Ican 2021 Advanced Taxation Question 5

DD Nigeria Limited, a private limited liability company, was incorporated in March 2010. The company produces highly successful spring water. The Board of Directors of the company comprises a non-executive Chairman, his wife as the Managing Director and the Chairman’s childhood friend. For the day-to-day running of the business, the Managing Director is being assisted by the Production Manager, Sales/Marketing Manager, Administrative Officer and Accounting Officer (a diploma graduate). The company has a track record of steady growth in profitability and market share. In a bid to cut down its cost of raw materials, particularly polythene, the Board at its recent meeting decided to acquire a polythene company in the neighbourhood that is witnessing dwindling fortunes due to insufficient funds to finance its working capital. The Board has also lost confidence in the Accounting Officer as his poor knowledge in tax related matters was brought to the fore during recent visit to the company by officials of the Federal Inland Revenue Service. The Managing Director has approached your firm of tax consultants to help provide professional advice on tax matters in respect of some transactions and activities that occurred in the last one year. Records of the following transactions were made available to you: (i) The company purchased plant and machinery at a cost of N5,000,000 on April 1, 2019. Plant was later disposed on September 15, 2019 for N3,500,000. The undisposed machinery was valued at N4,300,000. Incidental expenses incurred on disposal was N250,000. (ii) The company sold an acre of land, which was acquired on May 22, 2018, at a cost of N6,750,000 for N12,500,000 on October 19, 2018. In the following month, the company bought another land, which was to be used for the purpose of the business, for N15,000,000 to replace the one sold. It was however, subsequently disposed for N18,000,000 in June 2019. (iii) Part of the industrial building (where the production unit is located) was damaged in October 2020 during a protest by some youths in the area. The company, in November 2020, received N2,200,000 as compensation under policy of insurance. The company has intention of utilising the fund for acquisition of another building.