Tranquility Ltd (the company) is a manufacturer of aroma diffuser and related supplies, carrying on business in Hong Kong, with factory located in Hong Kong. The company also holds real estate (commercial and residential) both for resale and long- term investment. The Commissioner of the Inland Revenue accepts that for profits tax purposes the company's property dealing and investment activities can be separated on the basis of the classification adopted in its accounts. For the year ended 31 March 2020, the company's profit and loss account contained the following particulars: Note Loss from manufacturing Profit from property trading Assignment of rental income Financial assistance Debt recovery: staff loan Gain on disposal of fixed assets Interest income 1 2 3 HK$ (500,000) 2,000,000 400,000 150,000 150,000 20,000 100,000 2,320,000 (300,000) 2,020,000 (500,000) 1,520,000 4 Depreciation Net profit before extraordinary item Extraordinary loss (net) Net profit after extraordinary items 5 5 (The company's agreed loss for the year ended 31 March 2019 was HK$1,000,000). Notes: The company supplies you with the following information: (1) The breakdown of the profit from property trading is as follows: HK$ Hong Kong property 1,500,000 Japan property 500,000 Total 2,000,000 (2) (3) (4) (5) The assignment of rental income of a Hong Kong property in the account took place because the company was temporarily short of funds. On 1 April 2019 the company sold its rights to receive certain rental income for a period of 12 months to OCBC, a bank located at, Julia Street, Singapore. The total rental income payable by the tenants during this period amounted to HK$460,000. Financial assistance was given by the Hong Kong General Chamber of Commerce to expand the company's sales in Singapore and Malaysia. The interest income in the account was accrued but unpaid interest on a fixed deposit with the Nagoya Bank, Japan. The deposit, which was denominated in US dollars, matured on 31 December 2020. The deposit was used to secure a loan (of the same amount as the deposit) with Nagoya Bank. (See note 6(k) below). The extraordinary loss in the account occurred in the following way. The company entered into a joint development project with Mr Lee for the purpose of buying agricultural land paying a premium to government for change of land use and then redeveloping the property for resale. To perform this activity the company and Mr Lee formed a joint venture company, PC Ltd, in which both parties held 50 per cent of the issued share capital. When PC Ltd was unable to reach terms with government for change of use, the company decided to withdraw from the project. It sold its shares in PC Ltd to Mr Lee at a substantial loss. The following expenses were included in the account extracted above: a. Legal fees of HK$100,000 were paid in connection with an ICAC investigation of one of the company's directors for bribery of a government official in relation to the re- zoning of the agricultural land noted in 5 above. The director was convicted. b. Legal fees incurred for renting a new office in North Point, Hong Kong of HK$10,000. C. The company paid HK$150,000 interest to an unrelated foreign trading company for a loan to purchase a Macau property for resale purposes. d. The company installed yellow color curtain (cost HK$123,456) for the company's representative office located in Middle Road, Singapore (this office was not a separate legal entity from the company). Previously, the company used blue color curtain acquired in 2018 (cost HK$103,456), when it commenced activities in Singapore e. The following provision has been made: Provision for bad debts - HK$100,000. It is the company's experience over many years that 10 per cent of its receivables at any one time become irrecoverable. The provision is based on this assumption and was computed by reference to the receivables outstanding at the balance sheet date. (6) f. The company has given HK$40,000 of energy bars to the Hong Kong Red Cross. g. Exchange loss Exchange gain on collection of trade debts Exchange loss on Japan property trading Total HK$ (15,000) 25,000 10,000 h. Taxes paid in respect of the company's manufacturing business are as follows: Witholding tax paid to foreign governements Customs duty paid to foreign governements Income tax paid to foreign governments Total HK$ 5,000 6,000 7,000 18,000 i. The company purchased an environment friendly vehicle for HK$500,000. The vehicle is for the directors' private use in Hong Kong. j. Trademark cost: Cost of purchasing a trademark Cost of registrating the captioned trademark in Hong Kong Total HKS 300,000 1,000 301,000 k. The company borrowed money from Nagoya Bank, Japan. The loan was secured by a collateral deposit placed with Nagoya Bank. The loan was obtained to purchase raw materials to manufacture the company's products. The interest expense in this regard was HK$100,000. (See note 4 above). (7) The agreed depreciation allowance for the year of assessment 2019/20 is HK$377,000. Required: On the basis of available information, calculate the profits tax payable, if any, by Tranquility Ltd for the year of assessment 2019/2020. (25 marks) (Show the tax computation. Detailed explanations of the tax treatments adopted are not required. Ignore provisional tax and profits tax reduction given by the government if applicable) Tranquility Ltd (the company) is a manufacturer of aroma diffuser and related supplies, carrying on business in Hong Kong, with factory located in Hong Kong. The company also holds real estate (commercial and residential) both for resale and long- term investment. The Commissioner of the Inland Revenue accepts that for profits tax purposes the company's property dealing and investment activities can be separated on the basis of the classification adopted in its accounts. For the year ended 31 March 2020, the company's profit and loss account contained the following particulars: Note Loss from manufacturing Profit from property trading Assignment of rental income Financial assistance Debt recovery: staff loan Gain on disposal of fixed assets Interest income 1 2 3 HK$ (500,000) 2,000,000 400,000 150,000 150,000 20,000 100,000 2,320,000 (300,000) 2,020,000 (500,000) 1,520,000 4 Depreciation Net profit before extraordinary item Extraordinary loss (net) Net profit after extraordinary items 5 5 (The company's agreed loss for the year ended 31 March 2019 was HK$1,000,000). Notes: The company supplies you with the following information: (1) The breakdown of the profit from property trading is as follows: HK$ Hong Kong property 1,500,000 Japan property 500,000 Total 2,000,000 (2) (3) (4) (5) The assignment of rental income of a Hong Kong property in the account took place because the company was temporarily short of funds. On 1 April 2019 the company sold its rights to receive certain rental income for a period of 12 months to OCBC, a bank located at, Julia Street, Singapore. The total rental income payable by the tenants during this period amounted to HK$460,000. Financial assistance was given by the Hong Kong General Chamber of Commerce to expand the company's sales in Singapore and Malaysia. The interest income in the account was accrued but unpaid interest on a fixed deposit with the Nagoya Bank, Japan. The deposit, which was denominated in US dollars, matured on 31 December 2020. The deposit was used to secure a loan (of the same amount as the deposit) with Nagoya Bank. (See note 6(k) below). The extraordinary loss in the account occurred in the following way. The company entered into a joint development project with Mr Lee for the purpose of buying agricultural land paying a premium to government for change of land use and then redeveloping the property for resale. To perform this activity the company and Mr Lee formed a joint venture company, PC Ltd, in which both parties held 50 per cent of the issued share capital. When PC Ltd was unable to reach terms with government for change of use, the company decided to withdraw from the project. It sold its shares in PC Ltd to Mr Lee at a substantial loss. The following expenses were included in the account extracted above: a. Legal fees of HK$100,000 were paid in connection with an ICAC investigation of one of the company's directors for bribery of a government official in relation to the re- zoning of the agricultural land noted in 5 above. The director was convicted. b. Legal fees incurred for renting a new office in North Point, Hong Kong of HK$10,000. C. The company paid HK$150,000 interest to an unrelated foreign trading company for a loan to purchase a Macau property for resale purposes. d. The company installed yellow color curtain (cost HK$123,456) for the company's representative office located in Middle Road, Singapore (this office was not a separate legal entity from the company). Previously, the company used blue color curtain acquired in 2018 (cost HK$103,456), when it commenced activities in Singapore e. The following provision has been made: Provision for bad debts - HK$100,000. It is the company's experience over many years that 10 per cent of its receivables at any one time become irrecoverable. The provision is based on this assumption and was computed by reference to the receivables outstanding at the balance sheet date. (6) f. The company has given HK$40,000 of energy bars to the Hong Kong Red Cross. g. Exchange loss Exchange gain on collection of trade debts Exchange loss on Japan property trading Total HK$ (15,000) 25,000 10,000 h. Taxes paid in respect of the company's manufacturing business are as follows: Witholding tax paid to foreign governements Customs duty paid to foreign governements Income tax paid to foreign governments Total HK$ 5,000 6,000 7,000 18,000 i. The company purchased an environment friendly vehicle for HK$500,000. The vehicle is for the directors' private use in Hong Kong. j. Trademark cost: Cost of purchasing a trademark Cost of registrating the captioned trademark in Hong Kong Total HKS 300,000 1,000 301,000 k. The company borrowed money from Nagoya Bank, Japan. The loan was secured by a collateral deposit placed with Nagoya Bank. The loan was obtained to purchase raw materials to manufacture the company's products. The interest expense in this regard was HK$100,000. (See note 4 above). (7) The agreed depreciation allowance for the year of assessment 2019/20 is HK$377,000. Required: On the basis of available information, calculate the profits tax payable, if any, by Tranquility Ltd for the year of assessment 2019/2020. (25 marks) (Show the tax computation. Detailed explanations of the tax treatments adopted are not required. Ignore provisional tax and profits tax reduction given by the government if applicable)