inventories
100,000
200,000
280,000
420,000
380,000
Bank overdraft
-
96,000
80,000
150,000
140,000
Office premises
1,800,000
1,720,000
1,640,000
1,840,000
1,680,000
Personal clothes
20,000
36,000
40,000
28,000
24,000
Creditors
360,000
420,000
280,000
240,000
320,000
Equipment- office
94,000
160,000
120,000
160,000
150,000
Debtors
160,000
260,000
180,000
120,000
194,000
Bank loan
170,000
360,000
100,000
94,000
136,000
Mortage
800,000
800,000
800,000
800,000
800,000

Additional information:
1. Office equipment costing Sh.40,000 was disposed of at Sh.60,000 in 2013. The gain on disposal was not recorded anywhere in the books.

2. Legal expenses of Sh.48,000 on purchase of office equipment on 1 January 2012 was not capitalised.

3. Living expenses for his family from year 2012 was Sh.80,000 per year and increased cumulatively at a rate of 10% per annum.

4. In years 2014 and 2015, he donated Sh. 160,000 and Sh.92,000 respectively to a political party registered in his country.

5. Capital allowances agreed with the commissioner of domestic taxes for each year amounted to Sh.56,000.

6. Business expenses allowable by the commissioner for each year were capped at Sh.24.000.

7. The bank statement records reveal that Mr. Bora had paid school fees of Sh.84,000 in 2013 for his children from the business bank account.

8. Household property for 2012 include property that Mr. Bora inherited from his father amounting to Sh.80.000

9. Mortgage loan relates to office premises. The interest on the loan was 10% per annum on the principal amount.

Required:
(i)  A capital statement for each of the years ended 31 December 2012, 2013, 2014 and 2015.

(ii)  Revised taxable income and tax payable by Mr. Bora from tax arrears arising from undeclared income. Note: Use year 2015 tax rates.

(iii)  Advise Mr. Bora on the intended appeal.


Answers and Explanations are locked.

Login to View Answer

November 2015

 1 Questions
Question 5c
​ ​ ​ ​​Amos Akida, a businessman, is facing a tax investigation by the revenue authority which suspects that he has been under-declaring income for the four years from year 2011 to year 2014. 

You are the head of a team from the revenue authority conducting an investigation on Amos Akida. He has submitted to your team records of his private and business assets and liabilities from I January 2011 to 31 December 2014 as shown below:

1 January
2011
31 December
2011
31 December
2012
31 December
2013
31 December
2014
Assets and liabilities
Sh. "000"
Sh. "000"
Sh. "000"
Sh. "000"
Sh. "000"
Factory premises
48,000
54,000
56,000
52,000
54,000
Plant and machinery
24,000
25,000
38,000
34,000
36,000
Motor vehicle (commercial)
12,000
14,000
14,000
15,000
20,000
Inventory
4,600
5,200
9,000
10,000
8,000
Trade receivables
3,950
4,540
3,640
3,530
3,980
Private residence
8,240
14,600
14,600
14,600
14,600
Trade payables
7,280
8,640
9,420
8,360
7,890
Bank loan
10,900
10,000
9,870
7,640
9,840
Loan from a friend
800
700
600
870
640
Mortgage loan
3,780
3,780
3,780
3,780
3,780
Cash balance
3,400
5,400
3,600
3,760
4,670

Additional information:
1
The cash balance on 31 December 2012 included Sh.600,000 inherited from a relative on 30 August 2012.
2
His living expenses for each of the four years were as follows: 
Year ended 31 December:
2011
2012
2013
2014
Living expenses (Sh.)
85,000
140,000
90,000
165,000
3
Interest on mortgage is at the rate of 15% per annum.
4
There were no disposals of non-current assets during the period under investigation.
 
Required: 
Taxable income of Amos Akida for each of the four years ended 31 December 2011, 2012, 2013 and 2014.

Ignore capital allowances.


Answers and Explanations are locked.

Login to View Answer

May 2015

 1 Questions
Question 2b
​ ​ ​​ Mr Shama has been trading as a general merchant since I January 2011. The Revenue Authority discovered that Mr Shama had not filed tax returns since commencement of business.
The investigations revealed that Mr Shama had not maintained proper books of account. The following details were obtained for the period from 1 January 2011 to 31 December 2014.

1
Assets and liabilities
                                          Year ended 31 December
2011
Sh.
2012
Sh.
2013
Sh.
2014
Sh.
Trade receivables
194,000
360,000
320,000
480,000
Trade payables
150,000
180,000
160,000
200,000
Inventories
120,000
196,000
300,000
340,000
Bank overdraft
90,000
48,000
70,000
120,000
Cash in hand
96,000
76,000
84,000
136,000
10% mortgage loan
1,680,000
1,600,000
1,520,000
1,460,000
Motor cars
2,000,000
2,500,000
3,000,000
2,000,000
Buildings
4,000,000
4,000,000
4,000,000
4,000,000
Wife's bank loan
900,000
800,000
700,000
600,000
Private residence
3,400,000
3,400,000
3,400,000
3,400,000
2
He brought into the business a private pick up owned by his son valued at sh.500,000 in the year 2013
3
He has been repaying, together with his wife, the bank loan acquired by the wife The mortgage loan was in respect to his private residence.
4
His living expenses amounted to Sh. 40,000 in 2011 and have been increasing at a compounded rate of 10% per annum
5
In the year 2013, he paid school fees of Sh. 184,000 out of the business bank account for his children's education.
6
He disposed of a motor car in 2014 for Sh. 800,000. The motor car had cost Sh 1,000,000 when it was purchased on 1 January 2011. Capital deductions were agreed at 2.5% on cost per annum on motor vehicles and none on buildings.
7
He donated Sh. 42,000 to a fund raiser in in and of a local church in year 2013
8
He withdrew Sh. 200,000 from the business bank account in year 2014 to repaint his private residence

Upon completion of the investigation, the Revenue Authority issued an estimated assessment of Sh. 4,000,000 which Mr Shama disputed.

Required.

(i) A capital statement for Mr Shama for the year ended 31 December 2012, 2013 and 2014

(ii) Advise Mr Shama on whether he should appeal against the estimated assessment


Answers and Explanations are locked.

Login to View Answer
Related Topics