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CONCEPTUAL

APPROACH TO TAXES
TAX YEAR 2016
6th EDITION

Income Tax
Sales tax
Capital Value Tax
Federal Excise Act & Rules, 2005

By:

NADEEM BUTT
Chartered Accountant
FCA, FPFA, B.Com.

AMAN PUBLICATIONS COMPANY


ALL RIGHTS RESERVED BY THE AUTHOR

No responsibility shall be taken for any mistake, error or


omission regarding any material contained in this book.

6TH Edition: 2016

AUTHOR
NADEEM BUTT
Chartered Accountant
FCA, FPFA, B.Com.

PRICE Rs. 600/-


SALIENT FEATURES OF THIS EDITION

Use of easy & understandable language.

Covers the syllabus of CA Module C, CAM-IV, ICMAP Stage IV & M.Com.

Helpful for the students & teachers of CA - Final, ACCA (PAK), Higher National Diploma
(HND), MBA, MPA, PIPFA & LLB.

Added various examples & solved practice questions to demonstrate the theory.

Reference of relevant provisions of income tax & sales tax law has been given.

Added after each chapter past papers topic wise theoretical questions of ICMA Stage IV from
tax year 2003 to 2015 & CA Module C / Stage-II CAF-06 from tax year 2001 to 2015.

Added past papers numerical questions of ICMA Stage IV from tax year 2003 to 2015 & CA
Module C / Stage-II CAF-06 from tax year 2001 to 2015.

Includes the amendments incorporated by the Finance Act, 2015.

Useful for all who want to learn, teach & practice Income tax & Sales tax.

FACILITY FOR ANY QUESTION OR QUERY FROM THE AUTHOR AT:

Ph No: 042-35408635-6 and 042-35408638-9

Cell: 0333 / 0301 - 4245240

E-mail: info@nbandco.com and


nadeembutt@nbandco.com
PREFACE TO THE SIXTH EDITION

With the grace of Almighty ALLAH and prayers of my family, friends, and students, I am presenting
the Sixth Edition of Conceptual approach to taxes. This book is primarily for the students of CAF
- of ICAP, Stage IV of ICMAP and M. Com.

I hope this book will serve the purpose of the students, teachers & other persons related with the
taxation. The book primarily consists of notes on each chapter with examples, multiple choice
questions, practical problems with solutions and topic wise last year questions from tax year 2003
to 2015.

I am grateful to all those who contributed a lot in the completion of this book. My special thanks
are due to my staff.

All positive criticism with suggestions for the improvement will be entertained.

Nadeem Butt
Chartered Accountant

October 01, 2015


THE AUTHOR

Mr. Nadeem Butt qualified as a Chartered Accountant in 1998 & after working with a well
known professional firm as Tax Manager has started his own professional firm under the
name and style Nadeem & Co. Chartered Accountants in 2007 & is practicing as Fellow
member of ICAP mainly in audit, income tax & sales tax for more than 200 various
corporate and non-corporate clients in Pakistan. He is also the life time member of Lahore
Tax Bar Association and Audit & Tax advisor of All Pakistan Cottage Industry & Small
Traders Association.

Member, (special invitees) Taxation Committee of Lahore Chamber of Commerce & Industry
(LCCI).

17 years post qualification teaching experience in the subjects of Taxation..

Visiting faculty member of the following professional educational institutions in providing


coaching for the exams of Taxation:

1. College of Accountancy & Professional Studies(CAPS) Module C & F

2. Institute of Cost & Management Accountants of Pakistan (ICMAP) Stage IV

3. Institute of Chartered Accountants of Pakistan (ICAP) Module C

4. Rise School of Accountancy Module C

5. Premier DLC (A project of Beacon house) AFC- CA

6. The University of Lahore M. Com.

7. SKANS School of Accountancy Module C

8. Punjab Group of Colleges M. Com.

9. GC University, Lahore Business Taxation Coaching

Appointed as auditor on behalf of the tax department by the Federal Board of Revenue for
Special Audit Under section 4A of the repealed Income Tax Ordinance of various corporate
and non-corporate entities.

Two students of Mr. Nadeem Butt (FCA) got 1st & 2ndpositions all over the Pakistan by
scoring 98% & 97% marks in Taxation exam of ICMAP.

Student of Mr. Nadeem Butt (FCA) got the first gold medal in the history of SKANS School
of Accountancy, Lahore in Financial Accounting Module C exam of ICAP.
INCOME TAX
For CA & ICMAP Students
S. No. CHAPTERS Page No.
1 Taxation System 1
2 Ethics in tax Laws 9
3 Constitutional Provisions 17
4 Preliminary 27
5 Introduction & geographical source of income 59
6 Computation of taxable income 71
7 Income from Salary 85
8 Income from property 111
9 Income from business 125
10 Assets and depreciation 147
11 Method of accounting & records 171
12 Capital gains 183
13 Income from other sources 205
14 Losses 219
15 Tax credits 237
16 Common rules 255
17 Returns and Assessments 265
18 Appeals & Revisions 287
19 Income Tax Authorities 301
20 Exemptions other than Covered in Respective Chapters 319
Solved Past Papers Income Tax Numericals of CA Module
21
C - (2001 to 2015) 323
For CA Mod F & ICMAP Students
S. No. CHAPTERS Page No.
22 Final Tax Regime & Minimum Tax 383
23 Deduction / Payment of Tax 407
24 Offences and prosecutions 455
25 Insurance business 465
26 Oil, natural gas & other mineral deposits 473
27 Banking business 481
28 Solved Past Papers Income Tax Numericals of ICMAP Stage IV 489
(2003 to 2015)
SALES TAX
For CA & ICMAP Students
S. No. CHAPTERS Page No.

1 Preliminary 535
2 Registration 549
3 Sales Tax Returns 561
4 Records & Books 569
5 Scope and Payment of Tax 577
6 Practice questions with solutions 603
7 Solved Past Papers Sales Tax Numericals of ICAP - (2003 to 2015) 615

For CA Mod F & ICMAP Students


S. No. CHAPTERS Page No.

8 Recovery of Arrears & Refund 637


9 Offences & Penalties 649
10 Appeals 659
11 Sales Tax Special Procedure Rules, 2007 665
12 Sales Tax Special Procedure (Withholding) Rules, 2007 685
13 Solved Past Papers Sales Tax Numericals of ICMAP Stage IV
(2003 to 2015) 691
14 Third, fifth and sixth Schedules 705
15 Eighth and Ninth Schedules 715
CAPITAL VALUE TAX & FEDERAL
EXCISE DUTY
For CA Mod F & ICMAP Students
S. No. CHAPTERS Page No.

(A) CAPITAL VALUE TAX 729

(B) FEDERAL EXCISE ACT & RULES, 2005

1 Definition 733
2 Levy, Collection & Payment of Duty 737
3 Offences & Penalties 745
4 Federal Excise Rules, 2005 751
Syllabus CAF-6 OF ICAP
Objective
The aim of this paper is to develop basic knowledge and understanding in the core areas of Income Tax and its
chargeability as envisaged in the Income Tax Ordinance 2001 and the Income Tax Rules 2002 (relevant to the
syllabus), Sales Tax Act 1990 and the Sales Tax Rules (relevant to the syllabus).

Grid Weighting
Objective, system and historical background, constitutional provisions and ethics 10
Income tax 65
Sales tax 25
Total 100

Syllabus
Contents Level Learning Outcome
Ref

A Basic concepts of taxation


1 Objectives 1 LO 1.1.1: Comprehend the main objectives of taxation
LO 1.1.2: Justify Taxation as means of development

2 Basic concept 1 LO 1 2.1: Understands the implication of direct and


indirect taxation

3 System of taxation in Pakistan 1 LO 1.3.1: Comprehend different kinds of taxes and


(Income Tax, Sales Tax, Federal their scope
Excise Tax, Capital Value Tax,
Customs)
4 Historical background 1 LO 1.4.1: State the history of taxation in sub-continent

B Constitutional provisions
1 Federal financial procedures 1 LO 2.1.1: Demonstrate familiarity with the Federal
(Article 78 to 88 of the Constitution Consolidated Fund and Public Account
of Pakistan) LO 2.1.2: Demonstrate familiarity with the expenditure
that can be charged upon Federal Consolidated Fund
2 Provincial financial procedures 1 LO 2.2.1: Demonstrate familiarity with the Provincial
(Article 118 to 127 of the Consolidated Fund and Public Account
Constitution of Pakistan) LO 2.2.2: Demonstrate familiarity with the expenditure
that can be charged upon Provincial Consolidated
Fund

i
Syllabus
Contents Level Learning Outcome
Ref

3 Distribution of revenues between 1 LO 2.3.1: Demonstrate familiarity with the formation of


Federation and the Provinces National Finance Commission and its main function.
(Article 160 to 165A of the LO 2.3.2: Demonstrate familiarity with the taxes that
Constitution of Pakistan) can be raised under the authority of Parliament
LO 2.3.3: Demonstrate familiarity with the powers of
provincial assemblies in respect of professional tax
LO 2.3.4: Demonstrate familiarity with the exemption
available to federal and provincial governments
LO 2.3.5: Demonstrate familiarity with the tax on
corporation owned by federal and provincial
government
4 Federal legislative lists relating to 1 LO 2.4.1: Enlist the revenue collection mentioned at
revenue generating measures S. No. 43 to 53 in Fourth Schedule attached to the
(related part of Fourth Schedule to Constitution
the Constitution of Pakistan)
C Ethics
1 Ethics for tax legislation 2 LO 3.1.1: Describe how canons of taxation developed
by economist are relevant for legislators while
formulating tax policies
2 Ethics for taxpayers 2 LO 3.2.1: Understand the right and purpose of state to
tax its citizen
LO 3.2.2: Understand morality behind compliance
with tax laws
3 Ethics for tax implementing 2 LO 3.3.1: Understand the powers Vs. ethical
authorities responsibilities of tax implementation authorities
LO 3.3.2: Understand pillars of tax administration,
namely, fairness, transparency, equity and
accountability
4 Tax evasion and avoidance 2 LO 3.4.1: Explain with simple examples the basic
difference between evasion and avoidance of tax

ii
Syllabus
Contents Level Learning Outcome
Ref

D Income Tax
1 Chapter I Preliminary (concepts 1 LO 4.1.1: Describe the definitions given in section 2
of terms defined section 2 sub- sub-section 1, 5, 5A, 6, 7, 9, 10, 11A, 19, 19C, 20, 21,
section 1, 5, 5A, 6, 7, 9, 10, 11A, 22, 23, 29, 29A, 29C, 36, 37, 38, 41, 44A, 46, 47, 49,
50, 51, 52, 53, 68
19, 19C, 20, 21, 22, 23, 29, 29A,
LO 4.1.2: Describe other definitions covered under
29C, 36, 37, 38, 41, 44A, 46, 47,
relevant sections
49, 50, 51, 52, 53, 68) LO 4.1.3: Apply definitions on simple scenarios
2 Chapter II Charge of tax 2 LO 4.2.1: Explain the chargeability of tax with simple
(excluding section 7) examples
3 Chapter III Tax on Taxable 2 LO 4.3.1: Compute taxable income and tax thereon
income (Excluding Section 29A, 30 relating to salary, income from property, income from
and 31) business, capital gain, dividend, profit on debt, ground
rent, rent from sub-lease, income from provision of
amenities, utilities or any other services connected
with rented building and consideration for vacating the
possession of building
4 Chapter IV (Part I, II and III) 1 LO 4.4.1: Understand and apply on simple scenarios
Common rules (Excluding Sections provisions for income of joint owner, apportionment of
78 and 79) deductions, fair market value and receipt of income
LO 4.4.2: Explain using simple examples the
provisions relating to tax year
LO 4.4.3: Explain with simple examples the provisions
relating to disposal and acquisition of assets, cost and
consideration received
5 Chapter V Part I Central 2 LO 4.5.1: Describe with simple examples the meaning
concepts of persons, resident and non-resident persons and
associates
6 Chapter V Part II Div I and II 2 LO 4.6.1: Describe with simple examples the
Individuals (Excluding Section principles of taxation of individuals
88A)
7 Chapter V Part III Association of 2 LO 4.7.1: Describe with simple examples the
persons principles of taxation of association of persons
8 Chapter VII Part II Taxation of 2 LO 4.8.1: Understand the applicability of tax on
foreign-source income of residents foreign salary income, credit against foreign tax and
treatment of foreign loss of a resident on simple
scenarios.
9 Chapter X Part I Returns 2 LO 4.9.1: Identify persons required to furnish a return
of income
LO 4.9.2: Identify persons not required to furnish a
return of income
LO 4.9.3: Identify persons required to furnish wealth
statements
LO 4.9.4: List the contents of wealth statement
10 Chapter X Part II Assessments 1 LO 4.10.1: Understand the meaning of assessment by
Commissioner and power of Commissioner to conduct
audit

iii
Syllabus
Contents Level Learning Outcome
Ref

11 Chapter X Part III Appeals 1 LO 4.11.1: List the appellate bodies


LO 4.11.2: Explain using simple examples the
circumstances when appeal to the Commissioner
(Appeals) is made and the pre-conditions applicable
LO 4.11.3: Explain the provisions relating to decision
of appeals by Commissioner (Appeals) using simple
examples
12 Chapter X Part VIII Records, 2 LO 4.12.1: Understand the provisions relating to
Information Collection and Audit records to be kept by the taxpayers
(Section174 and 177) LO 4.12.2: Describe the provisions relating to audit by
Commissioner
13 The Income Tax Rules related to 1 LO 4.13.1: Apply rules relevant to learning outcomes
the above chapters of the Income specified against each topic on well explained
Tax Ordinance 2001 shall also be scenarios
examined
14 First and Second Schedule 2 LO 4.14.1: Apply clauses relevant to learning
attached to the Income Tax outcomes specified against each topic on well
Ordinance 2001 explained scenario

iv
Syllabus
Contents Level Learning Outcome
Ref

E Sales Tax
Sales Tax Act 1990
1 Chapter I Preliminary (concepts 2 LO 5.1.1: Describe the definitions given in section 2
of terms defined Section 2 sub- sub-section 3, 5AA, 9, 11, 14, 16, 17, 20, 21, 22A, 25,
sections 3, 5AA, 9, 11, 14, 16, 17, 27, 28, 29A, 33, 35, 39, 40, 41, 43, 44, 46
20, 21, 22A, 25, 27, 28, 29A, 33, LO 5.1.2: Describe other definitions covered under
35, 39, 40, 41, 43, 44, 46) relevant sections
LO 5.1.3: Apply definitions on simple scenarios
2 Chapter II Scope and payment of 2 LO 5.2.1: Understand the application sales tax law on
tax taxable supplies including zero rated and exempt
supplies
LO 5.2.2: State the determination, time and manner of
sales tax liability and payment using simple examples
3 Chapter III Registration LO 5.3.1: State the requirement and procedure of
registration
4 Chapter IV Book keeping and LO 5.4.1: List the record to be kept by a registered
invoicing requirements person
LO 5.4.2: State the requirements of tax invoice
LO 5.4.3: Explain the retention period of record using
simple examples.
5 Chapter V Returns LO 5.5.1: Understand the various types of returns
required to be filed by registered and un-registered
persons.
Sales Tax Rules, 2006
1 Chapter I Registration, 2 LO 6.1.1: Explain the requirement and procedure of
Compulsory registration and De- registration, compulsory registration and
registration deregistration using simple examples
2 Chapter II Filing of return 2 LO 6.2.1: Explain the requirement and procedure of
filing of return using simple examples
3 Chapter III Credit and Debit And 2 LO 6.3.1: Explain the requirement and procedure of
Destruction of Goods issuing debit and credit notes using simple examples
LO 6.3.2: State the procedure for destruction of goods
4 Chapter IV Apportionment of 2 LO 6.4.1: Explain the requirement and procedure of
Input Tax apportionment of input tax using simple examples

v
Syllabus ICMAP Stage IV
Introduction:
This course covers Income Tax Ordinance, 2001, the Income Tax Rules, 2002 and other Tax Laws such
as the Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act and Rules, 2005, as amended
to date.
Objectives:
To provide the students with an in-depth knowledge of Tax Laws, enabling them to apply in decision-
making process in different business situations.
Outcomes:
On completion of this course, students should be able to:
identify and interpret principal types of taxation, such as direct taxes on individuals, income,
business individuals, Association of persons, registered and unregistered firms and companies,
trading profit and capital gains, and indirect taxes such as sales tax, customs duty and central excise
duty,
describe features of the direct and indirect taxes,
describe record-keeping, filing and tax payment requirements of principal types of taxation, relating
to business,
compute for recommendations to the management on issues, pertaining to tax liabilities of company
or firm, arising from income generation and capital gains,
compute and advise on tax liabilities of individuals, arising from income receipts, capital gains,
business or professions and other sources, and
Identify foreign tax obligations, situations and apply appropriate methods for relieving from such tax.

Indicative grid

PART SYLLABUS CONTENT AREA WEIGHTAGE

INCOME TAX
A 50%
1. Income Tax Ordinance, 2001
2. Income Tax Rules, 2002
INDIRECT TAX (SALES TAX)
3. Sales Tax Act, 1990
B 30%
4. Sales Tax Rules
5. Sales Tax Special Procedures
6. Federal Excise Act and Rules, 2005
INDIRECT TAX (OTHER INDIRECT TAXES)
7. Sindh Sales Tax on Services Act, 2011
8. Sindh Sales Tax on Services Rules, 2011
9. The Punjab Sales Tax Ordinance 2000
C 10. Punjab Sales Tax on Services Rules, 2012 20%
11. Islamabad Capital Territory (Tax on Services) Ordinance,
2001
12. The North-west Frontier Province Sales Tax Ordinance,
2000
13. The Balochistan Sales Tax Ordinance, 2000
TOTAL 100%

Note: The weightage shown against each section indicates, study time required for the topics in that
section. This weightage does not necessarily specify the number of marks to be allocated to that section
in the examination.

vi
Detailed Contents of Syllabus of ICMAP Stage IV
PART-A
INCOME TAX
1. The Income Tax Ordinance 2001

Definitions; charge to tax; tax on taxable income (computation of income from salary, property,
business, capital gains (as per Capital Gain Tax Ordinance 2012), other sources, exemptions, losses,
deductible allowances, tax credits); common rules (general, tax year, assets); provisions governing
persons (concept, individuals, AOP, companies); special industries (insurance, oil & gas and other
mineral deposits); international (geographical source of income, taxation of foreign source of income of
residents, taxation of non-residents, double taxation); anti-avoidance; procedures (returns,
assessments, appeals, collection and recovery of tax, payments and deductions, refunds, records and
audit, penalty, offence and prosecutions, additional tax); administration (general, transitional advance
tax provisions, miscellaneous); Schedules (first schedule, second schedule, third schedule, sixth
schedule, seventh schedule). Special provisions regarding depreciation, initial allowance, intangibles,
pre-commencement expenses, scientific research expenditures, employees training and facilities, profit
on debt, financial costs and lease payment, bad debts, provisioning regarding consumer loans, profit on
non-performing debts, transfer to participating reserve and tax accounting. Nature and areas of tax
management; deduction of tax at source; advance payment of tax; minimum tax.
2. Income Tax Rules, 2002

Definitions related to the rules; heads of income; income of residents; tax of non-residents; transfer
pricing; records and books of accounts; certificates; advance tax collection or deduction, payment,
statements of tax collected or deducted. Income tax recovery rules, registration of income tax
practitioners, Recognized terminal benefits funds.

vii
PART-B
SALES TAX
3. The Sales Tax Act, 1990
Chapter No. I, II, III, IV, V VII, VIII and IX of the Act, as amended up-to-date covering; definitions; scope
and payment of tax; registration; book-keeping and invoicing requirements; returns; offences and
penalties, appeals and recovery of arrears.
4. The Sales Tax Rules 2006
Definitions related to rules, registration, compulsory registration and de-registration, filing of returns,
credit and debit note destruction of goods, apportionment of input tax, refund, supply of zero-rated
goods to diplomats, diplomatic missions, privileged persons and privileged organizations, taxpayers
authorized representatives, alternative dispute resolution, special procedure for issuance of electronic
sales tax invoices between buyers and sellers.
5. Sales Tax Special Procedure Rules 2007
Payment of Sales Tax by Retailers, providing or Rendering Services Subject to Tax under Provincial
Laws, Refund claim by the Persons Engaged in Making Zero Rates, payment of Sales Tax by Importers.
Payment of Tax by Steel Melters and Ship Breakers, sales tax special procedure (withholding) Rules
2007.

INDIRECT TAX

6. Federal Excise Act and Rules, 2005

Federal Excise Act, 2005, Sections 2 to 19, 31 & 33 to 39, Federal Excise Rules, 2005, Rules 7 to 10,
15 to 17, & 32 to 34. Capital value tax: section 7 of the Finance Act 1989 as amended up-to-date.
Notifications, rules general orders and circulars, issued under the above-mentioned laws

PART C

PROVINCIAL SALES TAX

7. Sindh Sales Tax on Services Act, 2011

Preliminary, Scope of Tax, Payment and Collection of Tax on Taxable Services, Registration & De-
Registration, Book Keeping and Audit Proceedings, Returns

8. Sindh Sales Tax on Services Rules, 2011


Definitions, Registration and De-Registration, Filling of Returns, Adjustment of Input Tax And Tax paid,
Procedure For Collection of Sales tax on services.

9. The Punjab sales Tax ordinance 2000

Preliminary, Scope of Tax, Payment & Collection of Tax on Taxable Services, Registration & De-
Registration, Book Keeping And Audit Proceedings, Returns, First schedule (Classification of Services),
Second Schedule (Taxable Services)

10. Punjab sales Tax on services Rules, 2012

Definition, Registration & De- Registration, Filling of Return, Adjustment of Tax.

11. Islamabad Capital Territory (Tax on Services) Ordinance, 2001

12. The NorthWest Frontier Province Sales Tax Ordinance, 2000

13. The Balochistan Sales Tax Ordinance, 2000

viii
Syllabus M.Com.
COURSE DESCRIPTION:
This course is designed to give student an understanding of the structure of taxation system in Pakistan
and the policy factors essential to the application of tax system in business enterprise. This
comprehensive course will enable students to know how the taxation system of the Pakistan allows
them to take effective business decisions.it will also guide them to apply current tax rules in their
organization for effective usage of resources,
LEARNING OBJECTIVES:
After studying this course the student should be able:
a) to understand the various terms with concepts used under the income tax and sales tax law in
Pakistan;
b) to compute income, total income and taxable income and tax thereon of individuals, AOPs /
partnerships and corporations after taking into account the different exemptions and reliefs
available;
c) to compute the advance tax liability under section 147 and withholding tax provisions under
specific sections of the Income tax Ordinance, 2001;
d) to understand how income tax returns are filed, how assessment under various sections framed
and ultimately the procedure to file appeals under the Income tax Ordinance, 2001; and
e) to file the various sales tax returns and how to compute the sales tax liability / refund of various
persons in Pakistan.
Course contents:
INCOME TAX ORDINANCE 2001 AND INCOME TAX RULES 2002
Overview, scheme and scope
Comprehension of basic rules and concepts
Basic principles of construction, relevant definitions / concepts
1. Assessment [section 2(5) ]
2. Business[section 2,(9) ]
3. Deductible allowance[section 2(16) ]
4. Dividend [section 2(19) ]
5. Employment [section 2(22) ]
6. Income [section 2(29) ]
7. Permanent establishment [section 2(41) ]
8. Persons [section 2(42) ]
9. Taxable income [section 2(64) Read with total income under section 2(69)]
10. Taxpayer [section 2(66) ]
11. Tax year [[section 2 (68) ]
TAX ADMINISTRATION
[COVERED IN 19TH CHAPTER]
1. Tax authorities [section 207]
2. Circulars, orders and directions issued by the FBR [Section 206,213 and 214]
3. Advance rulings [section 206 A]
Provisions governing persons [Section 80 to 84]
Central concepts
Person
Resident and non / resident persons
Associates
ix
Tax on taxable income

1. Heads of income [section 11 ]


2. Income for tax purposes [section 9 and 10 ]
3. Tax payable on taxable income [first Schedule to the Ordinance ]

Salary

[Sections 12 to 14 along with all other operating sections read with rule 3 to 7 income tax rules, 2002]

1. Basis of assessment
2. Residence
3. Employee share schemes
4. Perquisites and benefits in kind
5. Taxation at source
6. Pension, gratuity and receipts from provident fund
7. Exemptions and tax concession

Income from property

1 Basis of charge
2 Non / adjustable amounts received in relation to buildings

Profits chargeable to tax as income from business

[Sections 18 to 36, relevant clauses of Second Schedule and Rules 10 TO 12 and 13]

1 Principles regarding chargeable income


2 General principles for all allowable deductions
3 Deductions not allowed
4 Depreciation
5 Special provisions for allowable deductions in computing profits chargeable to tax as income
from business
6 Intangibles
7 Pre /commencement expenditure
8 Scientific research expenditure
9 Employee training and facilities
10 Profit on debt, financial costs and lease payments
11 Bad debts
12 Profit on the non-performing debts of a banking company or development finance institution
13 Transfer to participatory reserve
14 Relief for losses
15 Exemptions and tax concessions

Capital gains

[Sections 2(10) read with 37, section 76, 77, 78, 79, 95 to 97 and various exemption clauses]

1 Principles for computing capital gains


2 Deduction of losses
Income from other sources [Section 39, 40, 55(1), 67, 89,101(6), 111]

1. Description of other sources


2. Allowable deductions

x
Tax credits [Sections 61 to 65]

Set off and carry forward of losses [Sections 56 to 59B]

A. Principles relating to inter-head adjustments


B. Rules for carrying forward and subsequent adjustments

Minimum tax [Sections 113 to113B]

Advance tax and withholding tax regime [Sections 14, 231A to 236B]

Default surcharge [Section 205 and 205A]

Procedure for filing of income tax returns and assessment [Sections 114 to 126]

Appellate system [Sections 127 to 136]

xi
SALES TAX ACT 1990 OR REFORMED GST WITH RELEVANT RULES / NOTIFICATIONS

Overview, scheme and scope

Comprehension of basis rules and concepts relevant definitions/ concepts

1 Due date [section 2(9)]


2 Exempt supply [section 2(11)]
3 Goods [section 2(12)]
4 Input tax [section 2(14) ]
5 Registered person [section 2(25)]
6 Supply [section 2(33) ]
7 Tax [section 2(34)]
8 Taxable activity [section 2(41)]
9 Taxable supply [section 2(43)]
10 Tax period [section 2(43)]
11 Time of supply [section 2(44)]

Scope and payment of tax

[Sections 3 to13 with relevant rules 19 to 25]

Scope of chargeability, mode of collection etc.


Zero rating
Change in the rate of tax
Time and manner of payment
Determination of tax liability
Tax credit not allowed
Debit and credit note
Excess amount to be carried forward or refunded
Assessment of tax
Short-paid amounts recoverable without notice
Exemption

Return

[Sections 26, 26AA, section 27 to 29 with relevant Rules 13 to 18]

Monthly return
Turnover tax return
Retail tax return
Special return
Final return
Return deemed to have been made

xii
Taxation System Chapter-01

Chapter

1 TAXATION SYSTEM

Sr. No. TOPICS COVERED

1. History of tax laws in Pakistan

2. Introduction to different taxation laws of Pakistan

3. Basics of taxation laws

4. Objectives of tax laws

(FOR CAF-6, MODULE F & ICMAP STUDENTS)


1. HISTORY OF TAX LAWS IN PAKISTAN

1.1 History of tax laws in Pakistan

In undivided India (now consisting of Pakistan, Bangladesh and India) income tax was introduced for the first
time in the year 1860. It was introduced by Income Tax Act, 1860 and exactly the same pattern was followed
that was prevailing in those days in the United Kingdom. This Act came into force on July 31, 1860 and
continued for only five (5) years upto 01-08-1865 when it was completely withdrawn. A major characteristic of
this Act was that the agricultural income from land, above the rental value of RS.600 per annum, was taxable.

In Pakistan, Federal Government is empowered to levy and collect tax on the income of a person other than
the income taxable in the domain of the respective Provincial Governments.

Later on some of the provinces imposed general income tax on traders being as Income Tax Act of 1886. This
Act of 1886 was a great improvement on earlier enactments. Its basic scheme, by and large, survives till today.
It introduced the definition of agricultural income which is almost the same as in the income tax ordinance
2001. This Act continued in force for 32 years till 1918.

The 1918 Act consolidated a number of wartime amendments. A graduated super tax on income over
Rs.50,000 and on the undistributed profits of the corporation and other entities was introduced by the Super
Tax Act of 1917 and continued in force through modifications by the Super Tax Act of 1920. The Income Tax
Act and the Super Tax Act were later on consolidated in another Act i.e. the Income Tax Act of 1922.

After independence from British rule on 14-08-1947, the Pakistan Government adopted the Income tax Act,
1922, as amended upto that date. The provisions of the Act were extended to the whole of Pakistan except the
special areas. The Income tax Act 1922 continued for 57 years till 1979. Due to a number of changes the
Government has faced difficulties in its implementation the Government introduced Income tax Ordinance,
1979.
The job of improving the law continued after the promulgation this Ordinance through National Tax Reforms
Commission in 1985. The commission suggested that Income Tax Ordinance 1979 should be replaced by
Income Tax Ordinance, 2001. This new Income Tax Ordinance was promulgated on 13-09-2001 and it has
became effective from 01-072002. The Central Board of Revenue (now FBR) has claimed that the new
Ordinance is a justifiable, pragmatic, easy to understand and in accordance with the global environment. All
the income tax returns for the income earned from 01-07-2002 onwards are being taxed under this law.

Conceptual Approach to Taxes 1


Taxation System Chapter-01

The tabular presentation of laws in Pakistan is as under:

SR. Name of prevailing Law Remarks

1. Income tax Act, 1860 Repealed in 1865

2. Income tax Act, 1886 Effective till 1917

3. Income tax Act, 1918 including Super Tax Act, 1917 Enforced till 1920

4. Income tax Act, 1922 (Merged Income Tax Act, 1918 with Effective till 30-06-1979
Super Tax Act, 1917)

5. Income tax Ordinance, 1979 Effective till 30-06-2002

6. Income tax Ordinance, 2001 Enforced from 01-07-2002

2. INTRODUCTION TO DIFFERENT TAXATION LAWS OF PAKISTAN

2.1 Brief overview of different direct and indirect taxes


Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad
categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these
taxes is explained below:
DIRECT TAXES

SR. Name of prevailing Law Remarks

1. Income tax Ordinance, 2001 Being as direct tax the income Tax Ordinance, 2001, tax is
levied on the taxable income of a taxpayer earned during a
tax year computed by applying the specified tax rates as
applicable to respective Taxpayer.
For the purpose of the charge of tax and the computation of
total income, all income is classified under the following five
heads:

Income from salary


Income from property
Income from business
Capital gains; and

Income from other sources

2. Income Support Act, 2013 Although effective from tax year 2013 on every individual
whose net moveable wealth as per wealth statement
exceeds from Rs. 1 Million, he has to pay income support
levy @ 0.5%. However this Act has ultimately repealed
retrospectively through Finance Act, 2014.

3. Capital Value Tax Capital Value Tax on different transaction such as transfer
of immoveable property, transfer of rights and acquisition of
shares of listed Companies etc.

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INDIRECT TAXES
Following are the indirect Taxes under the Pakistani Taxation System.

SR. Name of prevailing Law Remarks

1. Customs Act, 1969 Goods imported and exported from Pakistan are liable to Customs
duties as prescribed through code or otherwise in Pakistan
Customs Tariff. Customs duties in the form of import duties and
export duties constitute a major part of the total tax receipts. The
rate structure of customs duty is determined by a large number of
socio-economic factors. However, the general scheme envisages
higher rates on luxury items as well as on less essential goods.
The import tariff has been given an industrial bias by keeping the
duties on industrial plants and machinery and raw material lower
than those on consumer goods.

2. Federal Excise Act, 2005 Federal Excise duties (FEDs) are leviable on a limited number of
goods produced or manufactured, and services provided or
rendered in Pakistan. On most of the items FED is charged on the
basis of value or retail price. Some items are, however, chargeable
to duty on the basis of weight or quantity. Classification of goods is
done in accordance with the Harmonized Commodity Description
and Coding system which is being used all over the world. All
exports are liable to 0% FED.

3. Sales Tax Act, 1990 Sales tax is a value added tax system. Being as indirect tax
collectable from whole supply chain i.e. importers, manufacturers,
wholesalers (including dealers and distributors) and retailers with
certain exceptions. Therefore , the sales tax is a multi stage tax
payable at standard rate of 17% u/s 3 of the Sales tax Act, 1990
on:
Goods imported into Pakistan;
All taxable supplies by a registered person in respect of any
taxable activity carried on by him;
VAT is a percentage tax levied on the price each registered person
charges for goods or taxable services rendered by him.
VAT normally utilizes as system of tax credit (being as input tax
adjustment) to place the ultimate and read burden on tax on the
final consumer and to relieve the intermediaries from any tax
burden except the final consumer.
Further there are also the concepts of minimum tax and Final tax
under the sales tax Act on specific persons or class of persons or
sectors as the case may be.

2.2 Tax reliefs in cross border transactions


In cross border Transactions, Pakistan taxation system provides following types of reliefs:
Unilateral Relief
A person resident in Pakistan is entitled to a relief in tax on any income earned abroad, if such income has
already been subjected to tax outside Pakistan. Proportionate relief is allowed on such income at an average
rate of tax in Pakistan or abroad, whichever is lower. It is important to state that foreign source income of non
residents in Pakistan is not taxable in Pakistan under section 11(6) of the Income tax Ordinance, 2001.
Agreement for avoidance of double taxation and fiscal evasion with respect to Taxes
The Government of Pakistan has so far signed agreements to avoid double taxation with more than 50
countries including almost all the developed countries of the world. These agreements lay down the ceilings on
tax rates applicable to different types of income arising in Pakistan. They also lay down some basic principles
of taxation which cannot be modified unilaterally.

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3. BASICS OF TAXATION LAWS


3.1 Basics of tax laws
Adam Smiths in his famous book Wealth of Nations has elaborated following canons of Taxation:
Equality
Tax payments should be proportional to income and applied equally to all concerned areas.
Certainty
Tax liabilities should be clear and certain.
Convenience of payment
Taxes should be collected at a time and in a manner convenient for taxpayer.
Economy of collection
Taxes should not be expensive to collect and should not discourage business.
3.2 Principles for levy of tax
Accordingly, following are broader principles for levy of taxes:
The Benefit Principle
This principle holds the individuals should be taxed in proportion to the benefits they receive from the
governments and that taxes should be paid by those people who receive the direct benefit of the
government programs and projects out of the taxes paid.
The Ability-to-Pay Principle
This principle holds that taxes should relate with the peoples income or the ability to pay, that is, people
with greater income or wealth and can afford to pay more taxes should be taxed at a higher rate than
people with less income or wealth.
The Equal-Distribution Principle
This principle that income, wealth, and transaction should be taxed at a fixed percentage; that is, people
who earn more and buy more should pay more taxes, but will not pay a higher rate of taxes.
3.3 Structure of taxes
A tax is proportional
Meaning that the government takes an amount of money from a person which is indirect proportion to
his income. Rashid income is Rs 100,000 and the employer is deducting 10% of his salary for tax. After
a year his income increases to Rs 150,000 and employer deducts 12% of his salary for tax. The said tax
is proportional.
A tax is regressive
Meaning that the governments takes a larger percentage of a persons income per tax, while he is
receiving a lower income. Rashid s salary Rs 100,000 and employer is deducintg 15% of his salary for
tax which is contrary to our given example in number 1.
A tax is progressive
Meaning that the government takes a larger percentage of his salary for tax due to his high salary.
Rashid has a monthly income of Rs 300,000 and employer deducted 20% of his salary for tax. The tax
amount is proportionately equal to someones status in the society. A rich man should pay more than a
poor man.
3.4 Characteristics of tax laws
Following are major characteristics of a Taxation system:
It is enforced contribution.
Its payment is not voluntary nature, and the imposition is not dependent upon the will of the person
taxed.
It is generally payable in cash.
This means that payment by cheques, promissory notes, or in kind should not be accepted.
It is proportionate in character.

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Payment of taxes should be based on the ability to pay principle; the higher income of the tax payer the
bigger amount of the tax paid.

It is levied (to impose; collect) on income, Person or property.


There are taxes that are imposed or levied on acts, rights or privileges.

It is levied by the state which has jurisdiction over the person or property.
As a general rule, only persons, properties, acts, right or transaction within the jurisdiction of the taxing
state are subject for taxation.
It is levied by the law making body of the state.
This means that a prior law must be enacted first by the Parliament in Pakistan.
It is levied for public purposes.
Taxes or imposed to support the government for implementation of projects and programs.
Fiscal adequacy
Means that the sources of revenue taken as a whole should be sufficient to meet the expanding
expenditures of the government regardless of business, export taxes, trade balances, and problems of
economic adjustment. Revenues should be capable expanding or contracting annually in response to
variations of public expenditures.
Equality or Theoretical Justice.
Means the taxes levied must be based upon the ability of the citizen to pay.
Administrative Feasibility.
This principle connotes that in a successful tax system, such tax should be clear and plain to taxpayers,
capable of enforcement by an adequate and well-trained staff of public office, convenient as to the time
and manner payment, and not unduly burdensome upon on discouraging to business activity.
Consistency or Compatibility with Economic Goals.
This refers to the tax laws that should be consistent with economic goals or programs of the
government. These are the basic services intended for the masses.
3.5 Forms of escape from taxation
Shifting
It is one way of passing the burden of tax from one person to another.
For example: Taxes paid by the manufacturer may be shifted to the consumer by adding the
amount of the tax paid to price of the product.
Kinds of Shifting
Forward shifting occurs when the burden of the tax is transferred from a factor of the production
to the factor of distribution.
Backward shifting occurs when the burden of tax is transferred from the consumer to the
producer or manufacturer.
Onward shifting occurs when tax is shifted to two or more times either forward or backward.
Capitalization
This refers to the reduction in the price of the tax object to the capitalized value of future taxes
which the purchaser expects to be called upon to pay.
For example: A reduction made by the seller on the price of the real estate, in anticipation of the
future tax to be shouldered by the future buyer.
Transformation occurs when the manufacturer or producer upon whom the tax has been
imposed pays the tax and endeavor to recoup (make up for) himself by improving his process
of production
Tax Exemption is the grant of immunity or freedom from a financial charge or obligation or
burden to which others are subjected.
Grounds for tax exemption:

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Contract, wherein the government is the contracting party.


Public policy
Reciprocity

3.6 Strategies of taxation management


Tax practitioners and Taxpayer normally adopts any of the following technique to lessen Tax burden:
Tax Evasion is the practice by the taxpayer whereby revenue results are understated to defeat at or
lessen the amount for tax. This is also known as tax evasion.
Tax avoidance is non-declaration of income and non-payment of due taxes, this is called Tax
avoidance, it is called Tax Avoidance and is an offence.
Tax Planning is the exploitation/use by the taxpayer of legally permissible methods, Tax credits, tax
rebates, tax reductions in order to avoid or reduce tax liability. This is also known as tax minimization.

3.7 Example

Explain which type of Tax strategy is being employed by following persons and what are its legal
consequences:

Tax Law Objective


Mr. Babar has earned Turnover of Rs. 5 (M), however, he kept Tax avoidance, Criminal Act, He
its cash in his bank locker and hide that from Tax authorities. He cannot buy any asset or settle
paid all its related expenses from cash. liabilities unless he declare this
income
Mr. Tanveer earned income of Rs. 6(M), however, he declared Tax evasion, understatement is
only so much of income which is verifiable from the banks i.e. similar to Tax avoidance
4(M), remaining amount he has hidden in a separate bank
account
Mr. Yousaf has earned Rs. 7(M), however, he recorded Tax planning, it is legally
expenses incurred against such receipts, and accordingly, he permissible and appreciable Act.
offered the remaining income of Rs 3(M) for Taxes. He paid
salary to his brother to the extent it remain taxable below the tax
rate of 10%. In such way that he get reduction in tax rate.

4. OBJECTIVES OF TAX LAWS

4.1 Definition of taxation and its revenue objectives


Taxation is defined in many ways, common definition are as under:
It is the process by which the sovereign, through its law making body, raises revenues in order use it for
expenses of government.
It is a means of government in increasing its revenue under the authority of the law, purposely used to
promote welfare and protection of its citizenry.
It is the collection of the share of individual and organizational income by a government under the
authority of the law.

4.2 Non-revenue objectives


Taxes are primary revenue yielding tools of the Government of modern ages. The government levy taxes in
order to achieve following objectives:
For collection of revenue to run and administer the Government;
To use as a tool for implementation of its policies; and
For fair distribution of wealth.
Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry out
the national objective of social and economic development.

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To strengthen anemic enterprises by granting them tax exemptions or other conditions or incentives for
growth;
To protect local industries against foreign competition by increasing local import taxes;
As a bargaining tool in trade negotiations with other countries;

To counter the effects of inflation or depression;


To reduce inequalities in the distribution of wealth;
To promote science and invention, finance educational activities or maintain and improve the efficiency
of local forces;
To implement laws which eliminate discrimination among various elements in the markets / businesses.

4.3 Example

Explain what are the objectives of following tax laws:

Sr. Tax Law Objective


1. Tax on Salary income (including income from other Revenue Collection
heads of income) under various sections of the
Income Tax Ordinance, 2001
2. Any amount transferred otherwise than banking Documentation of economy
channel will be deemed as income u/s 39
3. Tax on moveable assets of the taxpayers Fair distribution of wealth
4. Higher taxes on import of luxury Goods Reduction in imports of unnecessary
goods and create good balance of Trade
5. Allowability of expenditure of Research & Promotion of Research & developments
developments
6. Zero rating on Exports, reduced rates of taxes on Promotion of Exports
imports
7. Tax credit on donations to approved institutions u/c 61 To promote culture of payment of
of Part 1 of the 2nd Schedule to the Income tax donation to only organised and regulated
Ordinance, 2001 institutions
8. Tax credit on investments in listed Companies shares Promote investments in listed
u/s 61 companies
9. Tax exemptions to software exports u/c 133 of Part 1 Promote software Industry
of the 2nd Schedule to the Income tax Ordinance,
2001

4.4 Taxes as mean for development


Taxes are one of the main mean for development. This is not because that revenue collected by the state is
used on developmental projects rather taxes can be used in many a ways to bring development in the country.
Some examples are as under:
The Government can declare some areas as free zone, industrial zone, economic zone and provide tax
incentives to such areas. These under developed area will become focus of businessman/industrialist.
This will bring employment, opportunities and prosperity in these un-developed areas.
Taxing the rich at higher rate whereas taxing the low income group at low tax rates
Imposition of high custom duty rates on luxury items or kind of items which are also manufactured in
Pakistan. This promotes local manufacturers and industry.

Tax credits on charity/donations to promote welfare activities.


Tax exemptions to charity organization /educational institutions to promote these activities.
Tax incentives for agro based projects to promote agriculture.

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CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q.NO.9 Spring 2015 State any five ways through which taxes can be used for development of the country.
Q.NO.10 Spring 2015 Briefly explain any three indirect taxes applicable in Pakistan.
Q.NO.7 Autumn 2014 The primary objective of a taxation system is to collect revenue. You are required to list the other
objectives (non-revenue) which a taxation system can achieve.

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Ethics in Tax Laws Chapter-02

Chapter

2 ETHICS IN TAX LAWS

Sr. No. TOPICS COVERED

1. Ethics

2. Ethics for Legislators

3. Ethics for Administrators

4. Ethics for Practitioners

5. Ethics for taxpayers

(FOR CAF-6, MODULE F & ICMAP STUDENTS)


1. ETHICS
1.1 Ethics meanings and application
The word ethics is derived from the Greek word ethos, which means "character," and from the Latin word
mores, which means "customs." Aristotle was one of the first great philosophers to study ethics. To him, ethics
was more than a moral, religious, or legal concept. He believed that the most important element in ethical
behaviour is knowledge that actions are accomplished for the betterment of the common good. He asked
whether actions performed by individuals or groups are good both for an individual or a group and for society.
To determine what is ethically good for the individual and for society, Aristotle said, it is necessary to possess
three virtues of practical wisdom: temperance, courage, and justice.
2. ETHICS FOR TAX LEGISLATORS
2.1 Ethics for tax legislators
Although we have already discussed the objectives of Taxation however the same are repeated here at the
cost of repetition.
For collection of revenue to run and administer the Government;

To use as a tool for implementation of its policies; and


For fair distribution of wealth.
Non-revenue objectives
Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry out
the national objective of social and economic development.
To strengthen anemic enterprises by granting them tax exemptions or other conditions or incentives for
growth;
To protect local industries against foreign competition by increasing local import taxes;
As a bargaining tool in trade negotiations with other countries;
To counter the effects of inflation or depression;
To reduce inequalities in the distribution of wealth;
To promote science and invention, finance educational activities or maintain and improve the efficiency
of local forces;
To implement laws which eliminate discrimination among various elements in the markets / businesses.

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In the second Chapter, we discussed the provisions of Constitution of Pakistan which empowers the legislators
to legislate for levy of Taxes on the masses. These powers are not unfettered and it should carry some ethical
and rational basis. This matter is further discussed as under:

2.2 Ethics and canons of taxation


According to Hugh Dalton, "a tax is a compulsory contribution imposed by a public authority, irrespective of the
exact amount of service rendered to the taxpayer in return, and not imposed as penalty for any legal offence."
As per above definition, Taxes are compulsory contribution. Secondly, its compliance is must for a citizen
living in that prescribed Jurisdiction otherwise State has right of enforcement its laws including recovery of tax
through prescribed coercive measures. Now, state right to tax its masses should be based upon some rational
basis. A good tax system is one which is designed on the basis of an appropriate set of principles (rules).
The tax system should strike a balance between the interest of the taxpayer and that of tax authorities. Adam
Smith was the first economist to develop a list of Canons of Taxation. These canons are still regarded as
characteristics or features of a good tax system.

2.3 Canons of taxation


What are Canons of Taxation? Canons of Taxation are the main basic principles (i.e. rules) set to build a 'Good
Tax System'. The canons of taxation are as under:
(i) Canon of Equity: The word equality here does not mean that everyone should pay the exact, equal
amount of tax. What equality really means here is that the rich people should pay more taxes and the
poor pay less. This is because the amount of tax should be in proportion to the abilities of the tax payer.
It is one of the fundamental concepts to bring social equality in the country.
The canon of equality states that there should be justice, in the form of equality, when it comes to
paying taxes. Not only does it bring social justice, it is also one of the primary means for reaching the
equal distribution of wealth in an economy.
(ii) Canon of Certainty: The tax payers should be well-aware of the purpose, amount and manner of the
tax payment. Everything should be made clear, simple and absolutely certain for the benefit of the
taxpayer. The canon of certainty is considered a very important guidance rule when it comes to
formulating the tax laws and procedures in a country. The canon of certainty ensures that the taxpayer
should have full knowledge about his tax payment, which includes the amount to be paid, the mode it
should be paid in and the due-date. It is believed that if the canon of certainty is not present, it leads to
tax evasion.
(iii) Canon of Convenience: Canon of convenience can be understood as an extension of canon of
certainty. Where canon of certainty states that the taxpayer should be well-aware of the amount,
manner and mode of paying taxes, the canon of convenience states that all this should easy,
convenient and taxpayer-friendly. The time and manner of payment must be convenient for the tax
payer so that he is able to pay his taxes in due time. If the time and manner of the payment is not
convenient, then it may lead to tax evasion and corruption.
(iv) Canon of Economy: The whole purpose of collecting taxes is to generate revenue for the company.
This revenue, in turn, is spent on public welfare projects. The canon of economy keeping in view the
above-mentioned purpose states that the cost of collecting taxes should be as minimum as possible.
There should not be any leakage in the way. In this way, a large amount of the collections will go
directly to the treasury, and therefore, will be spent in the government projects for the welfare of the
economy, country and the people. On the other hand, if the canon of economy isnt applied and the
overall cost of collecting taxes is unreasonably high, the collected amount will not be sufficient in the
end.
(v) Canon of Productivity: By virtue of the canon of productivity, it is better to have fewer taxes with large
revenues, rather than more taxes with lesser amounts of revenue. It is always considered better to
impose the only taxes that are able to produce larger returns. More taxes tend to create panic, chaos
and confusion among the taxpayers and it is also against the canon of certainty and convenience to
some extent.
(vi) Canon of Elasticity: An ideal system of taxation should consist of those types of taxes that can easily
be adjusted. Taxes, which can be increased or decreased, according to the demand of the revenue, are
considered ideal for the system. An example of such a tax can be the income tax, which is considered
very much ideal in accordance with the canon of elasticity. This example can also be taken in
accordance with the canon of equality. Flexible taxes are more suited for bringing social equality and
achieving equal distribution of wealth. Since they are elastic and easily adjustable, many government
objectives can be achieved through them.

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(vii) Canon of Simplicity: The system of taxation should be made as simple as possible. The entire
process should be simple, non-technical and straightforward. Along with the canon of certainty, where
the amount, time duration and manner of payment is made certain, the canon of simplicity avoids cases
of corruption and tax evasion if the entire method is made simple and easy.
(viii) Canon of Diversity: Canon of diversity refers to diversifying the tax sources in order to be more
prudent and flexible. Being heavily dependent on a single tax source can be detrimental for the
economy. Canon of diversity states that it is better to collect taxes from multiple sources rather than
concentrating on a single tax source. Otherwise, the economy is more likely to be confined, and hence,
its growth will be limited as well.
(ix) Canon of Flexibility: Canon of flexibility means that the entire tax system should be flexible enough
that the taxes can easily be increased or lowered, in accordance with the government needs. This
flexibility ensures that whenever the government requires additional revenue, it can be generated
without much hassle. Similarly, when the economy isnt booming, lowering taxes shouldnt be a problem
either.
Conclusion:
So these are the nine (9) canons of taxation that are used as the fundamentals for any taxation system and
study about taxation principles. Although Mr. Adam Smith originally presented the first four canons. Later, in
order to better suit to modern economies and for the sake of evolution as well, more canons were introduced.
2.4 Responsibilities of the tax legislators
The tax structure is a part of economic organisation of a society and therefore fit in its overall economic
environment. No tax system that does not satisfy above canons of Taxation can be termed a good one.
Moreover, the state should pursue that the primary aim of the tax should be to raise revenue for public
services, however, People should be asked to pay taxes according to their ability to pay and assessment of
their taxable capacity should be made primarily on the basis of income and property. May it be added here that
tax should not be discriminatory in any aspect between individuals and also between various groups.
3. ETHICS FOR TAX ADMINISTRATORS
3.1 Ethics for tax administrators introduction
Federal Board of Revenue is empowered under the law to monitor, assess, levy, collect taxes according to the
tax legislations. There are a number of occasions whereby they possess any of the following descretionary
powers.
Asses taxes;
Collect Revenue;
Seize Property;
Attatch Bank A/cs;
Commence legal (criminal/civil) proceedings against the taxpayer
Such descretionary powers may be misused and can become abusive powers as exercise of that power can
result in the following against the taxpayer:
Loss of property and income;
Imprisonment
So, these power can result in the loss of some of the fundamental human rights of the taxpayer. Ethics tend to
bring these powers within the principles of good and morality.

Example:
Mr. Asif is running a textile unit and income tax amounting to Rs. 15(M) is assessed against him. His bank
accounts balance is Rs. 10M, however, he has to fulfil his exports orders. In case he fails to fulfil his orders,
he will loose his clients and that orders. Moreover, he has to face SBP penal action for non export.
Considering his present critical financial position, Mr. Asif believes that tax recovery proceedings by recovery
from bank account (Attachment of bank account) will entail to an irreparable loss to his organisation. So he
requested to Commissioner Inland Revenue for allowing him to pay the due tax in instalments.
Now Commissioner Inland Revenue has power to allow him instalments (but to be paid with default
surcharge) or recover this tax directly from his bank account, unless stay order provided by the taxpayer from
the Commissioner Inland Revenue (Appeals) or honourable High Court. Justice and equity demands that his
request should be entertained; if not so then stay order as discussed shall be in the field. However the
allowablility of instalments will result into for the continuation and prosperity of business that eventually result
in payment of better taxes in future whereas recovery of tax will jeopardise his business operation.

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Example:
Income Tax Ordinance, sales Tax law, Federal excise law empower tax authorities to select cases for Audit
under various sections of the respective laws. This power can be misused by selecting some cases while
leaving many unaudited even in the presence of power of amendment in assessment under section 122 of
the Income Tax Ordinance, 2001. Thus, despite the law provides unfettered powers however, such powers
should be exercised on some ethical and rational basis.

3.2 Pillars of tax administration


In order to safeguard the interest of taxpayers and avoid abuse of powers by he Tax administration. Following
four pillars of Tax administration are defined:
1. Fairness
Strive to be impartial, fair, neutral and consistent in administering the law without regard to race, social
or economic circumstance;

2. Transparency
All Proceedings must be transparent and must be seen as transparent.
3. Equity
Best Tax administration is not that which collects most revenue rather it depends how this revenue
generation is accomplished. Whether all stakeholders are taxed fairly or tax is collected from poor
/salaried class after failing to collect taxes from entrepreneurs/businesses. Thus, equity demands that
tax administrator should not achieve its objectives in an irrational manner.
4. Accountability
There must be a strong system of accountability for wrong doers which should curb corruption, nepotism
and maladministration.
Under the four pillars, some of the ethical issues facing Tax administration:
1. Acceptance of gifts;
2. Conflict of Interest;
3. Selective application of the law/ or inconsistency in applying the law;
4. Political influence;
5. Confidentiality/secrecy;
6. Discretion;
7. Corruption;
8. Lack of Autonomy
In order to avoid pitfalls of the abusive use of discretion, seven principles for structuring discretion are defined
which are as under:
Open plans,
Open policy statements,
Open rules,
Open findings,
Open reasons,
Open precedents and
Fair informal procedure
3.3 Responsibilities of the tax implementing authorities
The tax administrator shall perform the following responsibilities:-
1. implement the tax administration reforms;
2. promote voluntary tax compliance and to make the tax administration a service oriented organization
and to implement comprehensive policies and programs for the education and facilitation of taxpayers,
stakeholders and employees, etc.;

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3. adopt modern effective tax administration methods, information technology systems and policies in
order to consolidate assessments, improve processes, organize registration of tax payers, widen the tax
base, and make departmental remedies more efficient including enforcement of, or reduction or
remission in, duty, penalty or tax, in accordance with the relevant law for the time being in force;
4. improve the productivity through a comprehensive and effective human resource strategy;
5. identify and select through Internal Job Posting process the employees for designated jobs;
6. grant additional allowances or any other incentives and rewards to the employees and members of the
Board;
7. take appropriate measures including internal controls to combat corruption within the organizations
under the Board and provide checks to ensure the integrity of employees that is verified periodically
through applicable procedure which shall be made one of the criterion for promotion and incentives;
8. re-designate existing posts within its jurisdiction, prepare job description of any post and create posts as
per rules;
9. direct or advise, where necessary, investigation or inquiry into suspected duty tax evasion, tax and
commercial fraud, money-laundering, financial crimes cases and to coordinate with the relevant law
enforcement agencies;
10. introduce and maintain a system of accountability of performance, competence and conduct of the
employees.
11. implement international obligations pursuant to a treaty, resolution or any international commitment;
12. create a surplus pool of employees as and when required;
13. make regulations, policies, programs, strategies in order to carry out the purposes of this Act;
14. regulate and enter into any agreement, contract, understanding, with any international organization or
institution or donor agency or counterpart entity with approval of the FG;
15. set up mechanism and processes that facilitate removal of grievances and complaints of the tax payers;
16. enable electronic communication in respect of all taxation matters such as e-filing, e-payments, e-
notice, e-notification, digital imaging, protocols or agreements as may be prescribed; and
4. ETHICS FOR TAX PRACTITIONERS

4.1 Ethics for tax practitioners


There are five fundamental principles of Ethics for tax practitioners are set out below:
(i) Integrity. The principle of integrity imposes an obligation on all tax practitioners to be straightforward
and honest in all professional and business relationships. Integrity also implies fair dealing and
truthfulness. Tax practitioners should not be associated with the reports, returns, communications or
other information where they believe that the information;
(a) Contains a materially false or misleading statement;
(b) Contains statements or information furnished recklessly; or
(c) Omits or obscures information required to be included where such omission or obscurity would
be misleading.
(ii) Objectivity. The principle of objectivity imposes an obligation on all tax practitioners not to compromise
their professional or business judgment because of bias, conflict or interest or the undue influence of
others. A Tax practitioner may be exposed to situations that may impair objectivity. It is impracticable to
define and prescribe all such situations. Relationships that bias or unduly influence the professional
judgment of the tax practitioners should be avoided.
(iii) Professional competence and due care. The principle of professional competence and due care
imposes the following obligations on tax practitioners;
(a) To maintain professional knowledge and skill at such a level that clients or employer receives a
competent professional service; and
(b) To act diligently and in accordance with applicable technical and professional standards, when
providing professional services.
Competent professional service requires the exercise of sound judgment in applying professional
knowledge and skill in the performance of such service. Professional competence may be divided into
two separate phases;

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Ethics in Tax Laws Chapter-02

(a) Attainment of professional competence; and


(b) Maintenance of professional competence.
(iv) Confidentiality. The principle of confidentiality imposes an obligation on all tax practitioners to refrain
from:
(a) Disclosing to third parties the clients business confidential information acquired as a result of
professional and business relationships without proper and specific authority or unless there is a
legal or professional right or duty to disclose, and
(b) Using confidential information acquired as a result of professional and business relationships
should to their personal advantage or the advantage of third parties.
A tax practitioner should maintain confidentiality even in a social environment. The tax practitioner
should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long
association with a business associate or a close or immediate family member.
(v) Professional behavior. The principle of professional behavior imposes an obligation on all tax
practitioners to comply with relevant laws and regulations and avoid any action that may bring discredit
to the profession. This includes actions which a reasonable and informed third party, having knowledge
of all relevant information, would conclude negativity affects the good reputation of the profession.
5. ETHICS FOR TAX PAYERS

5.1 Three approaches of tax compliance


There are three approaches to ethics for tax compliance which are as under:
Utilitarianism is a theory in normative ethics holding that the proper course of action is the one that
maximizes utility, usually defined as maximizing total benefit and reducing suffering or the negatives. In
simple words, it is the way one helps himself in the art of decision-making.
Deontology, It is described as "duty" or "obligation" or "rule"-based ethics, because rules "bind you to
your duty."[
Virtue ethics, focus less on lying in any particular instance and instead consider what a decision to tell
a lie or not tell a lie said about one's character and moral behavior. As such, the morality of lying would
be determined on a case-by-case basis, which would be based on factors such as personal benefit,
group benefit, and intentions.

5.2 Ethics and morality for taxation compliance


For Taxpayers following utilitarian approach, the most important economic goals are to ensure that goods and
services are available to allow everyone to have a decent life, and to ensure that these resources are
distributed widely enough for all or most people to enjoy them. So these taxpayers are ready to pay taxes even
on highest rate. Moreover, their compliance level will be high as the need availability of resources for vast
majority of masses and country.
On the other hand, taxpayers liking the deontologist ethical approach lay down absolute duties. Such duty
includes respect to other peoples property rights. This could be interpreted to mean that there should be no
tax at all, because tax is the forcible transfer of property away from taxpayers. On the other hand, the duty to
respect property rights could be used to argue that any social resources one used should be paid for, even if
one did not ask for those resources to be provided. Thus in order not to be a thief, anyone who uses a public
hospital, or even a public road, should make sure that he or she pays tax to cover their use. So in deontologist
approach, taxes are paid as duty to pay off against the facilities used by the taxpayers.
Virtue ethics can be a bit more helpful on the question of the justice of taxation. One should use ones talents
to the full. Financial incentives can encourage people to use their talents, but very high taxation dampens down
those incentives by reducing take-home pay. Another virtue is charity, either in cash or in time. The more take-
home pay people have, the more likely it is that they will feel able to afford charitable donations; and the higher
peoples pay rates, the easier it will be for them to take time away from paid work to perform charity work or
other forms of civic service, as school trustee or Mutwali of Masjid for example. A third virtue is independence.
It is good to earn what one needs rather than to depend on subsidies from others. Lower rates of taxation
make independence more easily achievable.
Tax can be used for all sorts of purposes, and it is often clear what ethicists of any particular kind would say
about these purposes. We can start with the provision of law and order and the more extensive public services
such as healthcare and education. Utilitarians will approve of taxation for these things because they allow
more goods and services to be produced, and they also allow more non-materialistic desires to be satisfied.
Virtue ethicists will approve because these services enhance peoples opportunities to use their talents and to
lead flourishing lives.

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When we turn to aid to the poor, utilitarians will approve because transferring resources from rich to poor
increases the happiness of the poor more than it reduces the happiness of the rich. Virtue ethicists will approve
because with redistribution the poor can be helped to flourish and develop virtues, and because looking after
the less fortunate is itself a virtue (although voluntary charity may be a greater virtue than forced payment).
And deontologists can recognize a duty to care for the poor.
A taxation addressing the needs of all these ethical thoughts can get better compliance. Morality for Taxpayers
to pay taxes is very justified as state is responsible to provide infrastructure for a decent life. Moreover, State is
responsible for providing facilities to the masses then it is the duty of the masses to pay taxes for it. State also
provide level playing field to all the concerned so that talent can be explored at full. So it is necessary that
taxes should be paid to provide facilities, to control law & order situation, infrastructural development etc.

5.3 The conduct of taxpayers


Most taxpayers pay their taxes, without fuss. But not all taxpayers act in this way. So lastly lets look at whether
three other forms of behavior can be ethically acceptable: tax evasion, tax avoidance and tax planning. We
already discussed these strategies in the following manner:
Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts. Tax evasion often
entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to
reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or
gains than the amounts actually earned, or overstating deductions. Tax evasion is an activity commonly
associated with the informal economy.
Tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and avoidance
can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to
subvert a state's tax system, although such classification of tax avoidance is not indisputable, given that
avoidance is lawful, within self-creating systems.
Tax Planning is the exploitation/use by the taxpayer of legally permissible methods, tax credits, tax
rebates and tax reductions in order to avoid or reduce tax liability. This is also known as tax
minimization.
A utilitarian, concerned with aggregate welfare, might be quite relaxed about tax planning. After all, when tax is
avoided, wealth is not destroyed: it is merely kept in the private sector instead of being transferred to the public
sector. The main utilitarian concern would probably be that it would result in an unintended distribution of the
tax burden, as some of the burden would be shifted from the rich onto people on modest incomes who cannot
afford clever tax lawyers. That would reduce their satisfaction more than it would increase the satisfaction of
the better-off people who have reduced their tax burdens. But that loss to the poor might not happen.
A virtue ethicist would unlike tax planning. It is, after all, hardly virtuous to exploit rules knowing that one is
exploiting them in unintended ways to redistribute the disadvantage away from oneself. A deontologist would
not positively favour tax planning, but might not condemn it either. Deontologists can easily argue for a duty to
obey the law: yet obeying the law is something the tax planner takes care to do, in his own special way.

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Ethics in Tax Laws Chapter-02

CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q.NO.8 Autumn 2014 Briefly explain the ethical responsibilities of the tax implementing authorities.

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Constitutional Provisions Chapter-03

Chapter

3 CONSTITUTIONAL PROVISIONS

Under Article of TOPICS COVERED


Constitution

78 to 88 Federal Financial Procedures


118 to 127 Provincial Financial Procedures
161 to 165A Distribution of Revenues between Federation and Provinces

Federal Legislative List

(FOR CAF-6, MODULE F & ICMAP STUDENTS)


1. FEDERAL FINANCIAL PROCEDURES
1.1 Introduction
Constitution of Pakistan is prime source for all legislations in Pakistan. It distributes powers among Federation
and Provinces. It provides procedures for levy and collection of taxes along-with procedures for use and
exploitations of funds received from taxes or by the Federation from any other source. This chapter has been
divided into the following three main areas:
Federal Financial Procedures
Provincial Financial Procedures
Distribution of Revenues between Federation & Provinces
The detailed explanation of the above areas is as under.
1.2 Federal consolidated fund and public account [Under Article 78]
All revenues received by the Federal Government, all loans raised by that Government and all moneys
received by it in repayment of any loan, shall form part of a consolidated fund, to be known as the Federal
Consolidated Fund.
All other moneys:
received by or on behalf of the Federal Government; or
received by or deposited with the Supreme Court or any other court established under the authority of
the Federation;
Shall be credited to the Public Account of the Federation.
1.3 Custody , etc., of federal consolidated fund and public account [Under Article 79]
The custody of the Federal Consolidated Fund, the payment or moneys into that Fund, the withdrawal of
moneys there from, the custody of other moneys received by or on behalf of the Federal Government, their
payment into, and withdrawal from, the Public Account of the Federation, and all matters connected with or
ancillary to the matters aforesaid shall be regulated by Act of Majlis-e-Shoora (Parliament) or, until provision in
that behalf is so made, by rules made by the President.
1.4 Annual budget statement [Under Article 80]
The Federal Government shall, in respect of every financial year, cause to be laid before the National
Assembly a statement of the estimated receipts and expenditure of the Federal Government for that year, in
this Part, referred to as the Annual Budget Statement.

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The Annual Budget Statement shall show separately:


the sums required to meet expenditure described by the Constitution as expenditure charged upon the
Federal Consolidated Fund; and
The sums required to meet other expenditure proposed to be made from the Federal Consolidated
Fund; and
shall distinguish expenditure on revenue account from other expenditure.
1.5 Expenditure charged upon federal consolidated fund [Under Article 81]
The following expenditure shall be expenditure charged upon the Federal Consolidated Fund:-
the remuneration payable to the President and other expenditure relating to his office, and the
remuneration payable to-
the Judges of the Supreme Court and the Islamabad High Court;
the Chief Election Commissioner;
the Chairman and the Deputy Chairman;
the Speaker and the Deputy Speaker of the National Assembly;
the Auditor-General;
The administrative expenses, including the remuneration payable to officers and servants, of the
Supreme Court, the Islamabad High Court, the department of the Auditor-General, the Office of the
Chief Election Commissioner and of the Election Commission and the Secretariats of the Senate and
the National Assembly;
All debt charges for which the Federal Government is liable, including interest, sinking fund charges, the
repayment or amortisation of capital, and other expenditure in connection with the raising of loans, and
the service and redemption of debt on the security of the Federal Consolidated Fund;
Any sums required to satisfy any judgment, decree or award against Pakistan by any court or tribunal;
and
Any other sums declared by the Constitution or by Act of Majlis-e-Shoora (Parliament) to be so charged.
1.6 Procedure relating to annual budget statement [Under Article 82]
So much of the Annual Budget Statement as relates to expenditure charged upon the Federal
Consolidated Fund may be discussed in, but shall not be submitted to the vote of, the National
Assembly.
So much of the Annual Budget Statement as relates to other expenditure shall be submitted to the
National Assembly in the form of demands for grants, and the Assembly shall have power to assent to,
or to refuse to assent to, any demand, or to assent to any demand subject to a reduction of the amount
specified therein;
Provided that, for a period of ten years from the commencing day or the holding of the second general election
to the National Assembly, whichever occurs later, a demand shall be deemed to have been assented to
without any reduction of the amount specified therein, unless, by the votes of a majority of the total
membership of the Assembly, it is refused or assented to subject to a reduction of the amount specified
therein.
No demand for a grant shall be made except on the recommendation of the Federal Government.
1.7 Authentication of schedule of authorised expenditure [Under Article 83]
The Prime Minister shall authenticate by his signature a schedule specifying:
the grants made or deemed to have been made by the National Assembly under Article 82, and
the several sums required to meet the expenditure charged upon the Federal Consolidated Fund but not
exceeding, in the case of any sum, the sum shown in the statement previously laid before the National
Assembly.
The schedule so authenticated shall be laid before the National Assembly, but shall not be open to discussion
or vote thereon.
Subject to the Constitution, no expenditure from the Federal Consolidated Fund shall be deemed to be duly
authorised unless it is specified in the schedule so authenticated and such schedule is laid before the National
Assembly as required above.

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1.8 Supplementary and excess grants [Under Article 84]


If in respect of any financial year it is found:
that the amount authorized to be expended for a particular service for the current financial year is
insufficient, or that a need has arisen for expenditure upon some new service not included in the Annual
Budget Statement for that year; or
that any money has been spent on any service during a financial year in excess of the amount granted
for that service for that year;
the Federal Government shall have power to authorize expenditure from the Federal Consolidated
Fund, whether the expenditure is charged by the Constitution upon that Fund or not, and shall cause to
be laid before the National Assembly a Supplementary Budget Statement or, as the case may be, an
Excess Budget Statement, setting out the amount of that expenditure, and the provisions of Articles 80
to 83 shall apply to those statements as they apply to the Annual Budget Statement.
1.9 Votes on account [Under Article 85]
Notwithstanding anything contained in the foregoing provisions relating to financial matters, the National
Assembly shall have power to make any grant in advance in respect of the estimated expenditure for a part of
any financial year, not exceeding four months, pending completion of the procedure prescribed in Article 82 for
the voting of such grant and the authentication of the schedule of authorized expenditure in accordance with
the provisions of Article 83 in relation to the expenditure.
1.10 Power to authorise expenditure when assembly stands dissolved [Under Article 86]

Notwithstanding anything contained in the foregoing provisions relating to financial matters, at any time when
the National Assembly stands dissolved, the Federal Government may authorize expenditure from the Federal
Consolidated Fund in respect of the estimated expenditure for a period not exceeding four months in any
financial year, pending completion of the procedure prescribed in Article 82 for the voting of grants and the
authentication of the schedule of authorized expenditure in accordance with the provisions of Article 83 in
relation to the expenditure.
1.11 Secretariats of Majlis-e-Shoora (Parliament) [Under Article 87]
Each House shall have a separate Secretariat: Provided that nothing in this clause shall be construed as
preventing the creation of posts common to both Houses.
Majlis-e-Shoora (Parliament) may by law regulate the recruitment and the conditions of service of persons
appointed to the Secretarial staff of either House.
Until provision is made by Majlis-e-Shoora (Parliament) under clause (2), the Speaker or, as the case may be,
the Chairman may, with the approval of the President, make rules regulating the recruitment and the conditions
of service, of persons appointed to the secretarial staff of the National Assembly or the Senate.
1.12 Finance committees [Under Article 88]
The expenditure of the National Assembly and the Senate within authorised appropriations shall be controlled
by the National Assembly or, as the case may be, the Senate acting on the advice of its Finance Committee.
The Finance Committee shall consist of the Speaker or, as the case may be, the Chairman, the Minister of
Finance and such other members as may be elected thereto by the National Assembly or, as the case may be,
the Senate.
The Finance Committee may make rules for regulating its procedure.
2 PROVINCIAL FINANCIAL PROCEDURES
2.1 Introduction
Provincial financial Procedures are almost the same as Federal Financial Procedures; however, these are
discussed in detail as under:
2.2 Provincial consolidated fund and public account [Under Article 118]
All revenues received by the Provincial Government, all loans raised by that Government, and all revenues
received by the Provincial Government, all loans raised by that Government, and all moneys received by it in
repayment of any loan, shall form part of a consolidated fund, to be known as the Provincial Consolidated
Fund.
All other moneys:
received by or on behalf of the Provincial Government; or

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Constitutional Provisions Chapter-03

Received by or deposited with the High Court or any other court established under the authority of the
Province;
shall be credited to the Public Account of the Province.
2.3 Custody, etc., of provincial consolidated fund and public account [Under Article 119]
The custody of the Provincial Consolidated Fund, the payment of moneys into that Fund, the withdrawal of
moneys there from, the custody of other moneys received by or on behalf of the Provincial Government, their
payment into, and withdrawal from, the Public Account of the Province, and all matters connected with or
ancillary to the matters aforesaid, shall be regulated by Act of the Provincial Assembly or, until provision in that
behalf is so made, by rules made by the Governor
2.4 Annual budget statement [Under Article 120]
The Provincial Government shall, in respect of every financial year, cause to be laid before the Provincial
Assembly a statement of the estimated receipts and expenditure of the Provincial Government for that year, in
this Chapter referred to as the Annual Budget Statement.
The Annual Budget Statement shall show separately:
The sums required to meet expenditure described by the Constitution as expenditure charged upon the
Provincial Consolidated Fund; and
The sums required to meet other expenditure proposed to be made from the Provincial Consolidated Fund;
and shall distinguish expenditure on revenue account from other expenditure.
2.5 Expenditure charged upon provincial consolidated fund [Under Article 121]
The following expenditure shall be expenditure charged upon the Provincial Consolidated Fund:
The remuneration payable to the Governor and other expenditure relating to his office, and the remuneration
payable to:
the Judges of the High Court; and
the Speaker and Deputy Speaker of the Provincial Assembly;
the administrative expenses, including the remuneration payable to officers and servants, of the High
Court and the Secretariat of the Provincial Assembly;
all debt charges for which the Provincial Government is liable, including interest, sinking fund charges,
the repayment or amortization of capital, and other expenditure in connection with the raising of loans,
and the service and redemption of debt on the security of the Provincial Consolidation Fund;
any sums required to satisfy any judgment, decree or award against the Province by any Court or
tribunal; and
Any other sums declared by the Constitution or by Act of the Provincial Assembly to be so charged.
2.6 Procedure relating to annual budget statement [Under Article 122]
So much of the Annual Budget Statement as relates to expenditure charged upon the Provincial Consolidated
Fund may be discussed in, but shall not be submitted to the vote of, the Provincial Assembly.
So much of the Annual Budget Statement as relates to other expenditure shall be submitted to the Provincial
Assembly in the form of demands for grants, and that Assembly shall have power to assent to, or to refuse to
assent to, any demand, or to assent to any demand subject to a reduction of the amount specified therein:
No demand for a grant shall be made except on the recommendation of the Provincial Government.
2.7 Authentication of schedule of authorised expenditure [Under Article 123]
The Chief Minister shall authenticate by his signature a schedule specifying:
the grants made or deemed to have been made by the Provincial Assembly under Article 122, and
The several sums required to meet the expenditure charged upon the Provincial Consolidated Fund but
not exceeding, in the case of any sum, the sum shown in the statement previously laid before the
Assembly.
The schedule so authenticated shall be laid before the Provincial Assembly, but shall not be open to
discussion or vote thereon.
Subject to the Constitution, no expenditure from the Provincial Consolidated Fund shall be deemed to be duly
authorized unless it is specified in the schedule so authenticated and such schedule is laid before the
Provincial Assembly as required above.

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2.8 Supplementary and excess grants [Under Article 124]


If in respect of any financial year it is found:
that the amount authorized to be expended for a particular service for the current financial year is
insufficient, or that a need has arisen for expenditure upon some new service not included in the Annual
Budget Statement for that year; or
that any money has been spent on any service during a financial year in excess of the amount granted
for that service for that year;
the Provincial Government shall have power to authorize expenditure from the Provincial Consolidated Fund,
whether the expenditure is charged by the Constitution upon that Fund or not, and shall cause to be laid before
the Provincial Assembly a Supplementary Budget Statement or, as the case may be, an Excess Budget
Statement, setting out the amount of that expenditure, and the provisions of Article 120 to 123 shall apply to
those statements as they apply to the Annual Budget Statement.
2.9 Votes on account [Under Article 125]
Notwithstanding anything contained in the foregoing provisions relating to financial matters, the Provincial
Assembly shall have power to make any grant in advance in respect of the estimated expenditure for a part of
any financial year, not exceeding three months, pending completion of the procedure prescribed in Article 122
for the voting of such grant and the authentication of the schedule of expenditure in accordance with the
provisions of Article 123 in relation to the expenditure.
2.10 Power to authorise expenditure when assembly stands dissolved [Under Article 126]
Notwithstanding anything contained in the foregoing provisions relating to financial matters, at any time when
the Provincial Assembly stands dissolved, the Provincial Government may authorize expenditure from the
Provincial Consolidated Fund in respect of the estimated expenditure for a period not exceeding four months in
any financial year, pending completion of the procedure prescribed in Article 122 for the voting of grants and
the authentication of the schedule of authorized expenditure in accordance with the provisions of Article 123 in
relation to the expenditure.
2.11 Provisions relating to National Assembly, etc., to apply to Provincial Assembly, etc. [Under Article
127]
Subject to the Constitution, the provisions of clauses (2) to (8) of Article 53, clauses (2) and (3) of Article 54,
Article 55, Articles 63 to 67, Article 69, Article 77, Article 87 and Article 88 shall apply to and in relation to a
Provincial Assembly or a committee or members thereof or the Provincial Government, but so that:
Any reference in those provisions to Majlis-e-Shoora (Parliament), a House or the National Assembly
shall be read as a reference to the Provincial Assembly;
Any reference in those provisions to the President shall be read as a reference to the Governor of the
Province;
any reference in those provisions to the Federal Government shall be, read as a reference to the
Provincial Government;
any reference in those provisions to the Prime Minister shall be read as a reference to the Chief
Minister.
any reference in those provisions to a Federal Minister shall be read as a reference to a Provincial
Minister.
any reference in those provisions to the National Assembly of Pakistan shall be read as a reference to
the Provincial Assembly in existence immediately before the commencing day.
3. DISTRIBUTION OF REVENUES BETWEEN FEDERATION AND PROVINCES
3.1 Introduction
It is essential to know who authorises which revenues. Federation can only tax to the extent constitution
authorise to legislate for collection of revenues. Similarly, Provinces can only legislate for levy of taxes to the
extent it is clarified in the Constitution of Pakistan. This part of this chapter describes the mechanism for
determination of distribution of revenue among Federation and Provinces.
3.2 National Finance Commission [Under Article 160]
Within six months of the commencing day and thereafter at intervals not exceeding five years, the President
shall constitute a National Finance Commission consisting of the Minister of Finance of the Federal
Government, the Ministers of Finance of the Provincial Governments, and such other persons as may be
appointed by the President after consultation with the Governors of the Provinces

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It shall be the duty of the National Finance Commission to make recommendations to the President as to:
the distribution between the Federation and the Provinces of the net proceeds of the taxes mentioned in
clause (3);
the making of grants-in-aid by the Federal Government to the Provincial Governments;
the exercise by the Federal Government and the Provincial Governments of the borrowing powers
conferred by the Constitution; and
Any other matter relating to finance referred to the Commission by the President.
The taxes referred above are the following taxes raised under the authority of Majlis-e-Shoora (Parliament),
namely:
taxes on income, including corporation tax, but not including taxes on income consisting of remuneration
paid out of the Federal Consolidated Fund;
taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed;
export duties on cotton, and such other export duties as may be specified by the President;
export duties on cotton, and such other export duties as may be specified by the President;
such duties of exercise as may be specified by the President; and
Such other taxes as may be specified by the President.
The share of the Provinces, in each Award of National Finance Commission shall not be less than the share
given to the Provinces in the previous Award.
The Federal Finance Minister and Provincial Finance Ministers shall monitor the implementation of the Award
biannually and lay their reports before both Houses of Majlis-e-Shoora (Parliament) and the Provincial
Assemblies.
As soon as may be after receiving the recommendation, of the National Finance Commission, the President
shall, by Order, specify, in accordance with the recommendations of the Commission under paragraph two (2)
above, the share of the net proceeds of the taxes mentioned in above which is to be allocated to each
Province, and that share shall be paid to the Government of the Province concerned, and, notwithstanding the
provision of Article 78 shall not form part of the Federal Consolidated Fund.
The recommendations of the National Finance Commission, together with an explanatory memorandum as to
the action taken thereon, shall be laid before both Houses and the Provincial Assemblies.
At any time before an Order as above is made, the President may, by Order, make such amendments or
modifications in the law relating to the distribution of revenues between the Federal Government and the
Provincial Governments as he may deem necessary or expedient.
The President may, by Order, make grants-in-aid of the revenues of the Provinces in need of assistance and
such grants shall be charged upon the Federal Consolidated Fund.
3.3 Natural gas and hydro-electric power [Under Article 161]
Notwithstanding the provisions of Article 78:
the net proceeds of the Federal duty of excise on natural gas levied at well-head and collected by the
Federal Government and of the royalty collected by the Federal Government, shall not form part of the
Federal Consolidated Fund and shall be paid to the Province in which the well-head of natural gas is
situated.
the net proceeds of the Federal duty of excise on oil levied at well-head and collected by the Federal
Government, shall not form part of the Federal Consolidated Fund and shall be paid to the Province in
which the well-head of oil is situated.
The net profits earned by the Federal Government, or any undertaking established or administered by the
Federal Government from the bulk generation of power at a hydro-electric station shall be paid to the Province
in which the hydro-electric station is situated.
Explanation: for the purposes of this clause "net profits" shall be computed by deducting from the revenues
accruing from the bulk supply of power from the bus-bars of a hydro-electric station at a rate to be determined
by the Council of Common Interests, the operating expenses of the station, which shall include any sums
payable as taxes, duties, interest or return on investment, and depreciations and element of obsolescence,
and over-heads, and provision for reserves.

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3.4 Prior sanction of President required to Bills affecting taxation in which provinces are interested
[Under Article 162]
No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is
assigned to any province, or which varies the meaning of the expression "agricultural income" as defined for
the purposes of the enactments relating to income-tax, or which affects the principles on which under any of
the foregoing provisions of this Chapter moneys are or may be distributable to provinces, shall be introduced
or moved in the National Assembly except with the previous sanction of the President.
3.5 Provincial taxes in respect of professions, etc [Under Article 163]
A Provincial Assembly may by Act impose taxes, not exceeding such limits as may from time to time be fixed
by Act of Majlis-e-Shoora (Parliament), on persons engaged in professions, trades, callings or employments,
and no such Act of the Assembly shall be regarded as imposing a tax on income.
3.6 Grants out of consolidated fund [Under Article 164]
The Federation or a Province may make grants for any purpose, notwithstanding that the purpose is not one
with respect to which Majlis-e-Shoora (Parliament) or, as the case may be, a Provincial Assembly may make
laws.
3.7 Exemption of certain public property from taxation [Under Article 165]
The Federal Government shall not, in respect of its property or income, be liable to taxation under any Act of
Provincial Assembly and, subject to clause (2), a Provincial Government shall not, in respect of its property or
income, be liable to taxation under Act of Majlis-e-Shoora (Parliament) or under Act of the Provincial Assembly
of any other Province.
If a trade or business of any kind is carried on by or on behalf of the Government of a Province outside that
Province, that Government may, in respect of any property used in connection with that trade or business or
any income arising from that trade or business, be taxed under Act of Majlis-e-Shoora (Parliament) or under
Act of the Provincial Assembly of the Province in which that trade or business is carried on.
Nothing in this Article shall prevent the imposition of fees for services rendered.
3.8 Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain corporations, etc.
[Under Article 165A]
For the removal of doubt, it is hereby declared that Majlis-e-Shoora (Parliament) has, and shall be deemed
always to have had, the power to make a law to provide for the levy and recovery of a tax on the income of a
corporation, company or other body or institution established by or under a Federal law or a Provincial law or
an existing law or a corporation, company or other body or institution owned or controlled, either directly or
indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of
such income.
All orders made, proceedings taken and acts done by any authority or person, which were made, taken or
done, or purported to have been made, taken or done, before the commencement of the Constitution
(Amendment) Order 1985, in exercise of the powers derived from any law referred to in above para, or in
execution of any orders made by any authority in the exercise or purported exercise of powers as aforesaid,
shall, notwithstanding any judgment of any court or tribunal, including the Supreme Court and a High Court, be
deemed to be and always to have been validly made, taken or done and-shall not be called in question in any
court, including the Supreme Court and a High Court, on any ground whatsoever.
Every judgment or order of any court or tribunal, including the Supreme Court and a High Court, which is
repugnant to the provisions of above paras shall be, and shall be deemed always to have been, void and of no
effect whatsoever.

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4. FEDERAL LEGISLATIVE LIST


4.1 Introduction
Federal Legislative List defines the areas whereby Federal Government can legislate to collect Revenue. This
is a long list, however, we herein discuss the areas which relates to Taxation.
4.2 Powers of the Federation to legislate on taxes
Following entries in the Federal legislative list as contained in the Constitution of Pakistan relates to taxes:

Entry No Taxes which can be imposed by the Federation

47. Taxes on income other than agricultural income;

48. Taxes on corporations.

49. Taxes on the sales and purchases of goods imported, exported, produced, manufactured
or consumed, except sales tax on services.

50. Taxes on the capital value of the assets, not including taxes on immovable property.

51. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy.

52. Taxes and duties on the production capacity of any plant, machinery, undertaking,
establishment or installation in lieu of any one or more of them.

53. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares
and freights.

Keeping in view the above provisions, following laws are enacted by the Federal Government:

Legislative powers of Federation Laws enacted there under

Taxes on income other than agricultural income; Income Tax Ordinance, 2001
Taxes on corporations.
Taxes on mineral oil, natural gas and minerals for
use in generation of nuclear energy.

Taxes on the sales and purchases of goods Sales Tax Act, 1990, Federal Excise Act, 2005,
imported, exported, produced, manufactured or Customs Act, 1969
consumed, except sales tax on services Taxes and
duties on the production capacity of any plant,
machinery, undertaking, establishment or
installation in lieu of any one or more of them.

Taxes on the capital value of the assets, not Income Support Levy, 2013 (repealed through
including taxes on immovable property. Finance Act of 2014) & Capital Value Tax levied
through Finance Act, 1989

4.3 Powers of the Provinces to legislate on taxes


All taxes other than the mentioned in above list of Federal legislative list as contained in the Constitution of
Pakistan are covered in the scope of legislation of Provinces. Accordingly, various types of taxes are
introduced by the Provinces are as under:
Agriculture income Tax
Sales Tax on services
Taxes on transfer of immoveable property
Professional Tax
Tax on luxury Houses
Tax on registration of luxury Vehicles etc.
Property tax

24 Conceptual Approach to Taxes


Constitutional Provisions Chapter-03

CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q.NO.9 (a) Autumn 2014 List the taxes which can be imposed by the Federal Government.

Q. NO. 9 (b) Autumn 2014 Briefly describe the duties of National Finance Commission.

Conceptual Approach to Taxes 25


Constitutional Provisions Chapter-03

26 Conceptual Approach to Taxes


Preliminary Chapter-04

Chapter

4 PRELIMINARY

Covered under this chapter:


- Section 1 & 3 of the Income Tax Ordinance, 2001
- All definitions u/s 2 of the Income Tax Ordinance, 2001.
- MCQs with solutions
- ICMAP & CA Mod C past papers theoretical questions
- Past papers of ICMAP stage IV and CAF-6 students

(FOR CAF-6 AND ICMAP STUDENTS)


Short title, extent and commencement [U/S 1]

This Ordinance may be called the Income Tax Ordinance, 2001.


It extends to the whole of Pakistan.
It shall come into force on such date as the Federal Government may, by notification in official Gazette, appoint
{1.7.2002}.

Ordinance to override other laws [U/S 3]

The provisions of this Ordinance shall apply notwithstanding anything to the contrary contained in any other law for the time
being in force.

Definitions [U/S 2]
"Accumulated profits" [U/s 2(1)] in relation to distribution or payment of a dividend, include-
(a) any reserve made up wholly or partly of any allowance, deduction, or exemption admissible under this Ordinance;
(b) all profits of the company including income and gains of a trust up to the date of such distribution or such payment, as
the case may be; and
(c) includes all profits of the company including income and gains of a trust up to the date of its liquidation;
Explanation: From the above it is clear that the term "accumulated profits" out of which companies may distribute or pay
dividends include reserve made up wholly or partly of any allowance, deduction, or exemption available under this
Ordinance, advance or loan to a shareholder and profits where distribution is made on liquidation.
"Appellate Tribunal" [U/s 2(2)] means the Appellate Tribunal Inland Revenue established u/s130;

Explanation: The Tribunal, established u/s130 of the Ordinance enjoys jurisdiction to hear cases of income tax, sales tax
and federal excise. The Customs Tribunal, however, remains separate and independent.
Tribunal is the final fact finding forum. Its decisions on law point are also final if not further contested or entertained by High
Court u/s133 of the Ordinance.
"Approved gratuity fund" [U/s 2(3)] means a gratuity fund approved by the Commissioner Inland Revenue in accordance
with Part III of the Sixth Schedule;
"Approved Annuity Plan" [U/s 2(3A)] means an Annuity Plan approved by Securities and Exchange Commission of
Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Life Insurance Company registered with the
SECP under Insurance Ordinance, 2000;
"Approved Income Payment Plan" [U/s 2(3B)] means an income Payment Plan approved by Securities and Exchange
Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Pension Fund Manager
registered with the SECP under Voluntary Pension System Rules, 2005;

Conceptual Approach to Taxes 27


Taxation System Chapter-01

"Approved Pension Fund" [U/s 2(3C)] means Pension Fund approved by Securities and Exchange Commission of
Pakistan (SECP) under Voluntary Pension System Rules, 2005, and managed by a Pension Fund Manager registered with
the SECP under Voluntary Pension System Rules, 2005;

Explanation of u/s 2(3A) (3B) and (3C): In terms of section 63, eligible persons are allowed tax credit for depositing an
amount in the fund, which is lesser of 25% of their taxable income a person joining at the age of 41 or above is allowed from
1st July 2006 to additional contribution of 2% for the first 10 years for each year exceeding 41 but his contribution should not
exceed 50% of his taxable income or up to Rs. 500,000. This regime allows tax credit to contributions and exemption to
investment income and then taxes the benefits at the time of premature or excessive withdrawals, Existing asset
management companies and life insurance companies are eligible to apply for licenses to set up pension funds and EFU
Life Insurance Company and three leading asset management companies including Arif Habib Investments and Atlas Asset
Management Company are running such schemes.
"Approved Employment Pension or Annuity Scheme" [U/s 2(3D)] means any employment related retirement scheme
approved under this Ordinance, which makes periodical payment to a beneficiary i.e. pension or annuity such as approved
superannuation fund, public sector pension scheme and Employees Old-Age Benefit Scheme;
"Approved Occupational Savings Scheme" [U/s 2(3E)] means any approved gratuity fund or recognized provident fund;

Explanation of u/s 2(3D) and (3E): The schemes include pension scheme and Employee Old-Age Benefit Scheme. No
approval for the second type of scheme is mentioned in Schedule to the Ordinance.
As regards clause (3E), it exclusively defines the terms to mean any approved gratuity or recognised provident fund. In other
words this has to be read in conjunction with section 2(3B), 2(3C) and Sixth Schedule to this Ordinance.

"Approved superannuation fund" [U/s 2(4)]: means a superannuation fund, or any part of a superannuation fund,
approved by the Commissioner Inland Revenue in accordance with Part II of the Sixth Schedule;

Explanation: It exclusively defines statutory superannuation funds that are approved by the Commissioner Inland Revenue
in accordance with Part II of the Sixth Schedule to the Ordinance read with rules 91 to 121.

"Assessment" [U/s 2(5)] includes provisional assessment, re-assessment and amended assessment, and the cognate
expressions shall be construed accordingly;

Explanation: The amended definition of the expression "assessment" has historic background based on judicial
pronouncements that the original assessment order, reassessment orders and final assessment orders are really but steps
in a series of judicial proceedings all connected on intrinsic unity and are regarded as one legal proceeding.

"Assessment year" [U/s 2(5A)] means assessment year as defined in the repealed Ordinance;

Explanation: It is a fixed period of twelve months starting from 1st July and ending on 30th June.
"Asset management company" [U/s 2(5B)] means an asset management company as defined in the Non-Banking
Finance Companies and Notified Entities Regulations, 2007;

Explanation: The asset management companies have the following features:-


1. The company should be a public company under the Companies Ordinance, 1984.
2. It has a paid-up capital of not less than Rs. 30 million,
3. Any director, officer or employee of such company who has not been convicted of fraud or breach of trust or
adjudicated as insolvent or had suspended payment or has compounded with his creditors.
4. The promoters and directors of such company are, in the opinion of corporate law authority, persons of means and
integrity having special knowledge and experience of matters which the company may have to deal with.

"Association of persons" [U/s 2(6)] "AOP" includes a firm, a Hindu undivided family, any artificial juridical person and
anybody of persons formed under a foreign law, but does not include a company;

Explanation: Now the Ordinance treats all kinds of bodies of persons except companies as AOP. It means that Punjab Bar
Council, which is an artificial juridical person, is to be treated as an AOP.

The taxation of AOPs is elaborated in section 92 and 93. If there is a change in the constitution of an AOP, section 98A will
apply. The CBR has clarified that not all AOPs are obliged to deduct tax u/s153 as clause (c) sub-section (9) of the said
section providing that only AOP "constituted by or under law" should act as withholding agent. The concept of AOP under
section 2(6) read with section 80 is different from one provided in section 153(9)(c).

"Banking company" [U/s 2(7)] means a banking company as defined in the Banking Companies Ordinance, 1962 and
includes anybody corporate which transacts the business of banking in Pakistan;

28 Conceptual Approach to Taxes


Preliminary Chapter-04

Explanation: Previously only specific statutory bodies like Pakistan Industrial Credit Investment Corporation (PICIC),
ADBF, National Bank of Pakistan, Band of Punjab, formed under specific law and doing banking business, were covered
under this definition, whereas now all bodies corporate, if engaged in banking business in Pakistan, will be considered
banking companies and will be subjected to higher rate of tax, till the time the rate of tax of public and banking companies
come at par.
The body corporate simplicitor and body corporate formed by or under a law are two different categories.
However, the expression "banking business" remains the same in both the enactments meaning by that only those bodies
corporate will be covered which are engaged in the banking business. The "banking business" is not an ordinary dictionary
expression. It has specific, technical meaning under the relevant law i.e. the Banking Companies Ordinance of 1962, which
reads as under:
"Banking Company" means any company which transacts the business of banking in Pakistan.
Banking means accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdraw-able by cheque, draft, or otherwise.
Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money
from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to
transact the business of banking within the meaning of this clause.
"BOARD" [U/s 2(8)] means the Central Board of Revenue established under the Central Board of Revenue Act, 1924 and
on the commencement of Federal Board of Revenue Act, 2007, the Federal Board of Revenue established u/s 3 thereof;
"Bonus shares" [U/s 2(9)] includes bonus units in a unit trust;

Explanation: This is an inclusive definition which retains the generally accepted meaning of the word "bonus shares" but
includes in its ambit "bonus units' in a unit trust. The purpose is to treat profit distribution by NIT and other unit trusts at par
with stock dividend issued by companies. Bonus shares shall now to be taxed separately in the hands of shareholders @
5% due to inclusion of the same in the income as provided in section 2(29) of the Ordinance.

"Business" [U/s 2(10)] includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the
nature of trade, commerce, manufacture, profession or vocation, but does not include employment;

Explanation: The Legislature has merged profession or vocation in the definition of '"business." This definition is not
exhaustive. It includes some specific categories but specifically excludes "employment" meaning by that professionals like
doctors, lawyers, accountants, engineers etc. while deriving income from employment will not be charged to tax under the
head "Income from Business" although they derive emoluments from rendering of professional services.
This verifies the principle laid down in 2000 PTD (Trib.) 457 that professional receipts (hospital share) derived by a doctor in
addition to emoluments as employee are not salary.

"Capital asset" [U/s 2(11)] Capital asset means property of any kind held by a person, whether or not connected with a
business, but does not include the following:
(a) Any stock-in-trade, consumable stores or raw materials held for the purpose of business;
(b) Any depreciable and intangible property; or
(c) Any movable property held for personal use by the person or any member of the persons family dependent on the
person but including the following as stated in section 38(5):
A painting, sculpture, drawing or other work of art, Jewellery, a rare manuscript, folio or book, a postage stamp or first day
cover, a coin or medallion; or an antique.
"Charitable purpose" [U/s 2(11A)] includes relief of the poor, education, medical relief and the advancement of any other
object of general public utility;
"Chief Commissioner Inland Revenue" [U/s 2(11B)] means a person appointed as Chief Commissioner Inland Revenue
u/s208 and includes a Regional Commissioner of Income Tax and a Director-General of Income Tax and Sales Tax;
Explanation: This definition was inserted after merger of income tax, sales tax and federal excise into one unified Inland
Revenue Service and after this insertion, consequently, the definition of "Regional Commissioner" appearing in u/s 2(46A)
was deleted.
"Collective investment scheme" [U/s 2(11C)] Collective Investment Scheme means a closed end fund and open-end
scheme as assigned under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003;

Explanation: Closed End Fund means an investment Company or a closed end scheme;

Conceptual Approach to Taxes 29


Taxation System Chapter-01

Open end Scheme means a scheme constituted by way of a trust deed that continuously offer for sale its units as
specified in the constituted document that entitle the holder of such units on demand to receive his proportionate share of
net assets of the scheme less any applicable charges.
"Company" [U/s 2(12)] "company" means -
(i) a company as defined in the Companies Ordinance, 1984;
(ii) a body corporate formed by or under any law in force in Pakistan;
(iii) a modaraba;
(iv) a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies;
(v) a co-operative society, a finance society or any other society;
(va) a non-profit organization
(vb) a trust, an entity or a body of persons established or constituted by or under any law for the time being in force;
(vi) a foreign association, whether incorporated or not, which the Board has, by general or special order, declared to be a
company for the purposes of this Ordinance;
(vii) a Provincial Government;
(viii) a Local Government in Pakistan; or
(ix) a Small Company;

Explanation: This is a referral definition adopting the same meaning as given in section 80. For the interpretation of the
expressions "formed by" or "under any law" see (2000) 82 TAX 52 (H.C.Lah.) = 2000 PTD 3388. A company is defined in the
Companies Ordinance, 1984, as under:
"company" means a company formed and registered under this Ordinance or an existing company;
"Commissioner Inland Revenue" [U/s 2(13)] means a person appointed as Commissioner Inland Revenue and includes
any other authority vested with all or any of the powers and functions of the CIR;

Explanation: The nomenclature of Commissioner Inland Revenue has been changed as a consequence of merger of
income tax, sales tax and federal excise into Inland Revenue Service.
The law after the said amendment envisaged two types of Commissioner Inland Revenues; one appointed as
Commissioner Inland Revenue u/s 208 and the other being taxation officer who was vested with powers of Commissioner
Inland Revenue u/s 209(2). A taxation officer [defined u/s 2(65)] exercising delegated powers u/s 210, however, is not
covered in this definition as explained in section 211(1). The second part of definition only covers those officers who enjoy
original jurisdiction of a case u/s 209(2) and not as delegates u/s 210 and thus to be treated as Commissioner Inland
Revenue as envisaged in section 209(4).
"CIR (Appeals)" [U/s 2(13A)] means a person appointed as a Commissioner Inland Revenue (Appeals) u/s 208;

Explanation: In order to cater for the amendments in income tax, sales tax and federal excise laws, merging all the three
into Inland Revenue. Commissioner Inland Revenue Inland Revenue (Appeals) now hears appeals for income tax, sales tax
and federal excise matters. Commissioner Inland Revenue of Appeals is the first appellate authority. His appointment,
functions and jurisdiction are governed u/s 127 to 129, 208 and 209.
The Board's instructions issued u/s 206 or otherwise are not binding on Commissioner Inland Revenue (Appeals). He is
bound to follow the orders of Income Tax Appellate Tribunal (ITAT) and higher courts as explained in [1996] 73 TAX 132
(Trib)].
Consumer goods [U/s 2(13AA)] means goods that are consumed by the end consumer rather than used in the
production of another good;
"Contribution to an Approved Pension Fund" [U/s 2(13B)] means contribution as defined in rule 2(j) of the Voluntary
Pension System Rules, 2005;

Explanation: At the same time a proviso is added that total tax credit available for the contribution made to approved
employment pension or annuity scheme and approved pension fund under Voluntary Pension System Rules, 2005 should
not exceed the limit prescribed or specified in section 63.
"Co-operative society" [U/s 2(14)] means a co-operative society registered under the Co-operative Societies Act, 1925 or
under any other law for the time being in force in Pakistan for the registration of co-operative societies;

Explanation: This refers to such cooperative societies that are governed under the Cooperative Societies Act of 1925 or
under any other law in force for the registration of cooperative bodies in Pakistan.
The courts have consistently held that cooperative societies are not companies within the ambit of section 16(2)(b) of the
Repealed Ordinance - [now section 80(2)(b)].

30 Conceptual Approach to Taxes


Preliminary Chapter-04

Section 3(e) of the Corporative Societies Act, 1925 says: "society" means a society registered or deemed to be registered
under the Act."
Section 2(e) of Corporative Societies Act defines "registered" to mean a society registered or deemed to be registered under
this Act."
The following enactments for registration of various cooperative societies and regulation of their affairs exist:
Cooperative Societies Act, 1925; (ii) Punjab Amendment Act I of 1992; (iii) Co-operative Societies Act, 1912; (iv) Co-
operative Societies Rules, 1927; (v) Sindh Co-operative Societies Reforms Rules, 1973; (vi) Multi-Unit Co-operative
Societies Act, 1942; (vii) Co-operative Development Board Ordinance, 1962; (viii) Co-operative Farming Act, 1976; (ix)
Co-operative Societies (Reforms) Ordinance, 1980; and (x) Sindh Co-operative Farming Societies.
"Debt" [Section 2(15)] means any amount owing, including accounts payable and the amounts owing under promissory
notes, bills of exchange, debentures, securities, bonds or other financial instruments;

Explanation: It is exclusively defined to mean any amount owing, including accounts payable and the sums owing under
promissory notes, bills of exchange, debentures, securities, bonds and other financial instruments.
The various terms used in this definition clause are defined in their respective law as under:
Section 4 of Negotiable Instruments Act, 1881: "Promissory not" - A "promissory note" is an instrument in writing (not
being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay on demand or at
a fixed or determinable future time a certain sum of money only to, or to the order of, a certain person, or to the bearer of the
instrument.
Section 5 of Negotiable Instruments Act, 1881: "Bill of exchange" - A "bill of exchange" is an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay on demand or at a fixed or
determinable future time a certain sum of money only to, or to the order of, a certain person or to the bearer of the
instrument.
An order to pay out of a particular fund is not unconditional within the meaning of this section; but an unqualified order to
pay, coupled with-
(a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to be debited
to the amount, or
(b) a statement of the transaction which gives rise to the note or bill, is unconditional.
Where the payee is a fictitious or non-existing person the bill of exchange may be treated as payable to bearer.
Section 2(a) of the Securities Act of 1920: "security - means a marketable deed or document that endeavours to secure
against pecuniary loss, e.g., bearer bonds, stock certificates, treasury bills etc. Currency notes are not covered under this
definition.
Section 2(34) of the Companies Ordinance, 1984: "security' - means any share, scrip, debenture, participation term
certificate, modaraba certificate, musharika certificate, term finance certificate bond, pre-organization certificate or such
other instrument as the Federal Government may, by notification in the official gazette, specify for the purpose.
Section 2(12) of the Companies Ordinance, 1984: "Debenture" - includes debenture stock, bonds, term finance
certificates and any other securities, other than a share of company, whether constituting a charge on the assets of the
company or not.
"Deductible allowance" [U/s 2(16)] means an allowance that is deductible from total income;

Explanation: This definition has been introduced with reference to specific deductions for Zakat and Workers' Welfare Fund
(WWF).
"Depreciable asset" [U/s 2(17)] "depreciable asset" means any tangible movable property, immovable property (other than
unimproved land), or structural improvement to immovable property, owned by a person that -
(a) has a normal useful life exceeding one year;
(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and
(c) is used wholly or partly by the person in deriving income from business chargeable to tax,
but shall not include any tangible movable property, immovable property, or structural improvement to immovable
property in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost
of the property or improvement in the tax year in which the property is acquired or improvement made by the person.
Developmental REIT Scheme [U/s 2(17A)] means Developmental REIT Scheme as defined under the Real Estate
Investment Trust Regulations, 2015;
"Disposal" [U/s 2(18)] A person who holds an asset shall be treated as having made a disposal of the asset at the time
when the asset is sold, exchanged, transferred or distributed or cancelled, redeemed, relinquished, destroyed, lost, expired

Conceptual Approach to Taxes 31


Taxation System Chapter-01

or surrendered, transmitted by succession or under a will, in case of a business asset applied to personal use or discarded
or ceased to be used in business.

Explanation of section 2(18) "disposal" However, the language is restrictive and does not convey this meaning. If
definition of the term is only restricted for the purpose of section 75, then this clause is redundant.

"Dividend" [U/s 2(19)] Includes any:


(a) Distribution by a company of accumulated profits to its shareholders, whether capitalised or not;
(b) Distribution by a company, to its shareholders of debentures, debenture-stock or deposit certificate in any form, to the
extent to which the company possesses accumulated profits;
(c) Distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is
attributable to the accumulated profits of the company immediately before its liquidation;
(d) Distribution by a company to its shareholders on the reduction of its capital, to the extent to which the company
possesses accumulated profits;
(e) payment by a private company or trust of any sum by way of advance or loan to a shareholder or any payment by any
such company or trust on behalf, or for the individual benefit, of any such shareholder, to the extent to which the
company or trust, in either case, possesses accumulated profits;
(f) Remittance of after tax profit of a branch of a foreign company operating in Pakistan;
but does not include -
(i) A distribution made in respect of any share for full cash consideration, or redemption of debentures or debenture
stock, where the holder of the share or debenture is not entitled in the event of liquidation to participate in the surplus
assets;
(ii) Any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of
money is a substantial part of the business of the company;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously
paid by it and treated as a dividend to the extent to which it is so set off; and
(iv) Remittance of after tax profit by a branch of Petroleum Exploration and Production (E and P) foreign company,
operating in Pakistan.

Explanation: PE of a non-resident is taxable on attributable profits in Pakistan u/s 105 or in terms of applicable provisions of
a double taxation treaty, if available. A Branch and head office is not independent or separate entities as are a holding or a
subsidiary company.

Example: Iqbal Industries (Pvt.) Ltd. had paid up capital of Rs.100,000 divided into 10,000 shares of Rs.10 each and
accumulated profit of Rs.50,000 at the time of liquidation. The official liquidator realized Rs.380,000 out of which Rs.230,000
was paid to the creditors. Remaining was paid to shareholders. Mr. Amir had 500 shares at the time of liquidation.
Required: Calculate (a) the amount received by Amir and (b) how much out of this amount is to be treated as dividend
income.
Solution:
Total amount received by Amir (150,000 x 500 / 10,000) 7,500
Amount treated as dividend to the extent of accumulated profit
(50,000 x 500 / 10,000) 2,500
Example: Under what circumstances advance or loan to a shareholder by a private company would be treated as 'dividend'
with reference to the Income tax Ordinance, 2001.
Solution: Loan or advance to the extent of accumulated profits paid to a shareholder by a private company as defined in the
Companies Ordinance, 1984 or by a trust shall be treated as dividend.
However, if the company is involved in the business of money lending then loan or advance in the ordinary course of
business shall not be treated as dividend.
"Eligible Person" [U/s 2(19A)] for the purpose of Voluntary Pension System Rules, 2005, means an individual Pakistani
who holds a valid National Tax Number or Computerised National Identity Card or National Identity Card for Overseas
Pakistanis issued by the National Database and Registration Authority:
Provided that the total tax credit available for the contribution made to approved employment pension or annuity scheme and
approved pension fund under Voluntary Pension System Rules, 2005, should not exceed the limit prescribed or specified in
section 63.

32 Conceptual Approach to Taxes


Preliminary Chapter-04

Explanation: For the purpose of voluntary pension scheme, the condition of computerized National Identity Cards or
National Identity Card for Overseas Pakistanis is provided in case of non-availability of National Tax Number.
"Definitions in Electronic Transactions Ordinance" [U/s 2(19B)] the expressions "addressee", "automated",
"electronic", "electronic signature", "information", "information system", "originator" and "transaction", shall have
the same meanings as are assigned to them in the Electronic Transactions Ordinance, 2002;
"Electronic record" [U/s 2(19C)] includes the contents of communications, transactions and procedures under this
Ordinance, including attachments, annexes, enclosures, accounts, returns, statements, certificates, applications, forms,
receipts, acknowledgements, notices, orders, judgments, approvals, notifications, circulars, rulings, documents and any
other information associated with such communications, transactions and procedures, created, sent, forwarded, replied to,
transmitted, distributed, broadcast, stored, held, copied, downloaded, displayed, viewed, read, or printed, by one or several
electronic resources and any other information in electronic form;
"Electronic resource" [U/s 2(19D)] includes telecommunication systems, transmission devices, electronic video or audio
equipment, encoding or decoding equipment, input, output or connecting devices, data processing or storage systems,
computer systems, servers, networks and related computer programs, applications and software including databases, data
warehouses and web portals as may be prescribed by the Board from time to time, for the purpose of creating electronic
record;
"Telecommunication system" [U/s 2(19E)] includes a system for the conveyance, through the agency of electric,
magnetic, electro-magnetic, electro-chemical or electro-mechanicals energy, of speech, music and other sounds, visual
images and signals serving for the impartation of any matter otherwise than in the form of sounds or visual images and also
includes real time online sharing of any matter in manner and mode as may be prescribed by the Board from time to time.";
Explanation of u/s 2(19B) to (19E): The insertion of three expressions, namely, "electronic record", "electronic resource"
and "telecommunication system" should have been under their respective alphabetical place, a pattern universally applied in
section 2.
These definitions are necessitated by the fact that the law now requires mandatory e-filing by the companies. These
expressions take into account the mode of keeping electronic record and method of its communication through electronic
modes.
"Employee" [U/s 2(20)] means any individual engaged in employment;
Explanation: This is an exclusive definition which says that "employee" means any individual engaged in employment.
"Employer" [U/s 2(21)] means any person who engages and remunerates an employee;
Explanation: This is an exclusive definition that says that "employer" means a person who engages and remunerates an
employee.`
"Employment [U/s 2(22)] includes -
(a) a directorship or any other office involved in the management of a company;
(b) a position entitling the holder to a fixed or ascertainable remuneration; or
(c) the holding or acting in any public office;
Explanation: The legislature wants to treat certain persons as employees although in their case the relationship of
"employer" and "employee" (master and servant) is not in existence. Such persons draw remuneration by way of holding
office and not through employment, but for the purpose of this Ordinance they are to be treated as employees. These
include amongst others the President, MNAs, MPAs and part-time directors of companies etc.
Fast moving consumer goods [U/s 2(22A)] means consumer goods which are supplied in retail marketing as per daily
demand of a consumer;
"Fee for technical services" [U/s 2(23)] means any consideration, whether periodical or lump sum, for the rendering of
any managerial, technical or consultancy services including the services of technical or other personnel, but does not
include-
(a) consideration for services rendered in relation to a construction, assembly or like project undertaken by the recipient;
or
(b) consideration which would be income of the recipient chargeable under the head "Salary";
Explanation: The key words in this definition are "managerial", "technical" or "consultancy" services, including services of
"technical" or "other" personnel. The contracts for services are distinguishable on the parameters of "technical" and "non-
technical" services, although the line of demarcation may be very thin and difficult to be drawn in certain circumstances.
Filer [U/s 2(23A)] means a taxpayer whose name appears in the active taxpayers list issued by the Board from time
to time or is holder of a taxpayers card.
"Financial institution" [U/s 2(24)] means an institution as defined under the Companies Ordinance, 1984 as follows;

Conceptual Approach to Taxes 33


Taxation System Chapter-01

Financial institution includes,


(a) a company or an institution whether established under any special enactment and operating within or outside
Pakistan which transacts the business of banking or any associated or ancillary business through its branches;
(b) a modaraba, leasing company, investment bank, venture capital company, financing company, housing finance
company, a non-banking finance company; and
(c) such other institution or companies authorised by law to undertake any similar business, as the federal Government
may, by notification in the office Gazette, specify for the purpose;
Explanation: "It is clear that only sub-clause (c) is applicable as far as this Ordinance is concerned. The company or an
institution which transacts the business of banking or an ancillary business, a Moradabad, a leasing company, investment
bank, a non-banking finance company are separately defined in the Ordinance, therefore, clause (a) and (b) of section
2(15A) cannot apply. The language of section 2(24) is also clear that it only refers to those institutions that are notified for
the purpose of section 2(15A)(c) of the Companies Ordinance, 1984, as "financial institution".
"Finance society" [U/s 2(25)] includes a co-operative society which accepts money on deposit or otherwise for the
purposes of advancing loans or making investments in the ordinary course of business;

Explanation: This is an inclusive definition that in addition to finance societies established under the relevant law covers all
such cooperative societies that accept money on deposit or otherwise for the purpose of advancing loans or making
investment in the ordinary course of their business.
"Firm" [U/s 2(26)] "firm" means the relation between persons who have agreed to share the profits of a business carried on
by all or any of them acting for all;

Explanation: This has the meaning as defined in section 80 which is the same as contained in the Partnership Act of 1932:
"Foreign-source income" [U/s 2(27)] An amount shall be foreign-source income to the extent to which it is not Pakistan-
source income.

Explanation: It means income as defined u/s 101(16). Section 101 has to be kept in mind to determine whether any income
is foreign-source or not. The concept of geographical source of income has been provided in the Ordinance to distinguish
between incomes accruing or arising in Pakistan or treated to be so and those having no Pakistani connection.
"House Building Finance Corporation" [U/s 2(28)] means the Corporation constituted under the House Building Finance
Corporation Act, 1952;

Explanation: This refers to statutory corporation viz. House Building Finance Corporation (HBFC) established under the
relevant Act, 1952.
Imputable income [U/s 2(28A)] in relation to an amount subject to final tax means the income which would have
resulted in the same tax, had this amount not been subject to final tax;
"Income" [U/s 2(29)] includes any amount chargeable to tax under this Ordinance, any amount subject to collection or
deduction of tax at source covered under final tax regime, any amount treated as income under any provision of this
Ordinance and any loss of income;

Explanation: The Ordinance describes different sources of income and prescribes various modes of computation under
each head. The definition in this clause is inclusive and not exhaustive. It includes all kinds of profits and gains or receipts
that are chargeable to tax under this Ordinance.
In the expression "income" the amounts subjected to collection of tax u/s 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A,
234(5), 236M and 236N were included. The word "deduction" has also been added to preclude the possibility of any benefit
by interpreting that only where some tax is collected income will be chargeable to tax and not otherwise. Likewise after
section 234 the words "any amount treated as income under any provision of this Ordinance" are added to cover those
incomes which are artificially made taxable under the Ordinance.
Example: Mr. A is a filer and being as shareholder of S Ltd. In tax year 2016 he received net dividend of Rs.18,000 and
bonus shares of having day end (ex-bonus) value on first day of closure of books Rs.50,000. Calculate his taxable income
and tax liability for tax year 2016.
Solution:
Mr. A
Tax year 2016
Computation of taxable income and tax liability: Rs.
Dividend (Final Tax Regime) (18,000 x 100/90) 20,000
Bonus shares (Final Tax Regime) (at first day end price) 50,000
34 Conceptual Approach to Taxes
Preliminary Chapter-04

Computation of tax liability:


Tax on Dividend @ 10% 2,000
Tax on Bonus issue @ 5% 2,500
Less: tax deducted on dividend 2,000
Less: tax deducted on bonus issue u/s 236M 2,500
Balance tax payable -
"Income year" [U/s 2(29A)] means income year as defined in the repealed Ordinance;

Explanation: This definition is retained as still used and is relevant under a number of provisions of the new Ordinance.
"Individual Pension Account" [U/s 2(29B)] means an account maintained by an eligible person with a Pension Fund
Manager approved under the Voluntary Pension System Rules, 2005;

Explanation; See detailed note u/s 2(3A)


"Industrial undertaking" [U/s 2(29C)] means-
(a) an undertaking which is set up in Pakistan and which employs,-
(i) 10 or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is
mechanically transmitted and is not generated by human or animal energy; or
(ii) 20 or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy
which is mechanically transmitted and is not generated by human or animal energy and which is engaged in,-
(i) the manufacture of goods or materials or the subjection of goods or materials to any process which
substantially changes their original condition; or
(ii) ship-building; or
(iii) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic
power; or
(iv) the working of any mine, oil-well or any other source of mineral deposits; and
(b) any other industrial undertaking which the Board may by notification in the official Gazette, specify;
Explanation: It may create adverse impact for exemption clauses where originally no intention was manifested by the
legislature for restrictive scope of the expression. Since the Federal Board of Revenue (FBR) enjoys power to declare any
other concern as industrial undertaking, it is hoped hardship cases, if any, would be dealt sympathetically and judiciously.
"Intangible" [U/s 2(30)] "intangible" means any patent, invention, design or model, secret formula or process, copyright,
trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, licence,
intellectual property, or other like property or right, contractual rights and any expenditure that provides an advantage or
benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved
land).

Explanation: This refers to assets mentioned in section 24, viz. all shades of intellectual property, or other like property or
right that provides advantage or benefit for a period of more than one year. This is an exclusive definition and therefore
eliminates any other possible meaning of the term "intangible." Since the word "intangible" is defined in section 2, it covers
the entire Ordinance unless there is anything repugnant in the subject or context.
"Investment company" [U/s 2(30A)] means an investment company as defined in the Non-Banking Finance Companies
Rules, 2003;
Explanation: "Investment company" was not defined in Investment Companies Advisors Rules, 971. Rather, certain
conditions were laid down for the companies intending to carry on the business of investment. They were as under:
Eligibility for registration
A company proposing to commence business as an investment company shall be eligible for registration under these rules if
it fulfils or complies with the following conditions or requirements, namely:-
- that such company is registered as a public limited company under the Companies Ordinance, 1984;
- that it is to function as a closed-end investment company with a capital of not less than Rs. 100 million:
Provided that an existing investment company shall raise its capital to Rs.100 million within a period of 3 years;
- that no director, officer or employee of such company has been convicted of fraud or breach of trust;
- that no director, officer or employee of such company has been adjudicated as insolvent or has suspended payment
or has compounded with his creditors;

Conceptual Approach to Taxes 35


Taxation System Chapter-01

that the promoters of such company are, in the opinion of the Authority, persons of means and integrity and have special
knowledge of matters which the company may have to deal with as an investment company.
KIBOR [U/s 2(30AA)] means Karachi Interbank Offered Rate applicable on first day of each quarter of the financial year-
Explanation: The introduction of KIBOR as basis for calculating additional tax and compensation rather than determining
these without prevalent market rates. U/s 171 at KIBOR concept has been introduced but for levy of additional tax u/s 205,
KIBOR plus 3% is discriminatory. For both purposes, the same basis should be applied.
"Leasing company" [U/s 2(30B)] means a leasing company as defined in the Non-Banking Finance Companies and
Notified Entities Regulation, 2007;
Explanation: The relevant provision of the said law reads as under:
"Leasing company" means a company engaged wholly in the business of leasing or which invests in such business at any
one time an amount equivalent to at least 75% of its assets.
Provided that cash and bank balances and investment in government securities shall be excluded to calculate investment in
leasing business for purposes of this definition.
"Liquidation" [U/s 2(31)] in relation to a company, includes the termination of a trust;

Explanation: This is an inclusive definition that in addition to the term 'liquidation' in relation to a company also covers the
termination of a trust.
"Local Government" [U/s 2(31A)] shall have the same meaning as in the Punjab Local Government Ordinance, 2001, the
Sindh Local Government Ordinance, 2001, the NWFP Local Government Ordinance, 2001 and the Baluchistan Local
Government Ordinance, 2001;
Explanation: The expression, "Local Government" has been inserted, replacing the term "local authority" wherever it
appears in the Ordinance. These two expressions are different in scope under their respective laws. The expression "local
authority" as denned in Section 2(28) of the General Clauses Act, 1897 has peculiar legal connotations to cover even "local
government" institutions. Definition of the term "Local Governments" which is a system of governance introduced in 2001
cannot be a substitute for "local authority".

"Member" [U/s 2(32)] in relation to an AOP, includes a partner in a firm;

Explanation: This is in relation to an AOP which also now includes partner in a firm as u/s 80 firms under the Partnership
Act are now included in the term 'AOP'-

"Minor child" [U/s 2(33)] means an individual who is under the age of 18 years at the end of a tax year;
Explanation: This is a new definition prescribing the age of 18 years for minority at the end of the tax year.
"Modaraba" [U/s 2(34)] means a modaraba as defined in the modaraba Companies and Modarabas (Floatation and
Control) Ordinance, 1980;
Explanation of u/s 2(34)"modaraba"
It means a Modaraba as defined in the Modaraba Companies and Modarabas Ordinance, 1980. The definition of the term in
the said law reads as under:
"Modaraba" means a business in which a person participates with his money and another with his efforts or skill or both his
efforts and skill and shall include Unit Trusts and Mutual Funds by whatever name called;
"Modaraba certificate" [U/s 2(35)] means a modaraba certificate as defined in the Modaraba Companies and Modarabas
(Floatation and Control) Ordinance, 1980;

Explanation: It has the same meaning as under the relevant law i.e. Modaraba Companies and Modarabas Ordinance of
1980., which says;

"Modaraba Certificate" means a certificate'' of definite denomination issued to the subscriber of the Modaraba
acknowledging receipt of money subscribed by him;
"modaraba company" means a company engaged in the business of floating and managing modaraba;
"Mutual Fund" [U/s 2(35A)] means a mutual fund registered or approved by the Securities and Exchange Commission of
Pakistan;

Explanation: The definition of "mutual fund" cover only such funds that are approved by the Securities and Exchange
Commission of Pakistan (SECP). Previously this condition was not imposed.

NCCPL [U/s 2(35AA)] means National Clearing Company of Pakistan Limited, which is a company
incorporated under the Companies Ordinance, 1984 and licensed as Clearing House by the SECP;

36 Conceptual Approach to Taxes


Preliminary Chapter-04

"Non-banking finance company" [U/s 2(35B)] means an Non-Banking Finance Company (NBFC) as defined in the
Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003.

Explanation: There was a choice between a specific definition of every type of financial institution and one general definition
covering all of them. At present there simultaneously exist specific definitions in respect of various financial institutions as
well as general definition of the expression 'financial institutions'. Drafting assignments should be given to some professional
draftsmen to make the new Ordinance free of such legal mistakes and duplications.
Non Filer [U/s 2(35C)] means a person who is not a filer.
"Non-profit organization" [U/s 2(36)] means any person other than an individual, which is -
(a) established for religious, educational, charitable, welfare or development purposes, or for the promotion of an
amateur sport;
(b) formed and registered under any law as a non-profit organization;
(c) approved by the Commissioner Inland Revenue for specified period, on an application made by such person in the
prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other documents
as may be required by the Commissioner Inland Revenue and none of the assets of such person confers, or may
confer, a private benefit to any other person;
Explanation: It covers organizations running for charitable, religious,-educational purposes and promotion of non-
professional sport. It covers such organizations that adhere to the above activities and get registered with the Commissioner
Inland Revenue and do not confer a private benefit on any other person. The concept is similar to organizations covered
under Rule 47(1) (d) of the repealed Income Tax Rules, 1982. For approval in terms of sub-clause (c) please see rule 211.
"Non-resident person" [U/s 2(37)] A person shall be a non-resident person for a tax year if the person is not a resident
person for that year.
Explanation: It means a person defined in section 81 as "A person shall be a non-resident person for a tax year if the
person is not a resident person for that year."
"Non-resident taxpayer" [U/s 2(38)] means a taxpayer who is a non-resident person;
Explanation: It means a person who is covered in clause (37) above.
"Officer of Inland Revenue" [U/s 2(38A)] means any Additional Commissioner Inland Revenue, Deputy Commissioner
Inland Revenue, Assistant Commissioner Inland Revenue, Inland Revenue Officer, Inland Revenue Audit Officer or any
other officer howsoever designated or appointed by the Board for the purposes of this Ordinance;
Explanation: The expression "taxation officer" defined in omitted clause (65) of section 2 became redundant after merger of
income tax, sales tax and federal excise in Inland Revenue Service.
"Originator" [U/s 2(39)] means Originator as defined in the Asset Backed Securitization Rules, 1999;
Explanation: It is as defined in Asset Backed Securitization Rules, 1989 as means a person who transfers to a Special
Purpose Vehicle any assets in the form of present or future receivables as a consequence of Securitization;
"Pakistan-source income" [U/s 2(40)]
(1) Salary shall be Pakistan-source income to the extent to which the salary -
(a) is received from any employment exercised in Pakistan, wherever paid; or
(b) is paid by, or on behalf of, the Federal Government, a Provincial Government, or a Local Government in
Pakistan, wherever the employment is exercised.
(2) Business income of a resident person shall be Pakistan-source income to the extent to which the income is
derived from any business carried on in Pakistan.
(3) Business income of a non-resident person shall be Pakistan-source income to the extent to which it is directly or
indirectly attributable to -
(a) a permanent establishment of the non-resident person in Pakistan;
(b) sales in Pakistan of goods merchandise of the same or similar kind as those sold by the person through a
permanent establishment in Pakistan;
(c) other business activities carried on in Pakistan of the same or similar kind as those effected by the non-
resident through a permanent establishment in Pakistan; or
(d) any business connection in Pakistan.

Conceptual Approach to Taxes 37


Taxation System Chapter-01

(4) Where the business of a non-resident person comprises the rendering of independent services (including
professional services and the services of entertainers and sports persons), the Pakistan-source business income of
the person shall include in addition to any amounts treated as Pakistan-source income under sub-section (3) any
remuneration derived by the person where the remuneration is paid by a resident person or borne by a permanent
establishment in Pakistan of a non-resident person.
(5) Any gain from the disposal of any asset or property used in deriving any business income referred to in sub-
section (2), (3) or (4) shall be Pakistan-source income.
(6) A dividend shall be Pakistan-source income if it is paid by a resident company.
(7) Profit on debt shall be Pakistan-source income if it is -
(a) paid by a resident person, except where the profit is payable in respect of any debt used for the purposes of a
business carried on by the resident outside Pakistan through a permanent establishment; or
(b) borne by a permanent establishment in Pakistan of a non-resident person.
(8) A royalty shall be Pakistan-source income if it is -
(a) paid by a resident person, except where the royalty is payable in respect of any right, property, or information
used, or services utilised for the purposes of a business carried on by the resident outside Pakistan through a
permanent establishment; or
(b) borne by a permanent establishment in Pakistan of a non-resident person.
(9) Rental income shall be Pakistan-source income if it is derived from the lease of immovable property in Pakistan
whether improved or not, or from any other interest in or over immovable property, including a right to explore for, or
exploit, natural resources in Pakistan.
(10) Any gain from the alienation of any property or right referred to in sub-section (9) or from the alienation of any
share in a company the assets of which consist wholly or principally, directly or indirectly, of property or rights referred
to in sub-section (9) shall be Pakistan-source income.
(11) A pension or annuity shall be Pakistan-source income if it is paid by a resident or borne by a permanent
establishment in Pakistan of a non-resident person.
(12) A technical fee shall be Pakistan-source income if it is -
(a) paid by a resident person, except where the fee is payable in respect of services utilised in a business carried
on by the resident outside Pakistan through a permanent establishment; or
(b) borne by a permanent establishment in Pakistan of a non-resident person.
(13) Any gain arising on the disposal of shares in a resident company shall be Pakistan-source income.
(13A) Any amount paid on account of insurance or re-insurance premium by an insurance company to an overseas
insurance or re-insurance company shall be deemed to be Pakistan source income.
(14) Any amount not mentioned in the preceding sub-sections shall be Pakistan-source income if it is paid by a resident
person or borne by a permanent establishment in Pakistan of a non-resident person.
(15) Where an amount may be dealt with under sub-section (3) and under another sub-section (other than sub-section
(14)), this section shall apply -
(a) by first determining whether the amount is Pakistan-source income under that other sub-section; and
(b) if the amount is not Pakistan-source income under that sub-section, then determining whether it is Pakistan-
source income under sub-section (3).
(16) An amount shall be foreign-source income to the extent to which it is not Pakistan-source income.
Explanation: It means income defined in section 101 covering both the Pakistan source and foreign source income.
"Pension Fund Manager" [U/s 2(40A)] means an asset management company registered under the Non-Banking Finance
Companies Rules, 2003, or a life insurance company registered under Insurance Ordinance, 2000, duly authorized by the
Securities and Exchange Commission of Pakistan and approved under the Voluntary Pension System Rules, 2005, to
manage the Approved Pension Fund;
"Permanent establishment" [U/s 2(41)] Means a fixed place of business through which the business of the person is
wholly or partly carried on, and includes:
(a) a place of management, branch, office, factory or workshop, premises for soliciting orders, warehouse, permanent
sales exhibition or sales outlet, other than a liaison office except where the office engages in the negotiation of
contracts (other than contracts of purchase);
(b) a mine, oil or gas well, quarry or any other place of extraction of natural resources;
(c) an agricultural, pastoral or forestry property;

38 Conceptual Approach to Taxes


Preliminary Chapter-04

(d) a building site, a construction, assembly or installation project or supervisory activities connected with such site or
project but only where such site, project and its connected supervisory activities continue for a period or periods
aggregating more than ninety days within any twelve-months period ;
(e) the furnishing of services, including consultancy services, by any person through employees or other personnel
engaged by the person for such purpose;
(f) a person acting in Pakistan on behalf of the person other than an agent of independent status acting in the ordinary
course of business as such, if the agent -
(i) has and habitually exercises an authority to conclude contracts on behalf of the other person;
(ii) has no such authority, but habitually maintains a stock-in-trade or other merchandise from which the agent
regularly delivers goods or merchandise on behalf of the other person; or
(g) any substantial equipment installed, or other asset or property capable of activity giving rise to income;
Explanation: The concept of PE was never a part of the domestic law and was always defined in various tax treaties. The
definition of PE incorporated in the new Ordinance is based on OECD Model Tax Treaty. It takes into account elaborate
situations and eventualities that constitute PE.
"Person" [U/s 2(42)] The following shall be treated as persons for the purposes of this Ordinance, namely:-
(a) An individual;
(b) a company or AOP incorporated, formed, organised or established in Pakistan or elsewhere;
(c) the Federal Government, a foreign government, a political sub-division of a foreign government, or public international
organisation
Explanation: This refers to the term defined in section 80.
PMEX [U/s 2(42A)] means Pakistan Mercantile Exchange Limited a futures commodity exchange company
incorporated under the Companies Ordinance,1984 and is licensed and regulated by the Securities and Exchange
Commission of Pakistan;
"Pre-commencement expenditure" [U/s 2(43)]
(1) A person shall be allowed a deduction for any pre-commencement expenditure in accordance with this section.
(2) Pre-commencement expenditure shall be amortized @ 20% on straight-line basis.
(3) The total deductions allowed in the current tax year and all previous tax years in respect of pre-commencement
expenditure shall not exceed the amount of the expenditure.
(4) No deduction shall be allowed where a deduction has already been allowed under any other section for the entire
amount of the pre-commencement expenditure in the tax year in which it is incurred.
(5) In this section, "pre-commencement expenditure" means any expenditure incurred before the commencement of a
business wholly and exclusively to derive income chargeable to tax, including the cost of feasibility studies,
construction of prototypes, and trial production activities, but shall not include any expenditure which is incurred in
acquiring land, or which is depreciable or amortized.
Explanation: This refers to expenditure referred to in section 25.
Example: A company incurred following expenses before commencement of its commercial activity.
Cost of feasibility study Rs. 40,000
Cost of trial production activities Rs. 20,000
Purchase of fixed assets Rs. 2,500,000
Required: Calculate the amount of pre-commencement expenses.
Solution:
Pre-commencement expenses Rs.
Cost of feasibility study 40,000
Cost of trial production 20,000
Total 60,000
"Prescribed" [U/s 2(44)] means prescribed by rules made under this Ordinance;

Conceptual Approach to Taxes 39


Taxation System Chapter-01

Explanation: It means as prescribed by the rules made under this Ordinance. The Board enjoys powers to make rules u/s
237. The rule-making power of the Board is subject to the limitation that any rule made should not be violative of the statute.
If a rule is repugnant to law, it will be ultra vires having no legal effect. The statements, forms, returns etc. prescribed by
rules have legal force and both the taxpayers and taxation officers are bound to make compliances, wherever required, in
the prescribed manner.
"Principal officer" [U/s 2(44A)] used with reference to a company or AOP includes -
(a) a director, a manager, secretary, agent, accountant or any similar officer; and
(b) any person connected with the management or administration of the company or AOP upon whom the Commissioner
Inland Revenue has served a notice of treating him as the principal officer thereof;

Explanation: The concept of Principal Officer is very important with reference to a company or an AOP against whom any
proceeding under the law has to be initiated. The definition covers a director, a manager, a secretary, an agent, any similar
officer as Principal Officer or any person connected with the management and administration of a company or association of
persons as Principal Officer on which the Commissioner Inland Revenue serves a notice.
"Private company" [U/s 2(45)] means a company that is not a public company;

Explanation: Private company under the Ordinance is defined exhaustively to mean a company that is not a public
company. The term "public company" is denned in section 2(47). So all the companies which are not covered in clause (47)
will automatically fall in the category of private companies. For the purpose of this Ordinance even the non-listed public
companies, which under the Companies Ordinance, 1984 are not private companies, are to be considered as private.
"Profit on a debt" [U/s 2(46)] whether payable or receivable, means -
(a) any profit, yield, interest, discount, premium or other amount, owing under a debt, other than a return of capital; or
(b) any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a credit facility
which has not been utilized;

Explanation: It is an exhaustive definition which means any profit, yield, interest, discount, premium or other amount
payable or receivable under a debt, other than a return on capital and any service fee or other charge in respect of a debt
including any such charge on a credit facility which has not been utilized.
"Public company" [U/s 2(47)] means -
(a) a company in which not less than 50% of the shares are held by the Federal Government or Provincial Government;
(ab) a company in which not less than 50% of the shares are held by a foreign Government, or a foreign company owned
by a foreign Government;
(b) a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and
which remained listed on that exchange at the end of that year; or
(c) a unit trust whose units are widely available to the public and any other trust as defined in the Trusts Act, 1882;

Explanation: It is defined to mean a company in which at least 50% of the shares are held by the Federal or Provincial
Governments, listed companies and unit trusts and any other public trust. This is a specific definition that has nothing to do
with the Companies Ordinance 1984, where the term is defined differently.
REIT Scheme [U/s 2(47A)] means a REIT Scheme as defined in the Real Estate Investment Trust Regulations
2015;
"Real Estate Investment Trust Management Company (RMC)" [U/s 2(47B)] means RMC as defined under the Real
Estate Investment Trust Regulations, 2015;
Rental REIT Scheme [U/s 2(47C)] means a Rental REIT Scheme as defined under the Real Estate Investment
Trust Regulations, 2015;
Explanation of u/s 2(47A) and (47Bl: "Real Estate Investment Trust (REIT) Scheme" and "Real Estate Investment
Trust Management Company (REITMC)"
These corporate bodies approved by the Securities and Exchange Commission Pakistan are meant for the purpose of
investment in real estate. These two entities have been given special benefits under the ITO, 2001 to promote a dose end
collective scheme constituted as a unit trust and managed by a real estate trust management company.
"Recognised provident fund" [U/s 2(48)] means a provident fund recognised by the Commissioner Inland Revenue in
accordance with Part I of the Sixth Schedule;

Explanation: It means a provident fund recognized in accordance with Part I of the Sixth Schedule.

40 Conceptual Approach to Taxes


Preliminary Chapter-04

"Rent" [U/s 2(49)] means rent as defined in section 15(2) and includes an amount treated as rent u/s 16; "rent" means any
amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to
use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land or a building.
Rent also includes Non-adjustable amounts received in relation to buildings.
Explanation: The word "rent" wherever used in the Ordinance will have the above meanings unless the context otherwise
requires,
"Repealed Ordinance" [U/s 2(49A)] means Income Tax Ordinance, 1979;

Explanation: The Income Tax Ordinance, 1979 as a reference wherever appears in the new Ordinance will be referred to
as "repealed Ordinance". Repeal and savings should be seen in section 239.
"Resident company" [U/s 2(50)] A company shall be a resident company for a tax year if -
(a) it is incorporated or formed by or under any law in force in Pakistan;
(b) the control and management of the affairs of the company is situated wholly in Pakistan at any time in the year; or
(c) it is a Provincial Government or Local Government in Pakistan.
Explanation: A company shall be a resident company u/s 83 of the ITO, 2001 for a tax year if-
(a) it is incorporated or formed by or under any law in force in Pakistan;
(b) the control and management of affairs of company is situated wholly or almost wholly in Pakistan at any time in the
year; or
(c) it is a Provincial Government or local government in Pakistan.

"Resident individual" [U/s 2(51)] An individual shall be a resident individual for a tax year if the individual -
(a) is present in Pakistan for a period of, or periods amounting in aggregate to, 183 days or more in the tax year; or
(b) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.

The following method shall be used to determine residential status of an individual under Rule 14 of the Income tax
Rules, 2002
(a) Subject to clause (c), a part of a day that an individual is present in Pakistan (including the day of arrival in, and the
day of departure from, Pakistan) counts as a whole day of such presence;
(b) the following days in which an individual is wholly or partly present in Pakistan count as a whole day of such
presence, namely:-
(i) a public holiday;
(ii) a day of leave, including sick leave;
(iii) a day that the individual's activity in Pakistan is interrupted because of a strike, lock-out or delay in receipt of
supplies; or
(iv) a holiday spent by the individual in Pakistan before, during or after any activity in Pakistan; and
(c) a day or part of a day where an individual is in Pakistan solely by reason of being in transit between two different
places outside Pakistan does not count as a day present in Pakistan.
Explanation: It means a person denned u/s 82 an individual shall be a resident individual for a tax year if the individual-
(a) is present in Pakistan for a period of, or periods amounting in aggregate to,183 days or more in the tax year; or
(b) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.
"Resident person" [U/s 2(52)] A person shall be a resident person for a tax year if the person is -
(a) a resident individual, resident company or resident AOP for the year; or
(b) the Federal Government.

Explanation: It means a person denned u/s 81 person shall be a resident person for a tax year if the person is-
(a) a resident individual, resident company or resident association of persons for the year; or
(b) the Federal Government.
"Resident taxpayer" [U/s 2(53)] means a taxpayer who is a resident person;

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Taxation System Chapter-01

Example: Differentiate between resident and non-resident persons.


(a) AOP in Pakistan while its control and management is not in Pakistan wholly or partly.
(b) An individual resident in Pakistan for a period of 185 days, however his stay in Pakistan was not continuous.
(c) A company incorporated in Pakistan.

Solution:
Non-resident (a) Resident (b) and (c)

"Royalty" [U/s 2(54)] means any amount paid or payable, as consideration for -
(a) the use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other like
property or right;
(b) the use of, or right to use any copyright of a literary, artistic or scientific work, including films or video tapes for use in
connection with television or tapes in connection with radio broadcasting, but shall not include consideration for the
sale, distribution or exhibition of cinematograph films;
(c) the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fiber or
similar technology in connection with television, radio or internet broadcasting;
(d) the supply of any technical, industrial, commercial or scientific knowledge, experience or skill;
(e) the use of or right to use any industrial, commercial or scientific equipment;
(f) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the
application or enjoyment of, any such property or right; and
(g) the disposal of any property or right.
"Salary" [U/s 2(55)] means salary as defined in section 12;

Explanation: This refers to salary as defined in section 12 which means any amount received by an employee from any
employment, whether of a revenue or capital nature, including from clauses (a) to (g) of the said section.
"Schedule" [U/s 2(56)] means a Schedule to this Ordinance;

Explanation: It means a schedule to this Ordinance, The schedules are as good as other parts of the statutes and it is
wrong to assume that in case of conflict between statute and schedules, the latter will prevail. In fact, in case of such a
conflict harmonious approach is to be adopted by the courts.
"Securitization" [U/s 2(57)] means securitization as defined in the Asset Backed Securitization Rules, 1999;
Explanation: "Securitization" means a process whereby any Special Purpose Vehicle raises funds by issue of Term
Finance Certificates or any other instruments with the approval of the Commission, for such purpose and uses such funds by
making; payment to the Originator and through such process acquires the title, property or right in the receivables or other
assets in the form of actionable claims;
"Share" [U/s 2(58)] in relation to a company, includes a modaraba certificate and the interest of a beneficiary in a trust
(including units in a trust);
Explanation: This is an inclusive definition which in addition to the ordinary meaning of the expression "share" includes
Modaraba Certificates and the interest of a beneficiary in a trust including unit trust. The aim is to bring these two categories
at par with shareholders of companies as far as taxation of distribution of profit by modarabas and unit trusts is concerned.
"Shareholder" [U/s 2(59)] in relation to a company, includes a modaraba certificate holder, a unit holder of a unit trust and
a beneficiary of a trust;
Explanation: It includes Modaraba Certificate holder and beneficiary of a trust. Since this is an inclusive definition all other
shareholders automatically fall under its meaning.
"Small Company" [U/s 2(59A)] means a company registered on or after 1.7.2005, under the Companies Ordinance, 1984,
which,-
(i) has paid up capital plus undistributed reserves not exceeding Rs.50 million;
(ia) has employees not exceeding 250 at any time during the year;
(ii) has annual turnover not exceeding Rs.250 million; and
(iii) is not formed by the splitting up or the reconstitution of company already in existence;

42 Conceptual Approach to Taxes


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Explanation: 'Small Company" is denned to mean a company registered on or after 1st July 2005 under the Companies
Ordinance 1984 having paid-up capital plus undistributed reserves not exceeding Rs. 50 million and has an annual turnover
not exceeding Rs. 250 million and the number of employees during the year at any time should not exceed 250. To qualify
under this category the company should not be formed by the splitting up or the reconstitution of the business already in
existence. There has been a demand to promote corporate culture in the country to encourage formal and documented
businesses.
"Special Judge " [U/s 2(59B)] means the special judge appointed u/s 203.
"Special Purpose Vehicle" [U/s 2(60)] means a Special Purpose Vehicle as defined in the Asset Backed Securitization
Rules, 1999;
"Speculation business" [U/s 2(61)] "speculation business" means any business in which a contract for the purchase
and sale of any commodity (including stocks and shares) is periodically or ultimately settled otherwise than by the actual
delivery or transfer of the commodity, but does not include a business in which -
(a) a contract in respect of raw materials or merchandise is entered into by a person in the course of a manufacturing or
mercantile business to guard against loss through future price fluctuations for the purpose of fulfilling the person's
other contracts for the actual delivery of the goods to be manufactured or merchandise to be sold;
(b) a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss in the
person's holding of stocks and shares through price fluctuations; or
(c) a contract is entered into by a member of a forward market or stock exchange in the course of any transaction in the
nature of jobbing arbitrage to guard against any loss which may arise in the ordinary course of the person's business
as such member.
"Stock fund" [U/s 2(61A)] means a collective investment scheme or a mutual fund where the investible funds are
invested by way of equity shares in companies, to the extent of more than seventy five (75%) of the investment.
"Stock-in-trade" [U/s 2(62)] "stock-in-trade" means anything produced, manufactured, purchased, or otherwise acquired
for manufacture, sale or exchange, and any materials or supplies to be consumed in the production or manufacturing
process, but does not include stocks or shares;

Explanation: The persons who are dealing in stocks or shares will not be taxed u/s 18 and in their case any gain or loss
arising from the disposal of such commodities will be considered as capital gain.
"Tax" [U/s 2(63)] means any tax imposed under Chapter II, and includes any penalty, fee or other charge or any sum or
amount leviable or payable under this Ordinance;

Explanation: It means any tax imposed and includes any penalty, fee or other charge or any sum or amount leviable or
payable under this Ordinance.
"Taxable income" [U/s 2(64)] The taxable income of a person for a tax year shall be the total income of the person for
the year reduced (but not below zero) by the total of any deductible allowances under Part IX of this Chapter of the person
for the year.
Example: From following information, compute taxable income of the person.
Total income 400,000
Zakat paid to central zakat fund 10,000
Solution:
Total income 400,000
Less: Zakat 10,000
Taxable income 390,000

Explanation of u/s 2(64)"taxable Income" It refers to the definition given in section 9 which reads as under:

The taxable income of a person for a tax year shall be the total income of the person for the year reduced (but not below
zero) by the total of any deductible allowances.
"Taxpayer" [U/s 2(66)]
means any person who derives an amount chargeable to tax under this Ordinance, and includes-
(a) any representative of a person who derives an amount chargeable to tax;
(b) any person who is required to deduct or collect tax; or
(c) any person required to furnish a return of income or pay tax;

Conceptual Approach to Taxes 43


Taxation System Chapter-01

Explanation: It means any person who derives any amount chargeable under this Ordinance and includes.-
1. Any representative of a person, as defined u/s 172.
2. Any person who is required to collect or deduct tax under this Ordinance.
3. Any person required to furnish a return of income or pay tax under this Ordinance.
"Tax treaty" [U/s 2(67) and 107]
(1) The Federal Government may enter into an agreement with the foreign government for the avoidance of double
taxation and the prevention of fiscal evasion with respect to taxes on income imposed under this Ordinance and
under the corresponding laws in force in that country and may by notification make such provisions necessary for
implementing the agreement.
(2) Where any agreement is made as above the same shall be effective even anything contained in any law for the time
being in force with respect to the following for:
(a) relief from the tax payable under this Ordinance;
(b) the determination of the Pakistan-source income of non-resident persons;
(c) where all the operations of a business are not carried on within Pakistan, the determination of the income
within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons,
including their agents, branches, and permanent establishments in Pakistan;
(d) the determination of the income to be attributed to any resident person having a special relationship with a
non-resident person; and
(e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable
under this Ordinance and under the corresponding laws in force in that other country.
(3) Any agreement referred above may include provisions for the relief from tax for any period before the commencement
of this Ordinance or before the making of the agreement.
"Tax year" [U/s 2(68)]
(1) Normal tax year shall be a period of twelve months ending on the 30th day of June and shall be denoted by the
calendar year in which the said date falls.
(2) Where a person's income year is different from the normal tax year such income year or period shall be that person's
special tax year.
(3) The Board in the case of a class of persons having a special tax year different from a normal tax year may permit to
use a normal tax year or vice versa.
(4) A person may apply, in writing, to the Commissioner Inland Revenue to allow him to use a twelve months' period,
other than normal tax year, as special tax year and the Commissioner Inland Revenue may by an order, allow him to
use such special tax year and vice versa.
(5) The Commissioner Inland Revenue shall grant permission only if the person has shown a compelling need to use
special tax year or normal tax year on such conditions as deem fit.
(6) An order shall be made after providing to the applicant an opportunity of being heard and where his application is
rejected the Commissioner Inland Revenue shall record in the order the reasons for rejection.
(7) The Commissioner Inland Revenue may, after providing to the person concerned an opportunity of being heard, by
an order, withdraw the permission granted.
(8) An order shall take effect from such date as may be specified in the order.
(9) Where the tax year of a person changes as a result of an order the period between the end of the last tax year prior to
change and the date on which the changed tax year commences shall be treated as "transitional tax year",
(10) A person dissatisfied with an order of Commissioner Inland Revenue may file a review application to the Board, and
the decision by the Board shall be final.
Explanation: It refers to the definition given in section 74.
Example: Differentiate between normal and special tax year.
(i) From 01-07-2015 to 30-06-2016
(ii) From 01-09-2015 to 31-08-2016
Solution: (i) is normal tax year while (ii) is special tax year.

44 Conceptual Approach to Taxes


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"Total income" [U/s 2(69) and 10] The total income of a person for a tax year shall be the sum of the
(a) Person's income under each of the heads of income for the year; and
(b) Persons income exempt from tax under any of the provisions of this Ordinance;

Explanation: It means as defined in section 10 which reads as under:


"The total income of a person for tax year shall be the sum of the persons income under each of the heads of Income for the
year".
"Trust" [U/s 2(70) and 80] "trust" means an obligation annexed to the ownership of property and arising out of the
confidence reposed in and accepted by the owner, or declared and accepted by the owner for the benefit of another, or of
another and the owner, and includes a unit trust;

Explanation: It means as defined in section 80 reproduced below:


"trust" means an obligation annexed to ownership of property and arising out of the confidence reposed in and accepted by
the owner, or declared and accepted by the owner for the benefit of another, or of another and the owner, and includes a
unit trust;
"Turnover" [U/s 2(70A) and 113] Means,
(a) the gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills,
derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final
discharge of the tax liability for which tax is already paid or payable;
(b) the gross fees for the rendering of services for giving benefits including commissions; except covered by final
discharge of tax liability for which tax is separately paid or payable;
(c) the gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is
separately paid or payable; and
(d) the company's share of the amounts stated above of any association of persons of which the company is a member.
Example: Compute turnover for the purpose of section 113 from following information:
Sales (including sales tax @ 17%) 117,000
Half of the sales (including sales tax) are chargeable to tax under final tax regime.
Solution:
Turnover for section 113
Sales (117,000 x 100 / 117) 100,000
Less: Taxable under final tax regime (excluding sales tax) 50,000
Turnover for the purpose of section 113 50,000
"Underlying ownership" [Section 2(71)] in relation to an entity, means an ownership interest in the entity held,
directly or indirectly through an interposed entity or entities, by an individual or by a person not ultimately owned by
individuals.

Explanation: It means as defined in section 98 that says:


"underlying ownership" in relation to an entity, means an ownership interest in the entity held, directly or indirectly through an
interposed entity or entities, by an individual or by a person not ultimately owned by individuals,
"Units" [U/s 2(72)] means units in a unit trust;

Explanation: It means units in a unit trust.


"Unit trust" [U/s 2(73)] means any trust under which beneficial interests are divided into units such that the entitlements of
the beneficiaries to income or capital are determined by the number of units held.

Explanation: It means a trust as denned in section 80 and reads as under:


"unit trust" means any trust under which beneficial interests are divided into units such that the entitlements of the
beneficiaries to income or capital are determined by the number of units held.
"Venture Capital Company" [U/s 2(74)] and "Venture Capital Fund" shall have the same meanings as are assigned to
them under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003;

Conceptual Approach to Taxes 45


Taxation System Chapter-01

Explanation: These shall have the same meanings as are assigned to them under Non-Banking Finance Companies Rules,
2003. Relevant provision of the said statute is as under;

"venture capital company" means a company licensed by the Commission to invest in venture projects through equity or
other instruments whether convertible into equity or not and provides managerial or technical expertise to venture projects,
or acts as a management company for management of venture capital fund;
"venture capital fund" means a. fund licensed under rule 26;
whistleblower [U/s 2(75)] means whistleblower as defined in section 227B;

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MULTIPLE CHOICE QUESTIONS


Q.1 Accumulated profits include
(a) any reserve made up wholly or partly of any allowance, deduction, or exemption admissible under ITO, 2001.
(b) all profits of the company including income and gains of a trust up to the date of payment of dividend.
(c) includes all profits of the company including income and gains of a trust up to the date of its liquidation.
(d) All of the above.
Q.2 Approved gratuity fund means a gratuity fund approved by the Commissioner Inland Revenue in accordance with Part
III of:
(a) Sixth Schedule.
(b) Second Schedule.
(c) Third Schedule.
(d) First Schedule.
Q.3 Approved superannuation fund means a superannuation fund, or any part of a superannuation fund, approved by the
Commissioner Inland Revenue in accordance with Part II of:
(a) Sixth Schedule.
(b) First Schedule.
(c) Second Schedule.
(d) None of the above
Q.4 An asset management company means a company as defined:
(a) In Banking Companies Ordinance, 1962.
(b) In Companies Ordinance, 1984
(c) In Non-Banking Finance Companies and Notified Entities Regulations, 2007
(d) In Income Tax Ordinance, 2001
Q.5 AOP does not include:
(a) Firm.
(b) Company.
(c) Hindu undivided family.
(d) Artificial juridical person.
Q.6 Business includes:
(a) Trade.
(b) Commerce.
(c) Manufacture.
(d) All of the above.
Q.7 Which of the following is not a capital asset?
(a) Painting.
(b) Stock in trade.
(c) Shares of private company.
(d) Book.
Q.8 Charitable purpose includes:
(a) Relief of the poor.
(b) Education.
(c) Medical.
(d) All of the above

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Taxation System Chapter-01

Q.9 Company includes:


(a) Firm.
(b) Hindu undivided family.
(c) Artificial juridical person.
(d) None of the above.
Q.10 Contribution to an Approved Pension Fund means contribution as defined in:
(a) Voluntary Pension System Rules, 2005.
(b) Income Tax Rules.
(c) Companies Ordinance, 1984.
(d) Sales Tax Act, 1990.
Q.11 Co-operative society means a co-operative society registered under
(a) the Co-operative Societies Act, 1925.
(b) any other law for the time being in force in Pakistan for the registration of co-operative societies.
(c) the Companies Ordinance, 1984.
(d) Both (a) and (b).
Q.12 Debt includes:
(a) Accounts payable.
(b) Promissory note.
(c) Bill of exchange.
(d) All of the above.
Q.13 Which of the following is not a deductible allowance:
(a) Donation to charitable institution.
(b) Zakat.
(c) WWF
(d) WPPF
Q.14 Depreciable asset has a useful life of:
(a) Less than 5 years.
(b) Exceeding one year.
(c) 12 months.
(d) One year.
Q.15 Depreciable asset is an asset which is used by a person:
(a) In deriving income from salary.
(b) For personal use.
(c) Income from business.
(d) Income from property.
Q.16 A person who holds an asset shall be treated as having made a disposal of the asset at the time when the asset is:
(a) Sold.
(b) Lost.
(c) Expired
(d) All of the above.
Q.17 Dividend includes:
(a) distribution by a company of accumulated profits to its shareholders, whether capitalised or not.

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(b) a distribution made in respect of any share for full cash consideration, or redemption of debentures or
debenture stock, where the holder of the share or debenture is not entitled in the event of liquidation to
participate in the surplus assets.
(c) any advance or loan made to a shareholder by a company in the ordinary course of its business, where the
lending of money is a substantial part of the business of the company.
(d) any dividend paid by a company which is set off by the company against the whole or any part of any sum
previously paid by it and treated as a dividend to the extent to which it is so set off.
Q.18 Eligible Person for the purpose of Voluntary Pension System Rules, 2005, means an individual Pakistani who holds:
(a) Valid National Tax Number
(b) Computerised National Identity Card
(c) National Identity Card for Overseas Pakistanis issued by the National Database and Registration Authority.
(d) Any of the above
Q.19 "Employment does not include:
(a) a directorship or any other office involved in the management of a company.
(b) a position entitling the holder to a fixed or ascertainable remuneration.
(c) the holding or acting in any public office.
(d) Sole proprietorship.
Q.20 Which of the following are treated as employee for the purpose of Income Tax Ordinance, 2001?
(a) President.
(b) MNAs and MPAs
(c) Part time directors of the companies
(d) All of the above
Q.21 Fee for technical services means:
(a) Consideration for the rendering of any managerial, technical or consultancy services.
(b) Consideration for services rendered in relation to a construction, assembly or like project undertaken by the
recipient.
(c) Consideration which would be income of recipient chargeable under the head "Salary".
(d) All of above
Q.22 Finance society includes a co-operative society which accepts money on deposit or otherwise for the purposes of:
(a) Advancing loans or making investments in the ordinary course of business.
(b) Establishment of Finance society.
(c) Making charitable donation
(d) All of the above
Q.23 "Firm" means the relation between persons who have agreed to:
(a) Establish a non-profit organization
(b) Incorporate a company under Companies Ordinance, 1984.
(c) Share the profits of a business carried on by all or any of them acting for all
(d) None of the above.
Q.24 Income include:
(a) any amount chargeable to tax under this Ordinance.
(b) any amount subject to collection or deduction of tax at source covered under final tax regime.
(c) any loss of income
(d) amount of any bonus shares
(e) All of the above

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Taxation System Chapter-01

Q.25 Industrial Undertaking means an undertaking which is:


(a) Set up in Pakistan
(b) Set up outside Pakistan
(c) Subsidiary of a foreign company
Q.26 Number of employees in an industrial undertaking which involves the use of electrical energy or any other form of
energy which is mechanically transmitted is:
(a) Less than 5
(b) 10 or more
(c) Less than 10
(d) 5 or more
Q.27 Number of employees in an industrial undertaking which does not involve the use of electrical energy or any other
form of energy which is mechanically transmitted is:
(a) 20 or more
(b) 10 or more
(c) Less than 20
(d) 40
Q.28 Which of the following is not an intangible asset under Income Tax Ordinance, 2001?
(a) Computer software
(b) License
(c) Expenditure that provides an advantage or benefit for a period of more than one year
(d) Expenditure incurred to acquire a depreciable asset
Q.29 KIBOR means Karachi Interbank Offered Rate applicable:
(a) On first day of each quarter
(b) On first day of each month
(c) On first day of each Year
(d) All of the above
Q.30 Member in relation to an AOP, includes:
(a) Partner in a firm
(b) Manager of the firm
(c) Director
(d) Employee of the firm
Q.31 Minor child means an individual who is under the age of 18 years at the:
(a) Beginning of a tax year
(b) End of a tax year
(c) Beginning of a Calendar year
(d) End of a Calendar year
Q.32 Mutual Fund means a mutual fund registered or approved by the:
(a) Appellate Tribunal Inland Revenue
(b) Commissioner Inland Revenue
(c) Registrar
(d) Securities and Exchange Commission of Pakistan
Q.33 Salary shall be Pakistan-source income to the extent to which the salary:
(a) is received from any employment exercised in Pakistan, wherever paid
(b) is paid by, or on behalf of, the Federal Government, a Provincial Government, or a Local Government in
Pakistan, wherever the employment is exercised
(c) Both (a) or (b)

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(d) None of the above


Q.34 Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived
from:
(a) Business carried on in Pakistan or outside Pakistan
(b) Business carried on outside Pakistan
(c) Business carried on in Pakistan
Q.35 Dividend shall be Pakistan-source income if it is paid by a:
(a) Company incorporated under Companies Ordinance, 1984.
(b) Non-resident company
(c) Resident company
(d) All of the above
Q.36 Profit on debt shall be Pakistan-source income if it is:
(a) Paid by a resident person
(b) Borne by a permanent establishment in Pakistan of a non-resident person.
(c) None of the above
(d) Both (a) and (b)
Q.37 Royalty shall be Pakistan-source income if it is:
(a) Paid by a resident person
(b) Borne by a permanent establishment in Pakistan of a non-resident person.
(c) None of the above
(d) Both (a) and (b)
Q.38 Rental income shall be Pakistan-source income if it is derived from:
(a) Lease of movable property in Pakistan
(b) Lease of immovable property in Pakistan
(c) Lease of movable property outside Pakistan
(d) Lease of immovable property outside Pakistan
Q.39 A pension or annuity shall be Pakistan-source income if it is:
(a) Paid by a resident person
(b) Borne by a PE in Pakistan of a non-resident person.
(c) None of the above
(d) Both (a) and (b)
Q.40 Which of the following is not a person for the purpose of Income Tax Ordinance, 2001?
(a) An individual;
(b) A company or AOP incorporated, formed, organised or established in Pakistan or elsewhere;
(c) The Federal Government, a foreign government, a political sub-division of a foreign government, or public
international organisation
(d) None of the above
Q.41 Pre-commencement expenditure shall be amortized @:
(a) 10%
(b) 15%
(c) 20%
(d) 5%
Q.42 Pre-commencement expenditure shall be amortized:
(a) On straight-line basis

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Taxation System Chapter-01

(b) Using diminishing balance method


(c) Using sum of digits method
(d) According to the International Accounting Standards
Q.43 Principal Officer used with reference to a company or AOP includes:
(a) a director, a manager, secretary, agent, accountant or any similar officer
(b) any person connected with the management or administration of the company or AOP upon whom the
Commissioner Inland Revenue has served a notice of treating him as the principal officer thereof;
(c) Both (a) and (b)
(d) None of the above
Q.44 Private Company means a company that is:
(a) Listed company
(b) Subsidiary of a listed company
(c) Not a public company
(d) An AOP in which a private company has made investment
Q.45 Which of the following is not a public company?
(a) a company in which not less than 50% of the shares are held by the Federal Government or Provincial
Government
(b) a company in which not less than 50% of the shares are held by a foreign Government, or a foreign company
owned by a foreign Government
(c) a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year
and which remained listed on that exchange at the end of that year
(d) a unit trust whose units are widely available to the public and any other trust as defined in the Trusts Act,
1882.
(e) None of the above
Q.46 Which of the following is not rent?
(a) Forfeited deposit paid under a contract for the sale of land
(b) Forfeited deposit paid under a contract for the sale of Building
(c) Non-adjustable amounts received in relation to buildings
(d) Non-adjustable amounts received in relation to Land
Q.47 A company shall be a resident company for a tax year if -
(a) It is incorporated or formed by or under any law in force in Pakistan
(b) The control and management of the affairs of the company is situated wholly in Pakistan at any time in the
year
(c) It is a Provincial Government or Local Government in Pakistan
(d) All of the above
Q.48 An individual shall be a resident individual for a tax year if the individual -
(a) Is present in Pakistan for a period of, or periods amounting in aggregate to, 183 days or more in the tax year
(b) Is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year
(c) Both (a) or (b)
(d) None of the above
Q.49 For the purpose of residential status of an individual, the day on which he arrives Pakistan shall be:
(a) Ignored
(b) Counted as whole day
(c) Counted as half day
(d) Counted as two days

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Q.50 For the purpose of residential status of an individual, the day on which he leaves Pakistan shall be:
(a) Ignored
(b) Counted as one whole day
(c) Counted as half day
(d) Counted as 2 days
Q.51 For the purpose of residential status of an individual, the day on which he leaves Pakistan shall be:
(a) Ignored
(b) Counted as whole day
(c) Counted as half day
(d) Counted as two days
Q.52 An industrial undertaking is an undertaking that is engaged in:
(a) the manufacture of goods or materials or the subjection of goods or materials to any process which
substantially changes their original condition
(b) ship-building
(c) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power
(d) the working of any mine, oil-well or any other source of mineral deposits; and
(e) All of the above
Q.53 A small company has employees:
(a) Not exceeding 10
(b) Not exceeding 250 at beginning of the year
(c) Not exceeding 250 at any time during the year
(d) Not exceeding 250 at the beginning of the year
Q.54 Repealed Ordinance means:
(a) Income Tax Ordinance, 1979
(b) Income Tax Ordinance, 2001
(c) Income Tax Rules
(d) None of the above
Q.55 A day or part of a day where an individual is in Pakistan solely by reason of being in transit between two different
places outside Pakistan:
(a) Does not count as a day present in Pakistan
(b) Counted as whole day
(c) Counted as half day
(d) Counted as two days
Q.56 For the purpose of Income Tax Ordinance, 2001, Federal Government shall be considered as:
(a) Resident person
(b) Non-resident person
(c) None of the above
Q.57 Which of the following is not a Royalty income?
(a) the use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other
like property or right;
(b) the use of, or right to use any copyright of a literary, artistic or scientific work, including films or video tapes for
use in connection with television or tapes in connection with radio broadcasting, but shall not include
consideration for the sale, distribution or exhibition of cinematograph films;
(c) the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic
fiber or similar technology in connection with television, radio or internet broadcasting;

Conceptual Approach to Taxes 53


Taxation System Chapter-01

(d) Income from lease of moveable or immovable property.


Q.58 Which of the following is not a royalty income?
(a) the supply of any technical, industrial, commercial or scientific knowledge, experience or skill;
(b) the use of or right to use any industrial, commercial or scientific equipment;
(c) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the
application or enjoyment of, any such property or right; and
(d) the disposal of any property or right.
(e) None of the above
Q.59 In relation to company, share includes:
(a) Modaraba certificate
(b) Interest of a beneficiary in a trust
(c) Units in a trust
(d) All of the above
Q.60 In relation to company, shareholder includes:
(a) Modaraba certificate holder
(b) Beneficiary of a trust
(c) Unit holder of a unit trust
(d) All of the above
Q.61 A small company has paid up capital plus undistributed reserves:
(a) Not exceeding Rs.50 million
(b) Exceeding Rs. 25 million
(c) Rs. 10 million
(d) Not exceeding Rs. 10 million
Q.62 The taxable income under NTR of a small company shall be charged to tax @ _______.
(a) 20%
(b) 25%
(c) 32%
(d) 35%
Q.63 A small company has turnover:
(a) Not exceeding Rs.250 million
(b) Exceeding Rs. 250 million
(c) Rs. 10 million
(d) Not exceeding Rs. 10 million
Q.64 Speculation business does not include a business in which:
(a) a contract in respect of raw materials or merchandise is entered into by a person in the course of a
manufacturing or mercantile business to guard against loss through future price fluctuations for the purpose of
fulfilling the person's other contracts for the actual delivery of the goods to be manufactured or merchandise to
be sold;
(b) a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss
in the person's holding of stocks and shares through price fluctuations; or
(c) a contract is entered into by a member of a forward market or stock exchange in the course of any transaction
in the nature of jobbing arbitrage to guard against any loss which may arise in the ordinary course of the
person's business as such member.
(d) All of the above
Q.65 Which of the following is not included in stock in trade?
(a) Raw material to be used in manufacturing
(b) Work in process

54 Conceptual Approach to Taxes


Preliminary Chapter-04

(c) Shares
(d) Finished goods manufactured or acquired
Q.66 Taxpayer means any person who derives an amount chargeable to tax under this Ordinance, and includes-
(a) any representative of a person who derives an amount chargeable to tax
(b) any person who is required to deduct or collect tax
(c) any person required to furnish a return of income or pay tax
(d) All of the above
Q.67 Normal tax year shall be a period of twelve months ending on:
(a) 1st day of July
(b) 30th day of June
(c) 31st day of December
(d) None of the above
Q.68 Tax year which is different from normal tax year is called:
(a) Special tax year
(b) Transitional tax year
(c) Assessment year
(d) Financial year
Q.69 Where a person changes his tax year from special to normal or normal to special tax year the period between the end
of the last tax year prior to change and the date on which the changed tax year commences shall be treated as:
(a) Special tax year
(b) Transitional tax year
(c) Assessment year
(d) Financial year
Q.70 "Turnover" means:
(a) the gross receipts from sales of goods less sales tax, Federal Excise duty, trade discounts shown on invoices,
or bills and income assessed under final tax regime;
(b) the gross fees for the rendering of services for giving benefits including commissions except covered under
final tax regime;
(c) the gross receipts from the execution of contracts except covered by final tax regime; and
(d) the company's share of the amounts stated above of any association of persons of which the company is a
member.
(e) All of the above
Q.71 "Permanent establishment" means a fixed place of business through which the business of the person is wholly or
partly carried on, and includes:
(a) a place of management, branch, office, factory or workshop, premises for soliciting orders, warehouse,
permanent sales exhibition or sales outlet, other than a liaison office except where the office engages in the
negotiation of contracts (other than contracts of purchase);
(b) a mine, oil or gas well, quarry or any other place of extraction of natural resources;
(c) an agricultural, pastoral or forestry property;
(d) All of the above
Q.72 "Permanent establishment" means a fixed place of business through which the business of the person is wholly or
partly carried on and does not include:
(a) any substantial equipment installed, or other asset or property capable of activity giving rise to income;
(b) a building site, a construction, assembly or installation project or supervisory activities connected with such
site or project continue for a period or periods more than 90 days within any 12 months period ;
(c) the furnishing of services, including consultancy services, by any person through employees or other
personnel engaged by the person for such purpose;
(d) None of the above

Conceptual Approach to Taxes 55


Taxation System Chapter-01

ANSWERS
Q 1 2 3 4 5 6 7 8 9
A (d) (a) (a) (c) (b) (d) (b) (d) (d)
Q 10 11 12 13 14 15 16 17 18
A (a) (d) (d) (a) (b) (c) (d) (a) (d)
Q 19 20 21 22 23 24 25 26 27
A (d) (d) (a) (a) (c) (e) (a) (b) (a)
Q 28 29 30 31 32 33 34 35 36
A (d) (a) (a) (b) (d) (c) (c) (c) (d)
Q 37 38 39 40 41 42 43 44 45
A (d) (b) (d) (d) (c) (a) (c) (c) (e)
Q 46 47 48 49 50 51 52 53 54
A (d) (d) (c) (b) (b) (b) (e) (c) (a)
Q 55 56 57 58 59 60 61 62 63
A (a) (a) (d) (e) (d) (d) (a) (b) (a)
Q 64 65 66 67 68 69 70 71 72
A (d) (c) (d) (b) (a) (b) (e) (d) (d)

56 Conceptual Approach to Taxes


Preliminary Chapter-04

ICMAP PAST PAPERS THEORETICAL QUESTIONS


Q.NO. 2(a) August 2014 Define the term public company as per the Income Tax Ordinance, 2001.
Q. 2(a) February 2014 Define the term Electronic Record as per the Income Tax Ordinance, 2001.
Q. NO. 2(b) February 2013 Explain the term ''Industrial undertaking'' as per section 2(29C) of the ITO, 2001.
Q. NO. 2(a) Summer 2011 Define the following terms under the Income Tax Ordinance, 2001:
(i) Business (ii) Charitable purpose (iii) Employment
Q. NO. 2(a) Winter 2010 Define the terms (i) Association of Persons (ii) Resident Company (iii) Profit on Debt
Q. NO. 2(a) Summer 2010 Define the terms (i) Fee for technical services (ii) Employment (iii) Small company
3 (c) Summer-2010 Define the terms (i) Fee for technical services (ii) Non-profit organization
Q. NO. 2(c) Winter 2008 What is the definition of Small Company u/s 2(59A) of the I.T.O. 2001?
Q. NO. 3(c) Summer 2008 Define the terms (i) Fee for technical services (ii) Non-profit organization
Q. NO. 2(c) Winter 2007 In the light of the ITO-2001 what do you understand from the term Trust?
Q. NO. 2(d) Winter 2007 Define the terms (i) Pre-commencement expenditure u/s 25 (ii) Rent, u/s 15.
Q. NO. 3(a) Summer 2007 Define the term amalgamation as per section 2(1A) of the ITO-2001.
Q. NO. 3(b) Summer 2007 Define the term industrial undertaking u/s 2(29C) of the ITO-2001.
Q. NO. 3(c) Summer 2007 Define the term profit on debt as per section 2(46) of the ITO-2001.
Q. NO. 4(b) Summer 2006 Explain (i) Resident (ii) Association of Persons (iii) Finance society (iv) Trust (v) Royalty
Q. NO. 7(a) Winter 2005 Explain (i) Association of Persons (ii) Debt (iii) Employer (iv) Non-profit organization
Q. NO. 2(a) Summer 2005 Who is treated as Persons u/s 80 of the ITO-2001?
Q. NO. 2(b) Summer 2005 Define the terms (i) Resident and non-person (ii) Resident individual (iii) Resident company
Q. NO. 6(a) Summer 2005 Define Fee for Technical Services under ITO-2001.
Q. NO. 3(b) Summer 2004 Explain the term Public Company under ITO-2001.
Q. NO. 7 Summer 2004 Define the terms (i) Banking company (ii) Debt (iii) Dividend (iv) Income
Q. NO. 2 Summer 2003 Define the terms (a) Amalgamation (b) Fee for technical services (c) Tax year (d) Non profit
organization

Conceptual Approach to Taxes 57


Taxation System Chapter-01

CA MOD C PAST PAPERS THEORETICAL QUESTIONS


Q. NO. 7 Spring 2014 Certain payments made by a private limited company to its shareholders can be treated as
dividend. Explain the above in the context of ITO, 2001. Also identify the exceptions to this rule.
Q. No. 2 (b) Spring 2013
Explain the term Associates. State the circumstances under which a shareholder in a company and the company
may be regarded as associates.
Q. No. 5 (a) Spring 2013 Differentiate between public company and private company within the meaning of Income Tax
Ordinance, 2001.
Q. No. 4(b) Spring 2013 What do you understand by the term Dividend as referred to in the Income Tax Ordinance, 2001?
Briefly discuss the provisions relating to imposition of tax on dividend.
Q.2 (a) Autumn 2012 What do you understand by the term Royalty as described in the Income Tax, 2001?
Q.2 (a) Spring 2012 Briefly discuss concepts of Public Company and Small Company as explained in ITO, 2001.
Q.6 (b) Spring 2012 Under the Income Tax Ordinance 2001, where a person is reasonably expected to act in accordance
with the intentions of another person, both persons are considered as associates.
Required: (i) Explain the term person in the above context. (ii) State the circumstances in which a company and its
shareholder shall be considered as associates.
Q.4 (b) Autumn 2011 Explain the term industrial undertaking as specified in the Income Tax Ordinance, 2001.
Q.1 Spring 2002 Define the following with reference to the Income Tax Ordinance 1979:
(a) Assessee (b) Capital asset (c) Dividend (d) Public Company
Q.1 Autumn 2002 (a) Under what circumstances Advance or Loan to a shareholder by a private company would be treated
as dividend with reference to the provision of the Income Tax Ordinance, 1979.
(b) Rose Company Ltd. has a paid up capital of Rs. 5,000,000 consisting 500,000 shares of Rs.10 each. On 30.6.2001 the
companys balance sheet shows accumulated profits of Rs. 1,500,000. Last year the company also created a reserve of Rs.
1,000,000 for issue of Bonus shares. The company has to be liquidated. The official liquidator realized Rs. 6,500,000 and
distribution among the shareholders was made at the rate of Rs.13 per share. Shewani Group owns 200,000 shares in the
company.
How much of the amount received by Shewani Group is dividend? Please explain your answer.
(c) Please define terms Co-operative Society and Finance Society with reference to ITO, 1979 and compare the same.
Autumn 2001 Q.1 Define and explain the following with reference to the Income Tax Ordinance, 1979:
(a) Assessment Year (b) Special Income Year (c) Resident (d) Tax (e) Average rate of tax

58 Conceptual Approach to Taxes


Introduction and Geographical Source of Income Chapter-05

Chapter

5 INTRODUCTION AND GEOGRAPHICAL


SOURCE OF INCOME

Section Rule TOPICS COVERED


What is income tax?
Taxability in Pakistan
2(52), 82, 83, 84 14 Resident person and determination of residential status
Total income
Tax regimes
Income tax return
101 Determination of geographical source of income
50, 51, 102 and 103 Special cases for taxation of foreign source of income
Multiple Choice questions with solutions
ICMAP and CA Mod C past papers theoretical questions

(FOR CAF-6 AND ICMAP STUDENTS)


Introduction:
This chapter deals with the basic concepts of Income Tax Ordinance, 2001. Being as direct tax it is levied on the income of
tax payers and the Federal Board of Revenue is responsible to monitor its levy, collection and other procedural issues.
What is income tax?
Income tax is a direct tax which a person is liable to pay on his income earned during the tax year.
Taxability in Pakistan
Persons are divided into two categories for the purpose of taxability:
1. Resident: Resident person is taxable for both Pakistan Source Income and Foreign Source Income (excluding
foreign source salary income if foreign tax paid or foreign salary is not taxable over there or when there is double
taxation treaty agreement).
2. Non Resident: Non-resident person is taxable for Pakistan Source Income only.
Resident person [U/s 2(52)]
A person shall be a resident person for a tax year if the person is-
(a) a resident individual, resident company or resident AOP for the year; or
(b) the Federal Government.
Determination of residential status
Residential Status of an individual [Section 82]
Residential status for tax purpose has nothing to do with the nationality or domicile for an individual because the residential
status is based on number of days of physically presence in Pakistan during a tax year. Therefore, a foreigner may be a
resident person and a Pakistani national may be a non-resident for tax purposes. A person may be resident in a tax year and
non resident in next tax year and vice versa.

Physical stay in a tax year in Pakistan Status Status


(a) 0-182 days Non-Resident
(b) 183 or more days (equal or more than 50% of days in a year) Resident
(c) A government employee posted abroad in the tax year is resident irrespective of his physical stay in Pakistan.

Conceptual Approach to Taxes 59


Introduction and Geographical Source of Income Chapter-05

Rule 14 of the Income Tax Rules 2002:


Rule to count days an individual present in Pakistan becomes vital when a person has frequent visits to or from
Pakistan. Rule 14 of the Income Tax Rules prescribes the procedure for counting of days as under:
Part of a day that an individual is present in Pakistan counts as a whole day including:
- A day of arrival in Pakistan
- A day of departure from Pakistan
- A public holiday
- A day of leave
- A day that the individual's activity in Pakistan is interrupted because of a strike, lock-out or delay in receipt of
supplies
- A holiday spent in Pakistan before, during or after any activity in Pakistan
- A day In Pakistan solely by reason of being in transit does not count as a day present in Pakistan
Residential Status of Company [Section 83]
(a) A company incorporated in Pakistan, provincial government and local governments are resident without any
condition.
(b) A company incorporated outside Pakistan is resident if control and management of the affairs is situated wholly in
Pakistan in the year.
Residential Status of Association of Persons (AOP) [Section 84]
AOP shall be considered as resident if control and management of affairs is situated wholly or partly in Pakistan in the
year.
Total income
Income tax is generally applicable on total income (including exempt income) that has been divided into following 5 heads
of income.
NTR = Normal tax regime SBI = Separate block of income FTR = Final tax regime

S. No. Head of income Tax regime


1 Salary income NTR and SBI
2 Property income NTR
3 Business income NTR and FTR
4 Capital gains NTR and Fixed tax as SBI
5 Other sources NTR and SBI under FTR

Tax regimes
There are three tax regimes:
Normal tax regime (NTR):
Incomes which are chargeable to tax under NTR are added together to obtain taxable income and then tax rate according to
the slab rate is applied to determine tax liability.
Separate block of income under NTR (SBI):
Incomes which are chargeable to tax under Separate Block of Income are taxable under Normal Tax Regime, however,
income is not added in taxable income and further, fix rates applicable for income covered under Separate Block of Income
to determine tax liability.
Minimum tax liability under NTR:
Applicable under sections 113, 148, 153 and 235.
Final tax regime (FTR):
In case of Incomes which are chargeable to tax under Final Tax Regime, tax is deductible at a fixed rate on income and
such tax deduction is treated as final discharge of tax liability.
Separate block of income (SBI) under FTR:
Incomes which are chargeable to tax under SBI are taxable under Final Tax Regime; however, income is not added in
taxable income and further, fixed rates applicable for income covered under Separate Block of Income to determine tax
liability.

60 Conceptual Approach to Taxes


Introduction and Geographical Source of Income Chapter-05

Total tax liability:


Total tax liability is calculated as follows:
Tax liability under NTR xxx
Tax liability under SBI xxx
Tax liability under FTR xxx
Total tax liability xxx

Income tax return


Under Income Tax Ordinance, 2001, certain persons are required to file income tax return.
What is income tax return?
Income tax return is a declaration of total income and tax liability which a person is required to file to the income tax
department. A return of income, if complete shall be treated as assessment order.
What is assessment order?
An order in which relevant income tax authority assess the total income and tax liability of a taxpayer, is called assessment
order. In Pakistan, return of income filed by the taxpayer is treated as assessment order if return filed is complete in all
respects.
Determination of geographical source of income [S 101]
Salary shall be Pakistan source income which:
(a) is received from any employment exercised (place of rendering of services) in Pakistan, wherever paid; or
(b) is paid by, or on behalf of, the Federal Government, a Provincial Government, or a Local Government in Pakistan,
wherever the employment is exercised (place of rendering of services).
Rental income shall be Pakistan source income :
If it is derived from the lease of immovable property in Pakistan including a right to explore for, or exploit, natural sources in
Pakistan (for owner of immoveable property).
Any gain from the alienation of any property or right
As stated above the rental income or from the alienation of any share in a company the assets of which consist wholly or
principally, directly or indirectly, of property or rights shall be Pakistan source income.
Business income of a resident person:
Shall be Pakistan source income to the extent to which the income is derived from any business carried on in Pakistan.
Business income of a non-resident person
Shall be Pakistan source income which is directly or indirectly attributable to-
(a) A Permanent Establishment of the non-resident person in Pakistan;
(b) Sales in Pakistan of goods merchandise of the same or similar kind as sold by the person through a Permanent
Establishment in Pakistan;
(c) Other business activities carried on in Pakistan of the same or similar kind as those affected by the non-resident
through a Permanent Establishment in Pakistan; or
(d) Any business connection in Pakistan.
A dividend shall be Pakistan-source income
If it is-
(a) Paid by a resident company; or
(b) Dividend u/s 2(19)(f) for remittance of after tax profit of a branch of a foreign company operating in Pakistan other
than branch of Petroleum Exploration and production.
Profit on debt shall be Pakistan-source income if it is -
(a) paid by a resident person, except where the profit is payable in respect of any debt used for the purposes of a
business carried on by the resident outside Pakistan through a permanent establishment; or
(b) borne by a permanent establishment in Pakistan of a non-resident person.

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Introduction and Geographical Source of Income Chapter-05

A royalty shall be Pakistan-source income if it is -


(a) paid by a resident person, except where the royalty is payable in respect of any right, property, or information used, or
services utilised for purposes of a business carried on by resident outside Pakistan through a permanent
establishment; or
(b) borne by a permanent establishment in Pakistan of a non-resident person.
A pension or annuity shall be Pakistan-source income
if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person.
Any gain arising on the disposal of shares in a resident company shall be Pakistan source income.
A technical fee shall be Pakistan-source income if it is -
(a) paid by a resident person, except where the fee is payable in respect of services utilised in a business carried on by
the resident outside Pakistan through a permanent establishment; or
(b) borne by a permanent establishment in Pakistan of a non-resident person.
Any gain arising on the disposal of shares:
in a resident company shall be Pakistan source income.
Any amount paid on account of insurance or re-insurance premium
by an insurance company to an overseas insurance or re-insurance company shall be deemed to be Pakistan source
income.
Any amount not mentioned above:
Shall be Pakistan source income if it is paid by a resident person or borne by a permanent establishment in Pakistan of a
non-resident person.
Where amount may be dealt with Pakistan source income business income of non-resident and under any other above sub-
sections, this section shall apply -
(a) by first determining whether the amount is Pakistan source income ; and
(b) if amount is not Pakistan source income under that sub-section, then determining whether it is Pakistan source
income .
Foreign source income
An amount shall be foreign source income to the extent to which it is not Pakistan source income.
Example
Mr. Asif is marketing manager of ABC Pakistan (Pvt.) Ltd. since 2005. His responsibilities include looking after and
supervision of the marketing related matter of Asian region. In the said region, major set ups are situated in India,
Bangladesh and Singapore. The location wise bifurcation of his monthly salary is as under:
Particulars Pakistan India Bangladesh Singapore
Pay 600,000 530,000 500,000 350,000
House rent 250,000 210,000 200,000 140,000
Utilities 65,000 50,000 45,000 35,000
Medical reimbursements 150,000 10,000 55,000 30,000
Total 1,065,000 800,000 800,000 555,000
However, in the current year, his financial results are as under:

Particulars India Bangladesh Singapore Amount

Net foreign source income 2,205,000 620,000 245,000 3,070,000


You are required to compute the taxable income and tax liability of Mr. Asif for the tax year 2016.

62 Conceptual Approach to Taxes


Introduction and Geographical Source of Income Chapter-05

Solution
Mr. Asif
Tax year 2016
Computation of taxable income
Particulars Pakistan India Bangladesh Singapore
Pakistan source income
Gross salary 1,065,000 800,000 800,000 555,000

Less: Exempt medical reimbursement 150,000 10,000 55,000 30,000


Taxable 915,000 790,000 745,000 525,000
Total of all countries Pakistan source of income 2,975,000
Foreign source income
India Bangladesh Singapore Total gross
Net foreign source income 2,205,000 620,000 245,000 3,070,000
Total income (Pakistan + Foreign Source) 6,045,000
Taxpayer is a non-salaried person hence rates for non-salaried persons have been applied.
Tax on Rs. 6,045,000 [1,319,500 + 35% x (6,045,000 - 6,000,000)] 1,335,250
THREE CONSIDERATIONS FOR FOREIGN SOURCE OF INCOME
(a) Foreign source salary income shall be subject to fulfillment of payment and exempt source of income.
(b) Where incomes other than foreign source salary income are added in the foreign tax credit is allowed after
considering double taxation treaty agreements.
Example: Differentiate between Pakistan Source Income and Foreign Source Income.
(a) Salary paid by Provincial Govt. of Pakistan to an employee working abroad.
(b) Business income received by a non-resident not through his permanent establishment.
(c) Dividend income received by a non-resident from a resident company.
(d) Miss Amna is a resident person sold shares of a non-resident company at profit.
(e) Pension paid by a non-resident person to a resident person.

Solution: Pakistan source income: a, b, c Foreign source income: d, e,


Example:
Following is the details of income of Mr. Bhatti during the year 2016 are as under.
Rs.
1. Interest on Foreign Bonds (one-third is received in Pakistan). 150,000
2. Agricultural income from Bangladesh, received there but later on remitted to Pakistan 70,000
3. Property income from UK received outside Pakistan 500,000
4. Business income from Turkey which is controlled through a permanent establishment in Pakistan
(Rs. 45,000 is received in Pakistan) 135,000
5. Dividend paid by a resident company but received outside Pakistan 100,000
6. Remittance (not in the nature of income) brought to Pakistan 120,000
7. Profits from a business in Karachi and managed from outside Pakistan 70,000
8. Profit on sale of an asset in Pakistan but received in USA 250,000
9. Pension from Pakistan Government but received in USA 70,000
What is the gross total income of Mr. Bhatti, if he is: (i) resident in Pakistan and (ii) non-resident in Pakistan?

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Introduction and Geographical Source of Income Chapter-05

Solution:
RESIDENT IN NON-
PAKISTAN RESIDENT
1. Interest on Foreign Bonds
(one-third is taxable on receipt basis) 50,000 -
(two-third is taxable on accrual basis) 100,000 -
2. Agriculture income in Bangladesh income accrued and received outside Pakistan 70,000 -
3. Income from property in UK received outside Pakistan:
Income accruing and arising outside Pakistan 500,000 -
4. Income earned from business in Turkey which is controlled through a permanent
establishment in Pakistan (Rs. 45,000 is received in Pakistan)
Rs. 45,000 is taxable on receipt basis 45,000 45,000
Balance is taxable on accrual basis 90,000 90,000
5. Dividend paid by a resident company but received outside Pakistan
income declared to be Pakistan source [Section 101(6)] 100,000 100,000
6. Remittance (not in the nature of income brought to Pakistan
No question of taxability arise
70,000 70,000
8. Profit on sale of an asset in Pakistan but received in London:
Income declared to be Pakistan source [Section 12(5)] 250,000 250,000
9. Pension from Pakistan Government but received in London:
Income declared to be Pakistan-source [Section 101(11)] 70,000 70,000
1,345,000 625,000

Special cases of taxability of foreign source income


Foreign source income of a short term resident [Section 50]
An individual shall be exempt in respect of his foreign-source income which is not brought / received in Pakistan if he is
resident only by reason of his employment and he is present in Pakistan for not exceeding 3 years.
This section shall not apply
(a) on business established in Pakistan by the person being an individual.
(b) Any foreign source income brought or received in Pakistan by the person being an individual.
Foreign source Income of a returning expatriate [Section 51]

If an individual citizen of Pakistan (returning expatriate) is resident in the current tax year but was non-resident in the 4
preceding tax years, his foreign-source income shall be exempt current tax year and in the following tax year.
Salary earned outside Pakistan shall be exempt if a citizen of Pakistan leaves Pakistan during a tax year and remains
abroad during that tax year.
Foreign source salary of resident individuals [Section 102]
Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income
tax on such salary or his employer has withheld from the salary and paid to the revenue authority of the foreign country in
which the employment was exercised.
A credit or exemption shall be allowed only if the foreign income tax is paid within 2 years after the end of the tax year in
which the foreign income was derived by the resident taxpayer otherwise in the absence of double tax treaty agreement the
same shall be taxable in Pakistan. [Section 103]

64 Conceptual Approach to Taxes


Introduction and Geographical Source of Income Chapter-05

MULTIPLE CHOICE QUESTIONS


Q.1 Income tax is
(a) Direct tax
(b) Indirect tax
(c) Semi-direct tax
(d) None of the above
Q.2 A person is liable to pay income tax on taxable income earned during the
(a) Financial year
(b) Calendar year
(c) Tax year
(d) (a) and (c) above
Q.3 Resident persons are taxable for
(a) Pakistan Source Income
(b) Foreign Source Income
(c) Both (a) and (b)
(d) Business income
Q.4 Residential Status of an individual shall be determined on the basis of:
(a) Nationality
(b) Number of days stay in Pakistan
(c) Govt. employee
(d) Either (b) or (c)
Q.5 For income tax purposes, a foreigner:
(a) May be a resident person
(b) Cannot be a resident person
(c) None of the above
Q.6 For a resident individual, physical stay basis is necessary for
(a) Equal or less than 182
(b) Equal or more than 183 days
(c) No physical stay is necessary
Q.7 A government employee posted abroad is resident because:
(a) He stays in Pakistan for 182 days
(b) He stays in Pakistan for 183 or more days
(c) He does not stay in Pakistan
(d) He has no limitation on stay in Pakistan
Q.8 Part of a day an individual is present in Pakistan for a day of arrival, departure, public holiday or day of leave
(a) Counts as a whole day
(b) Counts as half day
(c) Is not counted
Q.9 A day that the individuals activity in Pakistan is interrupted because of a strike, lock-out or delay in receipt of supplies
(a) Is not counted
(b) Counts as a whole day
(c) Counts as half day
(d) None of the above

Conceptual Approach to Taxes 65


Introduction and Geographical Source of Income Chapter-05

Q.10 A day in Pakistan only by reason of being in transit between two different countries
(a) Counts as whole day
(b) Is not counted
(c) Counts as half day
(d) None of the above
Q.11 Company incorporated outside Pakistan is resident if control and management of the affairs is situated:
(a) Wholly or partly in Pakistan
(b) Wholly in Pakistan
(c) Partly in Pakistan
(d) Any where
Q.12 AOP shall be resident if control and management of the affairs is situated:
(a) Wholly in Pakistan
(b) Partly in Pakistan
(c) Wholly or partly in Pakistan
(d) Anywhere
Q.13 Total income has been divided into:
(a) 1 head of income
(b) 3 heads of income
(c) 5 heads of income
(d) No heads
Q.14 Salary is Pakistan source of income if it is in Pakistan
(a) Received from any employment exercised outside Pakistan
(b) Received from any employment exercised in Pakistan
(c) Received from any business exercised in Pakistan
Q.15 Profit on debt is not Pakistan source income if
(a) it is paid by resident person
(b) it is paid by permanent establishment of non-resident
(c) it is paid by non-resident person.
Q.16 Pension paid by a non-resident person to a resident person is
(a) Pakistan source
(b) foreign source
(c) local source
Q.17 Foreign source of short term resident is not taxable if it not
(a) brought / paid in Pakistan
(b) paid / received in Pakistan
(c) brought / received in Pakistan
Q.18 Total tax liability is equal to tax under
(a) NTR plus FTR
(b) NTR plus minimum tax liability
(c) FTR plus minimum tax liability
Q.19 If income tax return is complete then it is called
(a) a provincial assessment order
(b) an assessment order
(c) a re-assessment order
66 Conceptual Approach to Taxes
Introduction and Geographical Source of Income Chapter-05

Q.20 Foreign source income of a short term resident is not taxable if he is not present in Pakistan
(a) not less than 4 years
(b) more than 3 years
(c) more than 5 years
Q.21 A credit or exemption on foreign salary income shall be allowed only if the foreign tax is paid within
(a) 3 years after the end of tax year
(b) 2 years after the end of tax year
(c) 4 years after the end of tax year
Q.22 Income tax return is the declaration of
(a) total income & taxable income
(b) total taxable income & tax liability
(c) total income & tax liability
Q.23 Where the fee is payable in respect of services utilized in a business carried on resident outside Pakistan through
permanent establishment is
(a) Pakistan sources income
(b) foreign source income
(c) both a & b

ANSWERS

1 (a) 2 (c) 3 (c) 4 (d) 5 (a)

6 (b) 7 (d) 8 (a) 9 (b) 10 (b)

11 (b) 12 (c) 13 (c) 14 (b) 15 (c)

16 (b) 17 (c) 18 (a) 19 (b) 20 (b)

21 (b) 22 (c) 23 (b)

Conceptual Approach to Taxes 67


Introduction and Geographical Source of Income Chapter-05

ICMAP PAST PAPERS THEORETICAL QUESTIONS


Q.No. 2(b) August 2014 Mr. Aslam is a non-resident person working as a Senior Manager in one of the renowned
companies of the United States of America. In addition to his foreign salary income, he has some properties and
investments in shares in Pakistan from which he is earning handsome income. Mr. Aslam has little knowledge about the
Pakistani Tax Laws and he is worried about the payment of his tax liability for the tax year ended June 30, 2014.

Required: Suppose you are Tax Consultant and Mr. Aslam has sought your professional opinion in respect of the following
matters in the light of the Income Tax Ordinance, 2001:
(i) Being a non-resident whether foreign-source income and Pakistan-source income of Mr. Aslam are taxable
or exempt from tax? Discuss.
(ii) What types of Pakistan-source Income are taxable?
(iii) Under what regime the Pakistan-source income of Mr. Aslam will be treated?
(iv) What is the last date for submitting the statement in lieu of return in respect of his Pakistan-source income?

Q. No. 3(a) February 2014 Noorani Merchant and Co. is a tax consultancy firm. It has a list of clients who seek advices in
respect of various tax matters.

Required: Assume that you have been working as a Tax Advisor of Noorani Merchant and Co. and is given a task to
determine the residential status of the following clients for the tax year ended June 30, 2014 under the given three
scenarios. Also substantiate your answer with reasons in the light of the provision of the Income Tax Ordinance, 2001 and
the Income Tax Rules, 2002:

(i) Mr. Fahim resides in London and works as Chief Accountant in a British Company. Assume that he has come
to Pakistan for the first time on a special assignment from his company on March 1, 2014 and left Pakistan on
October 31, 2014.

(ii) Mr. Saleem is a Federal Government employee. Assume that he is posted to the United Arab Emirates for taking
special training on Petroleum Exploration Project from July1, 2013 to June 30, 2014.
Ms. Saima has got a job in St. Micheal Pharma, a reputable company of United State of America (USA). She went to USA
on December 28, 2013 to assume her responsibilities as a Managing Director of the company. Assume that in April, 2014
her company sent her to China on training. On May 31st 2014 on her way back to USA she stayed in Karachi for three days
due to cancellation of flights.

(b) There are various modes of charging Income Tax under the Income Tax Ordinance, 2001 commonly known as Tax
Regimes. Briefly describe each of the following modes of taxation:-

Normal Tax Regime (NTR)


Separate Tax Regime (STR)
Final Tax Regime or Presumptive Tax Regime (FTR)
Minimum Taxation Regime (MTR)
Q. NO. 2(c) SUMMER 2010 What does section 102 of the ITO, 2001 say about foreign source salary of resident individuals?
Q. NO. 2(c) SUMMER 2009 In each of the following cases, you are required to identify the income as Pakistan source
income or foreign, source income, and provide the relevant provision of the sections used as the basis for identification:
(i) Mr. Walter Vincent, is the employee of United Nations, who is employed in Pakistan. His salary is paid by United
Nations through direct credit to his foreign bank account.
(ii) Mr. Jonty Rhodes has been hired for one month as coach of national cricket team for training in Dubai. He has been
paid US $100,000 as fee for professional services by the Federal Government of Pakistan.
(iii) Mr. Hammad Ali is a resident person for tax purpose. He has earned an income of Rs. 500,000 from the disposal of
shares of a company incorporated outside Pakistan.
(iv) M. Clifford, a resident of United Kingdom, has made a gain of UK 1000 from the sale of the shares of a company
listed in London Stock Exchange. The principal activity of the company is to explore for the natural resources of
Pakistan.
(v) Mr. Kareem, a resident of Pakistan, has been paid an amount of US $100,000 on account of secret formula for
making a chemical, by a company incorporated outside Pakistan.
Q. NO. 2(c) SUMMER 2008 Describe the provisions of the ITO, 2001 for foreign source salary of resident individuals.
Q. NO. 2(c) SUMMER 2007 How residential status of an individual is determined under rule 14 of the Income Tax Rules,
2002?
Q. NO. 3(a) WINTER 2006 Explain the foreign source salary of resident individual u/s 102 of the Income tax Ordinance,
2001.

68 Conceptual Approach to Taxes


Introduction and Geographical Source of Income Chapter-05

CA MOD C PAST PAPERS THEORETICAL QUESTIONS


Q. NO. 6(a) Spring 2014 State the provisions of Income Tax Ordinance, 2001 relating to foreign-source salary of
resident individuals.
Q. No. 4 (b) Autumn 2013 In view of the provisions of Income Tax Ordinance, 2001 and Rules made there under, determine
the residential status of the following persons for the tax year 2013:
(i) Ramiz proceeded to Saudi Arabia on 24 December 2012 to assume responsibilities on his new job. He visited Karachi
from 20 June 2013 to 24 June 2013 for presenting a paper in a seminar but due to unavoidable circumstances, the
seminar was cancelled.
(ii) Khalil, an officer working at Ministry of Foreign Affairs, since last three years, was posted to the Pakistans mission in
Geneva from 1 August 2012 to 30 June 2013.
(iii) Ali Associates is a partnership firm and provides consultancy services in Pakistan as well as United Kingdom (UK). The
management and control of its affairs is situated partly in UK and partly in Pakistan.

(iv) Smith, a Nigerian football coach, came to Pakistan on 28 February 2013. He left the country on 31 August 2013.

Q.3 (a) Spring 2013 State the provisions of the Income Tax ordinance, 2001 for determining the residential status of
an Association of persons.
Q.3 (a) Autumn 2012 State the provisions of the Income Tax Ordinance, 2001 with regards to the residential status of
individuals and companies.
Q.3 (b) Autumn 2012 Margaret, a German national was employed as a Technical Manager of Faiza Chemicals Limited, a
resident company, on 1 October 2010 for a term of two years. Under the terms of employment, she was allowed to deliver
lectures at various professional organizations. During tax year 2012, she conducted three workshop sessions, the details of
which are as follows:
- Workshop Session in Lahore: A fee of US$ 15,000 in equivalent Pak Rupees was received from a local event manager.
The fee was credited to her bank account maintained in Karachi.
- Workshop Session in Munich: A fee of US$ 25,000 was received in Germany in her Munich bank account.
- Workshop Session in Dubai: A fee of US$ 20,000 was remitted to her bank account in Karachi.
Required: Discuss the taxability of the amounts received by Margaret for conducting the workshop sessions during the
tax year 2012.
Q.4 (a) Autumn 2011 Briefly discuss residential status of the following persons for the tax year 2011 under the ITO, 2001.
(i) Mr. Shah has been working as an Information Analyst in the Ministry of Foreign Affairs. On 1 November 2010, he was
posted to Pakistan Embassy in Canada for three years.
(ii) Asif Learning Center is a partnership concern, providing IT training to professionals in Pakistan, UAE and Saudi
Arabia. Up to 31 July 2010, the management and control of its affairs was situated partly in Pakistan. However, with
effect from 1 August 2010, the entire management and control of the affairs of the partnership was shifted to Dubai.
(iii) Mr. Liaquat was sent to Pakistan on a special assignment by his UK-based company on 1 March 2011. He left
Pakistan on 09 September 2011.
(iv) Farooq Trading LLC was incorporated as a limited liability company in UAE. The management and control of its affairs
are situated wholly in Pakistan.
Q.2(b) March 2009: Briefly discuss residential status of following persons under the ITO, 2001 for the tax year 2009.
(i) Asif is an employee of Baluchistan Government, who has been sent to United Kingdom for an official assignment on
1.12.2007 for two years.
(ii) Messrs Akhtar Abbas and Co. is a partnership firm, doing business of financial consultancy in Pakistan as well as
United Arab Emirates (UAE). The management and control of its affairs is situated partly in UAE and partly in Pakistan.
Q.4(b) Spring (March) 2006: Mr. A, a Pakistani Citizen, returned to Pakistan in November 2004 after completing his
employment contract In United Arab Emirates (UAE). He worked till October 2004in UAE where there was no tax on
salaries. Mr. A is in Pakistan since then and has been employed by a local company. Explain the tax implication on Mr. A's
income, earned in UAE and Pakistan, for the tax year 2005.
Q.6(a) Sept 2003: Under what circumstances a resident individual is entitled to tax on his foreign source salary, and when is
the foreign tax treated as having been paid?

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Introduction and Geographical Source of Income Chapter-05

Q.2(ii) March 2000: State the basis of taxation regarding residents and non-resident.
Q.6 Sept 2000: Briefly describe the provisions related to the scope of total Income.
Q.9 May 1994: Which of the following appear to be correct in the given choices?
The income of a non-resident individual is taxed in Pakistan which is:
(a) Earned and received in Pakistan
(b) Earned and received abroad
(c) Earned outside Pakistan but received in Pakistan
(d) Earned in Pakistan but received abroad

70 Conceptual Approach to Taxes


Computation of Taxable Income Chapter-06

Chapter

6 COMPUTATION OF TAXABLE INCOME

Topics covered Topics covered


Section Section
(Part - I for CAF-6 and ICMAP students) (Part - II for CA Mod F and ICMAP students)
Part - I Part - II
Taxation of companies, disposal of business by
4 Tax on taxable income 94, 95, 96
individual and AOP
Disposal of assets between wholly owned
companies, disposal of asset under a
5A Tax on un-distributed reserves 97,97A,98
arrangement and reconstruction and change in
control of an entity
Change in the constitution of AOP and
7A Tax on shipping of a resident 98A & 98B
Discontinuance of business or dissolution of AOP
7B Tax on Profit on Debt 98C Succession to business, otherwise than on death
General provisions relating to taxes Taxation of Permanent Establishment of non
8 105
imposed u/s 5, 5A, 6, 7, 7A & 7B resident
Taxable income, total income and heads
9, 10 & 11 107 Avoidance of double taxation
of income
86 Principle of taxation of individuals
87 Deceased individuals MCQs with solutions
ICMAP and CA Mod C past papers theoretical
92 Taxation of AOP
questions
Rates of tax of salaried individual and non
salaried individual
Tax or refund to be computed to the
219
nearest Rupee

PART I (For CAF-6 and ICMAP students)


1. Tax on taxable income [U/s 4]
Income tax shall be imposed each tax year (subject to this Ordinance), at the rate or rates specified the First
Schedule, as the case may be, on every person who has taxable income for the year. From the resultant income tax
computed subtraction shall be made for any tax credits allowed to the taxpayer for the year.
Where a taxpayer is allowed more than one tax credit for a tax year, the credits shall be applied in the following order-
(a) any foreign tax credit allowed u/s 103; then
(b) any tax credit allowed u/s 61 to 65; and then
(c) any tax credit allowed for taxes paid (including advance tax) and tax deducted at source,
Certain classes of income and income of certain classes of persons may be subject to separate taxation or collection
of tax or deduction of tax shall be treated as a final tax on the income of the person.
Income covered under FTR and SBI shall not be included in the computation of taxable income in accordance with
section 8 or 169, as the case may be.
2. Tax on un-distributed reserves [U/s 5A]
Subject to this Ordinance, a tax shall be imposed at the rate of 10%, on every public company other than a
scheduled bank or a Moradabad, that derives profits for a tax year but does not distribute cash dividends
within six months of the end of the said tax year or distributes dividends to such an extent that its reserves,

Conceptual Approach to Taxes 71


Computation of Taxable Income Chapter-06

after such distribution, are in excess of 100% of its paid up capital, so much of its reserves as exceed 100% of
its paid up capital shall be treated as income of the said company:
Provided that for tax year 2015, cash dividends may be distributed before the due date mentioned in section
118(2), for filing of return for tax year 2015.
The above provisions shall not apply to
a. a public company which distributes profit equal to either 40% of its after tax profits or 50% of its paid
up capital, whichever is less, within six months of end of tax year;
b. a company qualifying for exemption U/C (132) Part I of the Second Schedule.
c. a company in which not less than 50% shares are held by the government.
In this section, reserve includes amounts set-aside out of revenue or other surpluses excluding capital
reserves, share premium reserves and reserves required to be created under any law, rules or regulations.
3. Tax on shipping of a resident [U/s 7A]
In the case of any resident person engaged in the business of shipping, a presumptive income tax shall be
charged in the following manner, namely:-
(a) ships and all floating crafts including tugs, dredgers, survey vessels and other specialized
craft purchased or bare-boat chartered and flying Pakistan flag shall pay tonnage tax of an
amount equivalent to one US $ per gross registered tonnage per annum; and
(b) ships, vessels and all floating crafts including tugs, dredgers, survey vessels and other
specialized craft not registered in Pakistan and hired under any charter other than bare-
boat charter shall pay tonnage tax of an amount equivalent to fifteen US cents per ton of
gross registered tonnage per chartered voyage provided that such tax shall not exceed one
US $ per ton of gross registered tonnage per annum:
Explanation.- For the purpose of this section, the expression equivalent amount means the rupee
equivalent of a US dollar according to the exchange rate prevalent on the first day of December in the case of
a company and the first day of September in other cases in the relevant assessment year.
th
The provisions of this section shall not be applicable after 30 June, 2020.
4. Tax on Profit on Debt [U/s 7B]

Subject to this Ordinance, a tax shall be imposed, at the rate specified as under, on every person (other
than a Company) who receives a POD from any person mentioned in clause (a) to (d) of section 151(1).

1. Where profit on debt does not exceed 10%


Rs.25,000,000
2. Where profit on debt exceeds Rs 2,500,000 + 12.5% of the amount exceeding
25,000,000 but does not exceed Rs.
Rs.25,000,000
50,000,000
3. Where profit on debt exceeds Rs Rs 5,625,000 + 15% of the amount exceeding
50,000,000 Rs.50,000,000
The tax imposed above on a person who receives a POD shall be computed by applying the relevant rate
of tax to the gross amount of the profit on debt.
This section shall not apply to a POD that is exempt from tax under this Ordinance.

5. General provisions relating to taxes imposed under FTR / separate block of income [U/s 8]
Subject to this ordinance, where the tax imposed under Final Tax Regime / Separate Block of Income on the amount
in respect of which the tax is imposed and-
(a) Such amount shall not be chargeable to tax under any head of income in computing the taxable income of the
person who derives it for any tax year;
(b) No deduction shall be allowable for any expenditure incurred in deriving the amount;
(c) The amount shall not be reduced by any deductible allowance or the set off of any loss;
(d) The tax payable by a person under final tax regime / separate block of income shall not be reduced by any tax
credits allowed under this Ordinance; and

72 Conceptual Approach to Taxes


Computation of Taxable Income Chapter-06

(e) The liability of a person under final tax regime / separate block of income shall be discharged to the extent that
the tax has been paid in accordance with the relevant section or the tax payable has been deducted at source.
6. Taxable Income (U/s 9)
The taxable income of a person for a tax year shall be the total income (other than exempt income) of the person for
the year (but not below zero) less Zakat, Workers Profit Participation Fund (WPPF), Workers Welfare Fund (WWF)
and deductible allowance for profit on debt (u/s 64A).
Example: If the total income of Mr. Ali is Rs.500,000 then you are required to compute the taxable income of Mr. Ali,
if he paid the following amounts:
Zakat Rs. 18,000, WWF Rs. 5,000, WPPF Rs. 8,000 and Profit on debt (u/s 64A) Rs. 20,000

Solution:
Rs.
Total of income as per question 500,000
Less: deductible allowances: (18,000 + 5,000 + 8,000 +20,000) = (51,000)
Taxable income 449,000
7. Total Income (U/s 10)
The total income of a person for a tax year shall be the sum of the person's income under the heads of income
(including exempt income) for the year.
8. Heads of Income (U/s 11)
(1) For the computation of tax and total income, all income shall be classified under the following heads, namely-
(a) Salary
(b) Property income
(c) Business income
(d) Capital Gains and
(e) Income from Other Sources.
(2) Where the total deductions allowed to a person for a tax year under a head of income exceed the total of the
amounts derived by the person, he sustained a loss equal to the excess amount.
(3) The income of a resident person shall be computed by taking into account amounts that are Pakistan-source
income and foreign-source income.
(4) The income of a non-resident person shall be computed by taking into account only amounts that are
Pakistan-source income.
9. Principle of taxation of individuals [U/s 86] Subject to this Ordinance, the taxable income of each individual shall
be determined separately.
9.1 Deceased individuals [U/s 87] The legal representative of a deceased individual shall be liable for
(a) any tax that the individual would have become liable for if the individual had not died; and
(b) any tax payable in respect of the income of the deceased's estate.
The liability under this Ordinance shall be first charge on the deceased estate and shall be limited on the legal
representative under this section to the extent to which the deceased's estate is capable of meeting the liability.
In this section, "legal representative" means a person who in law represents the estate of a deceased person, and
includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in
representative character the person on whom the estate devolves on the death of the party so suing or sued.
10. Tax liability of a Company and Association of Persons:
10.1 Principles of taxation of associations of persons [Section 92]
An AOP shall be liable to tax separately from the members of the association and where the AOP has paid tax the
amount received by a member of the association out of the income of the association shall be exempt from tax;
Provided that if at least one member of the AOP is a Company, the share of such company or companies shall be
excluded for the purpose of computing the total income of the AOPs & the Company or companies shall be taxed
separately at the rate applicable to the companies, according to their share.

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Computation of Taxable Income Chapter-06

Example
Sultan (Pvt.) Limited and NA International (sole proprietor) of Mr. Asad have a joint venture in the name of Nimco
consultants. It is not a registered with registrar of firms. The share in interest of company and Mr. Asad in the joint
venture is 65:35 respectively. The JV is providing the consultancy services to its clients. Mr. Asad withdraws salary of
Rs. 60,000 per month. Total Income of the Joint Venture is Rs 1,700,000. Carry forward of losses of preceding years
is Rs. 600,000. Tax already deducted is Rs. 85,000. Mr. Asad also provided the loan to the joint venture and received
interest of Rs. 320,000 during the year:
You are required to calculate the taxable income and tax liability of the joint venture, Sultan (Pvt.) and Mr.
Asad for the tax year 2016.
Solution
Computation of tax liability of Joint Venture Rs.

Total income 1,700,000


Add: inadmissible expenses
Salary paid to Mr. Asad (60,000 x 12) 720,000
Profit on debt to Mr. Ahsan 320,000
1,040,000
Taxable income 2,740,000
Less: Carry forward losses (600,000)
Taxable income 2,140,000
Less Share as member in the income of AOP (65%) to be taxed in the hands of the Company 1,391,000
Balance taxable income in the hands of the AOP (35%) 749,000
Tax liability [Rs.7,000+ 10% (749,000 500,000)] 31,900

Computation of Share of members

Divisible income (749,000 31,900) 717,100


Salary (720,000)
Interest on loan (320,000)
Actual loss for Mr. Asad from AOP (322,900)

10.2 Practical example on determination of share from AOP:


IBN is an AOP with two partners Mr. Ghazali and Mr. Aftab with ratio of sharing 40:60.
Rs.
Net profit as per accounts 1,200,000
Depreciation as per accounts 600,000
Salary to partner (Mr. Aftab) 250,000
Brokerage to partner (Mr. Aftab) 100,000
2,150,000
Less: Tax depreciation 900,000
Taxable Income 1,250,000
Income Tax [32,000 + 15% x (1,250,000 - 750,000)] 107,000
Divisible Income 1,143,000
Share of profit from AOP shall be computed as under:
Partner Ghazali Partner Aftab Total
Salary Nil 250,000 250,000
Brokerage Nil 100,000 100,000
Balance 317,200 475,800 793,000
317,200 825,800 1,143,000
Although share of profit from AOP (after tax) is exempt in the hands of individual members but the same shall be
included for rate purpose in other taxable income except income taxed under Final tax regime / Separate block of
income
11. RATES OF INCOME TAX FOR TAX YEAR 2016 (For salaried, non-salaried individual and AOPs)
Tax rate for company is 32%, small company and modaraba company 25%
Tax rates on individual for the Tax Year 2016:
NON-SALARIED CASE AND AOP i.e. where taxable salary is nil or up to 50% of taxable income in case of
individual.

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Computation of Taxable Income Chapter-06

S. No. Taxable income Rate of Tax


(1) (2) (3)

1. Where taxable income does not exceed Rs. 400,000 0%

2. Where the taxable income exceeds Rs. 400,000 but 7% of the amount exceeding Rs. 400,000
does not exceed Rs.500,000

3. Where the taxable income exceeds Rs. 500,000 but Rs.7,000 + 10% of the amount exceeding Rs.
does not exceed Rs.750,000 500,000

4. Where the taxable income exceeds Rs. 750,000 but Rs. 32,000 + 15% of the amount exceeding
does not exceed Rs.1,500,000 Rs. 750,000

5. Where the taxable income exceeds Rs. 1,500,000 Rs. 144,500 + 20% of the amount exceeding
but does not exceed Rs.2,500,000 Rs. 1,500,000

6. Where the taxable income exceeds Rs. 2,500,000 Rs. 344,500 + 25% of the amount exceeding
but does not exceed Rs.4,000,000 Rs. 2,500,000

7. Where the taxable income exceeds Rs. 4,000,000 Rs. 719,500 + 30% of the amount exceeding
but does not exceed Rs.6,000,000 Rs. 4,000,000

8. Where the taxable income exceeds Rs. 6,000,000 Rs. 1,319,500 + 35% of the amount exceeding
Rs. 6,000,000

Provided that in the case of an AOPs that is a professional firm prohibited from incorporating by any law or the rules
of the body regulating their profession, the 35% rate of tax mentioned against serial number 8 of the Table shall be
32% for tax year 2016 and onwards.
SALARIED CASE i.e. where taxable salary exceeds 50% of taxable income
S. No. Taxable income Rate of Tax
(1) (2) (3)
1. Where taxable income does not exceed Rs. 400,000 0%
2. Where the taxable income exceeds Rs. 400,000 but 2% of the amount exceeding Rs. 400,000
does not exceed Rs. 500,000
3.. Where the taxable income exceeds Rs. 500,000 but Rs.2,000+ 5% of the amount exceeding Rs.
does not exceed Rs. 750,000 500,000
4. Where the taxable income exceeds Rs. 750,000 but Rs. 14,500 + 10% of the amount exceeding
does not exceed Rs. 1,400,000 Rs. 750,000
5. Where the taxable income exceeds Rs. 1,400,000 Rs. 79,500 + 12.5% of the amount exceeding
but does not exceed Rs. 1,500,000 Rs.1,400,000
6. Where the taxable income exceeds Rs. 1,500,000 Rs. 92,000 + 15% of the amount exceeding
but does not exceed Rs. 1,800,000 Rs. 1,500,000
7. Where the taxable income exceeds Rs. 1,800,000 Rs. 137,000 + 17.5% of the amount exceeding
but does not exceed Rs. 2,500,000 Rs. 1,800,000
8. Where the taxable income exceeds Rs. 2,500,000 Rs. 259,500 + 20% of the amount exceeding
but does not exceed Rs. 3,000,000 Rs. 2,500,000
9. Where the taxable income exceeds Rs. 3,000,000 Rs. 359,500 + 22.5% of the amount exceeding
but does not exceed Rs. 3,500,000 Rs. 3,000,000
10. Where the taxable income exceeds Rs. 3,500,000 Rs. 472,000 + 25% of the amount exceeding
but does not exceed Rs. 4,000,000 Rs. 3,500,000
11. Where the taxable income exceeds Rs. 4,000,000 Rs. 597,000 + 27.5% of the amount exceeding
but does not exceed Rs. 7,000,000 Rs. 4,000,000
12. Where the taxable income exceeds Rs.7,000,000 Rs. 1,422,000 + 30% of the amount exceeding
Rs. 7,000,000

12. Tax or refund to be computed to the nearest Rupee [U/s 219]


In the determination of any amount of tax or refund payable under this Ordinance, fractions of a rupee less than fifty
paisa shall be disregarded and fractions of a rupee equal to or exceeding fifty paisa shall be treated as one rupee.

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Computation of Taxable Income Chapter-06

PART II (For CA Mod F and ICMAP students)


13. Principles of taxation of Companies [U/s 94]
A company shall be liable to tax separately from its shareholders-
A dividend paid by a company shall be taxable under SBI except where the recipient is a Company.
A dividend paid by a non-resident company to a resident person shall be chargeable to tax under the head "Income
from Business" or "Income from Other Sources", unless the dividend is exempt from tax.
13.1 Tax rates applicable to Companies
Following tax rates are prescribed under Division II Part I First Schedule to the Income Tax Ordinance, 2001 for the
purpose of determination of liability of the Companies:
The rate of tax imposed on the taxable income of a company for the tax year 2016 is 32%.
The rate of tax for small company is defined in clause (ii) Division II Part I First Schedule to the Ordinance in the
following manner:
Where the taxpayer is a small company as defined in section 2, tax shall be payable at the rate of 25%.
The rates of tax in the case of modaraba is stipulated in clause 18, Part II, Second Schedule to the Ordinance in the
following manner:
In the case of a modaraba the rate of income tax shall be 25% of total income excluding such part of total income to
which Division III of Part I of the First Schedule or section l53 or section 154 applies.
The rates of tax are defined to the different categories of companies. The term company includes the following:
Banking company , public company, a unit trust, private company, co-operative society, a finance society, assets
management company, Financial institution, House Building Finance Corporation, investment company, leasing
company, Mutual Fund, non-banking finance company, Venture Capital Company, Real Estate Investment Trust
(REIT) and Real Estate Investment Trust Management Company.
14. Disposal of Business by individual / AOP to wholly owned Company [U/s 95 and 96]
(1) Where a resident individual or resident AOP disposes of all the assets of a business to a resident company,
no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied:-
(a) The consideration received by the transferor / AOP for the disposal is a share of shares in the company
other than redeemable shares;
(b) the transferor / each member of AOP must beneficially own all the issued shares in the same proportion
as it was in the business assets immediately before the disposal to the company;
(c) the company must undertake to discharge any liability in respect of the assets disposed of to the
company;
(d) any liability in respect of the assets disposed of to the company must not exceed the transferor's / AOP
cost of the assets at the time of the disposal;
(e) the FMV of the share or shares received by the transferor / AOP for the disposal must be substantially
the same as the FMV of the assets disposed of to the company, less any liability that the company has
undertaken to discharge in respect of the assets; and
(f) the company must not be exempt from tax for the tax year in which the disposal takes place.
(2) Where aforesaid provisions applies -
(a) each of the assets acquired by the company shall be treated as having the same character as it had in
the hands of the transferor / AOP;
(b) the company's cost in respect of the acquisition of the assets shall be in the case of
(i) a depreciable asset or amortised intangible, the WDV of the asset or intangible immediately
before the disposal;
(ii) stock in trade lower of cost or NRV as per balance sheet value used by the transferor; or
(iii) in any other case, the transferor's / AOP cost at the time of the disposal;
(c) if, immediately before the disposal, the transferor / AOP has deductions allowed for depreciation, initial
allowance and amortization regarding transferred assets which have not been set off against the
transferor's income, the amount not set off shall be added to the deductions allowed to the company in
the tax year in which the transfer is made; and

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(d) the transferor's / AOP cost in respect of the share or shares received as consideration for the disposal
shall be
(i) in the case of a consideration of one share, the transferor's / AOPs cost of the assets
transferred as determined under 2(b) above, less the amount of any liability that the company
has undertaken to discharge in respect of the assets; or
(ii) in the case of a consideration of more than one share, the amount determined under sub-clause
(i) divided by the number of shares received.
In determining whether the transferor's / AOP deductions for depreciation, initial allowance and amortization have
been set off against income under sub section 2(c) above, those deductions shall be taken into account last.
15.1 Disposal of asset between wholly-owned companies [U/s 97]
Where a resident company disposes of an asset to another resident company, no gain or loss shall be taken to arise
on the disposal if the following conditions are satisfied:-
(a) Both companies belong to a wholly-owned group of resident companies at the time of the disposal;
(b) The remaining (b), (c) and (d) clauses of this section are same as stated above in clauses (c), (d) and (f) of
sub section 2 of combined sections 96 and 97 respectively.
Where the above provisions applies
The same conditions to be satisfied as stated above in combined sections 96 and 97 from (a) to (d) of sub section 2
shall apply except the following additional note.
The transferor and transferee companies belong to a wholly-owned group if
(a) one company beneficially holds all the issued shares of the other company; or
(b) a third company beneficially holds all the issued shares in both companies.
15.2 Disposal of asset under a scheme of arrangement and reconstruction [U/s 97A]
(1) No gain or loss shall be taken to arise on disposal of asset from one company to another company by virtue of
operation of a Scheme of Arrangement and Reconstruction u/s 282L and 284 to 287 of the Companies
Ordinance, 1984 or section 48 of the Banking Companies Ordinance, 1962 if the following conditions are
satisfied,:
The clauses (a) to (c) of this sub section are same as stated above in clauses (c), (d) and (f) of sub section 2 of
combined sections 96 and 97 respectively and scheme is approved by the High Court, SBP or SECP on or
after 1.7.2007.
(2) No gain or loss shall be taken to arise on issue, cancellation, exchange or receipt of shares as a result of
scheme of arrangement and reconstruction as stated above.
(3) Where the above provisions applies:
The same conditions as stated above in combined sections 96 and 97 from (a) to (d) of sub section 2 shall
apply except the following additional note.
Where sub-section (2) of this section applies and the shares issued by virtue of the Scheme of arrangement
and reconstruction disposed of the cost of shares shall be the cost prior to the operation of the said scheme.
16. Change in control of an entity [U/s 98]
Where there is a change of 50% or more in the underlying ownership of an entity, any loss incurred for a tax year
before the change shall not be allowed as a deduction in a tax year after the change, unless the entity -
(a) continues to conduct the same business after the change as it conducted before the change until the loss has
been fully set off; and
(b) does not, until the loss has been fully set off, engage in any new business or investment after the change
where the principal purpose of the entity or the beneficial owners of the entity is to utilise the loss so as to
reduce the income tax payable on the income arising from the new business or investment.;
In this section. "entity" means a company or AOP to which section 92(1) applies;
"ownership interest" means a share in a company or the interest of a member in an AOP; and
"underlying ownership" in relation to an entity, means an ownership interest in the entity held, directly or indirectly
through an interposed entity or entities, by an individual or by a person not ultimately owned by individuals.

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16.1 Change in the constitution of an AOP [U/s 98A]


Where, during the course of a tax year, a change occurs in the constitution of an AOP, liability of filing the return on
behalf of the AOP for the tax year shall be on the AOP as constituted at the time of filing of such return but the
income of the AOP shall be apportioned among the members who were entitled to receive it and, where the tax
assessed on a member cannot be recovered from him it shall be recovered from the AOP as constituted at the time of
filing the return.
16.2 Discontinuance of business or dissolution of an AOP [U/s 98B]
Subject to the provisions of section 117, where any business or profession carried on by an AOP has been
discontinued, or where an AOP is dissolved, all the provisions of this Ordinance, shall, so far as may be, apply as if
no such discontinuance or dissolution had taken place.
Every person, who was, at the time of such discontinuance or dissolution, a member of such AOP and the legal
representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax payable
by the AOP.
17. Succession to business, otherwise than on death [U/s 98C]
(1) Where a person carrying on any business or profession has been succeeded in any tax year by any other
person, otherwise than on the death of the predecessor, and the successor continues to carry on that business
or profession,-
(a) the predecessor shall be liable to pay tax in respect of the income of the tax year in which the
succession took place up to the date of succession and of the tax year or years preceding that year;
and
(b) the successor shall be liable to pay tax in respect of the income of such tax year after the date of
succession.
(2) Where the predecessor cannot be found, the tax liability in respect of the tax year in which the succession took
place up to the date of succession and of the tax year or years preceding that year shall be that of the
successor in like manner and to the same extent as it would have been that of the predecessor, who shall be
entitled to recover it from the predecessor.
18. Taxation of a PE in Pakistan of a non-resident person [U/s 105]
The following principles shall apply in determining the taxable business income of a PE in Pakistan of a NRP namely:-
(a) The profit of the PE shall be computed on the basis that it is a distinct and separate person engaged in the
same or similar activities under the same or similar conditions and dealing wholly independently with the NRP
of which it is a PE;
(b) there shall be allowed as deductions any expenses incurred for the purposes of the business activities of the
PE including executive and administrative expenses so incurred whether in Pakistan or elsewhere;
(c) and (d) no deduction and income shall be considered for amounts paid / payable and received / receivable by
the PE to / from its head office or to another PE of the NRP other than towards reimbursement of actual
expenses incurred by the NRP to third parties by way of:
(i) royalties, fees or other similar payments for the use of any tangible or intangible asset by the PE;
(ii) compensation for any services including management services performed for the PE; or
(iii) profit on debt or insurance premium paid or payable on moneys lent to the PE, except in connection
with a banking business; and
No deduction shall be allowed in computing the taxable business income of a PE in Pakistan of a NRP for a tax year
for head office expenditure in excess of the amount as bears to the turnover of the PE in Pakistan the same
proportion as the non-residents total head office expenditure bears to its worldwide turnover.
In this u/s, "head office expenditure" means any executive or general administration expenditure incurred by the
NRP outside Pakistan for the purpose of the business of the Pakistan PE of the person, including any
(a) rent, local rates and taxes excluding any foreign income tax, current repairs, or insurance against risks of
damage or destruction outside Pakistan;
(b) salary and travelling paid to an employee employed by the head office outside Pakistan; and
(c) other expenditures which may be prescribed.

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19. Agreements for avoidance of double taxation and prevention of fiscal evasion [U/s 107]
1. The Federal Government may enter into an agreement, bilateral or multilateral with the government or governments
of a foreign countries or tax jurisdictions for the avoidance of double taxation and the prevention of fiscal evasion
and exchange of information including automatic exchange of fiscal evasion and exchange of taxes in income
imposed under the Ordinance or any other law for the time being in force and under the corresponding laws in force
in that country, and may, by notification in the official Gazette, make such provisions as may be necessary for
implementing the agreement,-
2. Notwithstanding anything contained in any other law to the contrary, the Board shall have the powers to obtain and
collect information when solicited by another country under a tax treaty, a tax information exchange agreement, a
multilateral convention, an inter governmental agreement, a similar arrangement or mechanism.
3. Notwithstanding the provisions of the Freedom of Information Ordinance, 2002, any information received or supplied
and any commitment communication or correspondence made, under a tax treaty, a tax information exchange
agreement, a multilateral convention, a similar arrangement or mechanism, shall be confidential subject to section
216(3).
(a) relief from the tax payable under this Ordinance; (b) the determination of the Pakistan-source income of non-
resident persons;
(c) where all the operations of a business are not carried on within Pakistan, the determination of the income
attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in
the hands of non-resident persons, including their agents, branches and permanent establishments in
Pakistan;
(d) the determination of the income to be attributed to any resident person having a special relationship with a
non-resident person; and
(e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable
under this Ordinance and under the corresponding laws in force in that other country.

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Computation of Taxable Income Chapter-06

MULTIPLE CHOICE QUESTIONS


1. Business income of a minor child (other than income from inherited property) shall be clubbed with the income of his
parent with
(a) Lesser taxable income
(b) Greater taxable income
(c) Any of them or
(d) None of the above
2. The tax liability of a member of an AOP is determined by considering
(a) Share from AOP
(b) Other Income
(c) Both of income
(d) None of these
3. An AOP is taxed
(a) along with its members
(b) separate from its member
(c) Both a and b
(d) one of these
4. The foreign source salary income of a resident individual is
(a) exempt from tax
(b) Exempt if foreign tax is paid, where applicable
(c) Not exempt
5. A resident taxpayer deriving foreign source business income is allowed a tax credit of
(a) Foreign income tax paid
(b) Pakistan income tax payable
(c) Lesser of a and b
(d) none of above
6. Any foreign tax credit in excess of tax liability may be ____________.
(a) Refunded
(b) Carried back
(c) Carried forward
(d) None of these
7. __________received by a member of an AOP is taxable as share of income .
(a) Salary
(b) Commission
(c) Profit on debt
(d) all of (a) to (c)
8. The tax liability of a dissolved AOP shall be recovered from
(a) Majority holder members
(b) All the members
(c) Only from assets of AOP
(d) From the AOP and its all the members

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9. Which of the following incomes shall be included in the computation of taxable income under Income Tax Ordinance,
2001
(a) income covered under NTR
(b) income covered under FTR
(c) income covered under SBI under FTR
(d) all of above
10. Under Income Tax Ordinance, 2001, there are ____ heads of income.
(a) 2
(b) 3
(c) 5
(d) 10
11. A non-resident person shall pay the tax in respect of ______________.
(a) Pakistan source income
(b) foreign source income
(c) property income
(d) all of above
12. The total income for the tax year 2016 consists of _______.
(a) taxable income
(b) exempt income
(c) taxable and exempt income
(d) none of the above
13. Any income may be received by__________.
(a) taxpayer himself
(b) any person on his behalf
(c) his employer
(d) both a and b
14. Companies are chargeable to tax __________ its shareholders.
(a) separately from
(b) together with
(c) in respect of its
(d) none of above
15. The taxable income of a salaried taxpayer not exceeds Rs.______ is chargeable to tax @ 0%.
(a) 300,000
(b) 350,000
(c) 400,000
(d) 500,000
16. Where a full time teacher or researcher working in non-profit organization is having salary income as well as some
other taxable income, the benefit of reduction in tax liability shall be available on ___________ if his total taxable
income is less than Rs. 1,000,000.
(a) his total income
(b) his salary income only
(c) income other than salary
(d) all of above

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17. Rate of tax for modaraba and a small company is ____.


(a) 50%
(b) 35%
(c) 25%
(d) 20%
18. Share from AOP is ______ in the hands of members.
(a) exempt
(b) taxable
(c) safe
(d) all of above
19. The rate of tax for _____ are same for tax year 2016.
(a) salaried and non-salaried persons
(b) AOP and companies
(c) Non-salaried person and AOP
(d) none of the above
20. The Company share in income (under normal tax regime) of an AOP being as member is to be taxed _________
from the tax year 2016.
(a) exempt from tax
(b) in the hands of the AOP
(c) in the hands of Company without any tax credit
d) none of the above

ANSWERS
1 (b) 2 (c) 3 (b) 4 (b) 5 (c)
6 (d) 7 (d) 8 (d) 9 (a) 10 (c)
11 (a) 12 (c) 13 (d) 14 (a) 15 (c)
16 (b) 17 (c) 18 (a) 19 (d) 20 (c)

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Computation of Taxable Income Chapter-06

ICMAP PAST PAPERS THEORETICAL QUESTIONS


Q. No. 3(a) February 2013 Write short answers of the following questions:
(ii) In case of a non-salaried taxpayer what would be the rate of income tax where the taxable income of an individual
exceeds Rs. 2,500,000?
Q. NO. 3(b) WINTER 2004 Describe main principles of taxation of companies as given in section 94 of Income tax
Ordinance, 2001?
Q. NO. 2(a) SUMMER 2004 What is the tax liability in case of succession to business, otherwise than on death, U/S 98(c) of
Income tax Ordinance, 2001?

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Computation of Taxable Income Chapter-06

CA MOD C PAST PAPERS THEORETICAL QUESTIONS


Q. NO. 5(a) Spring 2015 Under the provisions of the Income Tax Ordinance, 2001 state the rules relating to
residential status of an Association of Person (AOP). Also explain the taxability of income of AOP, in the hands of the
firm and its members.

Q.NO. 2 (a) Autumn 2014 Briefly discuss the provisions of Income Tax Ordinance, 2001 in respect of the following
situations:
Farhan received Rs. 960,000 as his share of profit from AOP, during the tax year 2014. He also earns income from other
sources.

Q. No. 6 Autumn 2013 Ahmed is responsible for managing the property of his uncle who died on 5 February 2013. The
approximate worth of the property if Rs. 7 mission. In August 2013, a notice was received from income tax department in the
name of his uncle requiring details of his income for the tax year 2012 along with demand for payment of tax in respect of
previous year amounting to Rs. 8.5 million.
Required:
Advise Ahmed as regards the following:
(a) Extent of Ahmeds liability in respect of the income earned by his uncle before 5 February 2013.
(b) His obligations relating to the tax assessment proceedings pending/arising against his uncle.

Q. NO. 6(a) Autumn 2009 Mr. Zias father expired in March 2009. Being the only heir, he received all his fathers business
and assets. In August 2009, a notice was received from the income tax department in the name of his father to pay unpaid
tax liabilities along with penalty and additional tax. Mr. Zia is of the view that since his father expired, the notice is irrelevant.
Required: In the light of ITO, 2001, explain the correct legal position of Mr. Zia with regard to his fathers income tax
liabilities and the related income tax proceedings.
Q.3 Autumn 2001 In the light of provisions of Income tax Ordinance, 1979, who is liable to discharge the tax liability of a
deceased person, and to what extent?

84 Conceptual Approach to Taxes


Income From Salary Chapter-07

Chapter

7 INCOME FROM SALARY

Section Rule Topic covered Section Rule Topic covered

12 6 Salary 13 5 Valuation of conveyance


73 Taxability of salary 13 3 Salaries of servants paid by employer
110 Salary paid by private companies 13 4 Valuation of accommodation
12 Profit in lieu of salary 14 Employee share scheme
12 Golden handshake Retirement benefits
11, 50, 51, Geographical source of salary income
Marginal perquisites
101 & 102 and their taxability
13 Value of perquisites Exemptions
Loan provided by employer to
13
employee with no interest
MCQs with solutions
ICMAP and CA Mod C past papers
theoretical questions

For CAF-6 and ICMAP Students


1. Definition of salary [U/s 12]
Any salary received by an employee in a tax year, other than exempt salary under the Income Tax Ordinance 2001,
shall be chargeable to tax in that year under the head salary.
A person is salaried person where taxable salary exceeds 50% of taxable income from all heads of income.
Salary means any amount received by an employee from any employment whether of a revenue or capital nature:
"Employee" means any individual engaged in employment [including an employed director (Rule 6)]. [U/s 2(20)]
"Employer" means any person who engages and remunerates an employee. [U/s 2(21)]
"Employment" includes: [U/s 2(22)]
(1) A directorship or any other office involved in the management of a company;
(2) A position entitling the holder to a fixed or ascertainable remuneration; or
(3) The Holding or acting in any public office.

Example: Hafiz Bilal Rana is an employee of a company. He comes to office only 4 hours in a day. He received
Rs.18,000 salary from the company. Explain with reasons that he is considered as an employee of a company or
not.

Solution: Although he is a part time employee of a company, however the amount so received shall be treated as
salary income for the year.
Basic salary:
For the purposes of tax, basic salary means any consideration received or receivable as basic salary. However, for
the purposes of retirement benefits, basic salary includes dearness allowance.
2. Salary includes the following [U/s 12(2)(a), (b), (c) and (d)]
(a) Pay / wages or other remuneration, leave pay / leave encashment, overtime, bonus, commission and fee;
(b) Work condition supplements;

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Income From Salary Chapter-07

(c) Allowances i.e. cost of living, subsistence, rent, utilities, education, entertainment or travel allowance excluding
any allowance solely expended for office purpose;
(d) Any expenditure incurred by an employee but paid or reimbursed by the employer other than for office
purpose.
(e) Profits in lieu of salary, perquisites, gratuity, pension or annuity, or any supplement to a pension or annuity,
benefit on account of employee share scheme, tax on salary paid by the employer and
(f) In the case of other assets given for use only, rental value or depreciation charged by the employer is the
taxable benefit for the employee e.g. TV is provided by the employer only for the use of employee.
3. Salary chargeable to tax:
Taxability of salary: [U/s 73]
Any income taxed on receipt basis shall not be taxable again on accrual basis and vice versa. Similarly if any
expenditure is deductible on due basis then the same shall not be deducted when it is paid and vice versa.
Salary paid by Private Companies [U/s 110]
The Commissioner Inland Revenue instead of charging tax on salary income, on cash basis may opt the accrual
basis in case of an employee of a Private Company. This treatment shall be applied where the employee in order to
avoid a higher tax rate, could have entered into agreement with his employer for payment of salary in a subsequent
year when his other income may be on lower side.
Suppose if there is income from other sources in the current year along-with income from salary and both as part of
total income may result into higher rate of tax in the current year therefore the employee with the consent of employer
may defer his full or part salary to be offered for tax when he will not have any income from other sources that will
result into lower rate of tax in the subsequent tax year.
Treatment of arrear salary received: [U/s 12(7) and (8)]
Employee may avail this option in writing to the Commissioner Inland Revenue to be taxed on accrual basis instead
of cash basis. It is allowed when the following conditions are met:
The salary is paid to an employee in arrears;
After including the arrears salary in the current years income the rate of tax is increased.
The declaration shall be made by the due date for furnishing of employees return of income for the tax year in
which amount was received or by such later date as the Commissioner Inland Revenue may allow.
Example:
In tax year 2015 Mr. Amir was paid salary for 8 months i.e. Rs. 800,000. In tax year 2016 he was paid salary for 16
months (including salary of 4 months of tax year 2015) i.e. Rs.1,600,000. Compute tax payable by him in tax year
2016.
Solution:
Mr. Amir
Computation of taxable income and tax liability:
Option A by including the arrear salary in current year income

TAX YEAR 2015


Rs.
Income from salary 800,000
Computation of tax liability
Tax on Rs. 800,000 [Rs.17,500 + 10% (800,000 750,000) 22,500

TAX YEAR 2016


Rs.
Income from salary 1,600,000
Computation of tax liability
Tax on Rs. 1,600,000 [92,000 + 15% x (1,600,000 - 1,500,000)] 107,000

Option B by offering the arrear salary in the respective year

TAX YEAR 2015


Rs.
Income from salary 1,200,000
Computation of tax liability
Tax on Rs. 1,200,000 [17,500 + 10% x (1,200,000 750,000) 62,500

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TAX YEAR 2016


Rs.
Income from salary 1,200,000
Computation of tax liability
Tax on Rs. 1,200,000 [14,500 + 10% x (1,200,000 750,000)] 59,500

Total tax payable as per option A (107,000 + 22,500) 129,500


Total tax payable as per option B (62,500 + 59,500) 122,000
Taxpayer shall pay tax as per option B with less tax payable.
Salary treated to have been paid and received: [U/s 12(5) and 69]
(A) A person (including an employer) shall be treated as having paid an amount, benefit or perquisite if it
is: [U/s 12(5)]
Paid by the person that may be a present, past or prospective, or an associate of the payer or a third party
under an arrangement with the payer.
(B) A person (including an employee) shall be treated as having received an amount, benefit or perquisite
if it is: [U/s 69]

Actually received by the person.


Applied on behalf of the person,
At the instruction of the person or under any law.
Made available to the person.
4. Profit in lieu of or in addition to salary [U/s 12(2)(e)]
The amount of any profit in lieu of salary or wages including any amount received:
(A) as compensation for the termination of employment paid voluntarily or under an agreement including
payments under golden handshake and loss of employment;
(B) payments from any fund other than related to the employees contribution;
(C) pension or annuity, or any supplement to a pension or annuity. [U/s 12(2)(f)] and
(D) any amount chargeable to tax under an employee share schemes u/s14.[U/s 12(2)(g)]
The amount of any profit in addition to salary or wages including any amount received
(A) as consideration at the time of entering into an employment agreement;
(B) as consideration on agreement regarding any conditions of employment or any changes in the employment
conditions;
(C) as consideration on a restrictive covenant agreement with any past, present or prospective employment;
4.1 Tax treatment on account of golden handshake payments or loss of employment on termination of
employment: [U/s 12(2)(e)(iii) and12(6)]
Where an employee received amounts on account of above then he may opt any one of the following options
available to him:
(A) To offer the same as income in the year of receipt; or
(B) The amount to be taxed at the rate in accordance with the following formula:
Preceding three years total tax on total taxable income under NTR
x 100
Total taxable income of preceding three tax years under NTR

Important note U/s 12(8):


The declaration shall be made by the due date for furnishing of employees return of income for the tax year in which
amount was received or by such later date as the Commissioner Inland Revenue may allow.
Example: Mr. Arif received taxable salary of Rs. 600,000 in tax year 2016. He retired on 1st day of May, 2016 and
received an amount of Golden Handshake of Rs. 900,000. If the following further information has been provided you
are required to compute the tax payable by him.
Last 3 years tax liability under normal tax regime 145,000
Last 3 years taxable income under normal tax regime 1,200,000

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Income From Salary Chapter-07

Solution: A person who receives Golden handshake has two options available to him. He may opt to include this
amount in his taxable income or he may opt to tax this amount as a separate block of income.
Mr. Arif
Tax year 2016
Computation of taxable income and tax liability: Rs.
Option 1 (included the golden handshake in the current year income)
Income from salary:

Salary 600,000
Golden handshake 900,000
Taxable income 1,500,000
Computation of tax liability:
Tax on Rs. 1,500,000 [79,500 + 12.5% x (1,500,000 1,400,000)] 92,000
Option 2 (offered on the basis of last three years average rate)
Income from salary:
Salary 600,000
Taxable income 600,000
Computation of tax liability:
Tax on Rs. 600,000 [2,000 + 5% x (600,000 500,000)] 7,000
Tax on golden handshake
[Rs. 900,000 x 12.08% as per note attached) 108,720
Tax liability 115,720
Rate for golden handshake = 145,000/1,200,000 x 100 = 12.08%
Lower tax is payable in option 1, hence same shall be opted by the tax payer.
4.2 Computation of tax on tax [u/s 12(3) & (4)]
Any tax liability of employee paid by employer on behalf of employee shall be added in the income of the employee
by such amount.
The grossed up amount may be calculated under the following cases.
Where normal rates are feasible:
Example: An employee of a company has received total salary of Rs. 800,000. As per appointment letter the
employer shall pay Rs. 22,500 as tax free salary to employee. Compute the tax liability for the tax year 2016.
SOLUTION
Taxable salary excluding tax paid by the employer 800,000
Tax paid by employer 22,500
Total taxable income 822,500

Computation of taxable income and tax liability

[14,500 + 10% x (822,500 750,000)] 21,750


Less: paid by employer 22,500
Balance tax excess paid (750)

Important note: Tax on tax amount depends on the terms and conditions settled between employer and employee.
The salary income will be charged to tax on its gross value after deduction of exempt salary income or allowances
and perquisites. However, no expense or other deduction shall be allowed with respect to any expenditure incurred in
deriving salary income. Section 12(4) of the ordinance states that:
No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to
tax under the head Salary.
Marginal perquisites [Clause 53A of Part I of Second Schedule]
Some employers provide concessional benefits to their own facilities e.g. a Hospital may allow its employee free
medical treatment or concessional medical facility or a school allow its children of its employees to get free or
concessional fee and a railway, bus or air transport providing free or concessional transport facility to its employees.
Marginal perquisites are exempt except free or concessional passage provided by transporters including airlines to
its employees (including the members of their household and dependants). For this purpose, we have to take the
market value of facility provided to employees and add the same in the salary income of employee after deducting
any cost borne by the employee.

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5. Value of Perquisites [U/s 13]


The value of perquisites to the extent of provided by an employer to his employee shall include the following:
(1) Motor vehicle used wholly or partly for private purposes
(2) Salary of housekeeper, driver or other domestic assistant.
(3) Fair market value of utilities.
(4) Actual amount waived off or obligation discharged by employer on behalf of the employee.
(5) Transfer of property or services provided
(6) Facility of accommodation or housing
(7) Interest free loan or loan at concessional rate
(8) In addition to the above the value of any other benefit.
6. Non applicability of this section [U/s 13(2)]
This section shall not apply to any amount of allowances provided by employer and expenditure incurred by
employee for the performance of official duties of employment.
7. Valuation of perquisites, allowances and benefits
7.1 Valuation of conveyance Rule-5 and [U/s 13(3)]
In case of motor vehicle provided by an employer to his employee partly or wholly for personal use, then the amount
chargeable to tax under the head salary income shall be computed according to following rules:
It is worthwhile to mention here that where the motor vehicle provided by employer has only been used for the
business purposes then there will be no treatment of the same in the hands of the employee.
(A) Partly for personal and business use
5% of the cost of vehicle or the fair market value (excluding mark up) at the commencement of the lease where
vehicle is taken on lease by employer.
(B) For personal use only
10% of the cost of vehicle or the fair market value (excluding mark up) at the commencement of lease
where vehicle is taken on lease by employer.
Example
Following are the details of income of Hamid Sarfraz for the financial year ended June 30, 2016, who is employed
with a company as Senior Manager.
Salary income
Pay Rs. 60,000 per month
House rent allowance Rs. 27,000 per month
Utilities Rs. 8,000 per month
He was provided with a company maintained car of 800CC. Compute the taxable income of Hamid Sarfraz for the
year if.
1. The cost of the car to the company was Rs. 500,000 and car was provided for personal use only.
2. The cost of the car to the company was Rs. 500,000 and car was provided for business use only.
3. The cost of the car to the company was Rs. 500,000 and car was provided partly for personal and partly for
business use.
4. The car is acquired by company on lease of Rs.850,000 and the FMV of the car is Rs.500,000 and car was
provided for personal use only.
Solution
Case 1 Case 2 Case 3 Case 4
Rs. Rs. Rs. Rs.

Salary (60,000 x 12) 720,000 720,000 720,000 720,000


House Rent allowance (27,000 x 12) 324,000 324,000 324,000 324,000
Utilities (8,000 x 12) 96,000 96,000 96,000 96,000
Car provided for:
- Personal use only (500,000 x 10%) 50,000 - - -
- Business use only - - - -
- Business and personal use (500,000 x 5%) - - 25,000 -
- Personal use only (500,000 x 10%) - - - 50,000
Taxable income 1,190,000 1,140,000 1,165,000 1,190,000

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Notes:
1. Nothing is included in taxable income when conveyance is provided for business use only.
2. In cases of lease, FMV shall be used.
Conveyance allowance: Amount received as conveyance allowance (other than car) in cash shall be totally taxable
and shall be included in the salary income of the employee.
Important note: It is worthwhile to mention here that where the motor vehicle provided by employer has only been
used for the business purposes then there will be no treatment of the same in the hands of the employee.
Example: Following are the details of income of Hamid for the financial year ended June 30, 2016, who is employed
with a company as Senior Manager.
Salary income
Pay Rs. 60,000 per month
House rent allowance Rs. 27,000 per month
Utilities Rs. 8,000 per month

He was provided conveyance allowance of Rs. 50,000 for a year. No car is provided by the employer. Compute the
taxable income and tax liability of Hamid for the Tax year 2016.

Solution:
Salary 60,000 x 12 720,000
House Rent allowance 27,000 x 12 324,000
Utilities 8,000 x 12 96,000
Conveyance 50,000
Taxable Income 1,190,000

Tax Liability under normal rates:


[14,500 + 10% x (1,190,000 750,000)] 58,500

7.2 Salaries of servants provided by employer Rule 3 [U/s 13(5)]


Salaries of housekeeper, gardener, driver or other servants of employee paid by the employer in the tax year for
services rendered by such persons for the employee shall be included in the salary income of the employee.
7.3 Utilities provided by employer [U/s 13(6)]
The amount of utilities such as telephone facility provided by an employer then the fair market value of utilities shall
be included in the salary of the employee. Utilities benefit may be provided by employer free or at concessional rate
or utility allowance in cash.
7.4 Actual amount waived off or obligation discharged by employer on behalf of the employee [U/S 13(9) & (10)]
Actual amount waived off and obligation discharged by employer on behalf of employee shall be included in the
salary income of the employee.
7.5 Property is transferred or services are provided by employer [u/s 13(11)]
Where in a tax year, property is transferred or services are provided by an employer to an employee, the amount
included in the salary income of the employee shall be the fair market value of such benefit at the date of transfer or
providing of services:
7.6 Valuation of Accommodation - Rule-4 [u/s 13(12)]
(1) Facility of accommodation or Housing
Where in the tax year, accommodation or housing is provided by an employer to his employee, the value of
such accommodation shall be the amount that would have been paid by the employee if the accommodation
was not provided to him.
The value of accommodation under this rule shall not be less than from the 45% of minimum of time scale or
basic pay where minimum time scale not given.
Important note: In short the following meaning may be derived from this rule:
(a) Firstly compute 45% of minimum of time scale or basic pay (where MTS not given) and 30% in case of
Mufasal areas then
(b) Compute Fair market value of accommodation
First preference to calculation (a) however where calculation in (b) above is more than (a) then the same shall
be added in the salary income of the employee.
Example: Miss Hira, an employee of HBL as managing director has provided the following details of her
expected income and expenses for the year ending June 30, 2016.

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Basic Salary Rs. 1,800,000 per year


Dearness allowance 10% of basic salary
Bonus Rs. 50,000
Conveyance allowance Rs. 50,000
Leave fare assistance Rs. 60,000
The company disbursed on July 1, 2015 to her, Rs. 3 million interest free loan to be recovered from the final
dues on retirement.
Company has paid Rs. 850,000 as annual rent for the accommodation provided to Managing Director.
She has been provided with a company maintained car for business and personal use. The purchase price of
the car is Rs. 12 million. The company also pays salary to official driver @ Rs. 8,000 per month. You are
required to compute her taxable income and tax thereon and show all workings and assumptions.
Solution:
Hira (resident)
Computation of the income and tax liability thereon
For the tax year 2016 Rs.

Basic Salary 1,800,000


Dearness allowance 10% of basic salary 180,000
Bonus 50,000
Conveyance allowance 50,000
Leave fare assistance 60,000
Interest fee loan 3,000,000 x 10% 300,000
Accommodation for house:
Higher of 45% of basic salary or fair market value
45% of basic salary 810,000 or Rs.850,000 850,000
Car 12,000,000 x 5% 600,000
Taxable Income 3,890,000

Tax Liability under normal case:


[472,000 + 25% x (3,890,000 3,500,000)] 569,500

Note: There will be no treatment of salary of official driver @ Rs. 8,000 per month paid by the Company as it
was for the discharge of official performance.
(2) Treatment of House rent allowance:
Any amount provided as house rent allowance (other than accommodation provided by the employer) in cash,
the total amount shall be taxable and shall be included in the salary income of the employee.
Example: Following are the details of income of Mr. Afzal for the financial year ended June 30, 2016, who is
employed with a company as Senior Manager.
Salary income
Pay Rs. 60,000 per month
House rent allowance Rs. 27,000 per month
Utilities Rs. 8,000 per month
He was provided conveyance allowance of Rs. 50,000 for a year. No car is provided by the employer.
Compute the taxable income and tax liability of Mr. Afzal for the Tax year 2016.
Solution:
Salary 60,000 x 12 720,000
House Rent allowance 27,000 x 12 324,000
Utilities 8,000 x 12 96,000
Conveyance 50,000 50,000
Taxable Income 1,190,000
Tax Liability under normal rates:
[14,500 + 10% x (1,190,000 750,000)] 58,500

7.7 Treatment of any other perquisite [U/s [13(13)]


Where any other perquisite not covered in section 12 is provided by an employer to an employee, the value of such
perquisite at fair value (excluding employee cost to acquire such benefit) shall be included in the salary income of the
employee.

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7.8 Loan from employer to employee on or after 01-07-2002 [u/s 13(7)]


Where a loan is made, by an employer to an employee either interest free or at concessional rate, the amount to be
included in the salary shall be computed according to the table given below:

Loan provided at: Amount to be included in the salary of the employee:


Interest free loan, or no profit on interest is charged Interest computed at benchmark rate.

0%, less than the bench mark rate, equal to Interest computed at benchmark rate, less actual amount
benchmark rate. paid by employee on account of loan.
Higher than the benchmark rate OR Amount of loan is
Nothing shall be included.
Rs. 500,000 or less than Rs. 500,000.

The benchmark rate in tax year 2003 was 5% p.a. (with 1% increase in each following tax year and in 2012 it was
14% p.a. as defined in section 12(14). From tax year 2013 to onwards benchmark rate has been capped at 10%.
However, with effect from tax year 2011 such benefit shall not be taxable in cases where such benefit is extended
by the employer due to the waiver of interest by such employee on his accounts (e.g. provident fund etc) maintained
with the employer.
Example: Inaam is an employee in a group of companies. He derived following income during the income year July
1, 2015 to June 30, 2016.
Salary income per month Rs.
(i) Basic salary Rs. 20,000
(ii) House rent allowance Rs. 8,000
(iii) Utility allowance Rs. 1,000
He is provided with a 1,000CC car, which is partly used for companys business (Cost of car is Rs. 1,000,000). He
has also obtained loan from the employer. Calculate his taxable income in the following cases:
a) Amount of loan is Rs. 500,000 and interest charged by the employer is 7% p.a.
b) Amount of loan is Rs. 600,000 and interest charged by the employer is 0% p.a.
c) Amount of loan is Rs. 600,000 and interest charged by the employer is 6% p.a.
d) Amount of loan is Rs. 600,000 and interest charged by the employer is 11% p.a.
Solution:

Computation of taxable income Case (a) Case (b) Case (c) Case (d)
Rs. Rs. Rs. Rs.

Basic salary (20,000 x 12) 240,000 240,000 240,000 240,000


House rent allowance (8,000 x 12) 96,000 96,000 96,000 96,000
Utility allowance (1,000 x 12) 12,000 12,000 12,000 12,000
Company car benefit (Rs.1,000,000 x 5%) 50,000 50,000 50,000 50,000
Interest free loan (Note 1) - 60,000 24,000 -
Taxable income 398,000 458,000 422,000 398,000

Note 1: (Interest free loan)

Case a:
When the amount of loan is Rs. 500,000 or less, nothing shall be included in taxable income.

Case b:
Interest calculated at bench mark rate shall be included in taxable income i.e. 600,000 x 10%.

Case c:
Amount to be included in taxable income is calculated as follows:

Interest at bench mark rate (600,000 x 10%) 60,000


Amount to be included in taxable income 24,000

Case d:
When interest rate is higher than benchmark rate, nothing shall be included in taxable income

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7.9 Loan for the acquisition of asset or property [U/s 13(8)]


Where the employee uses a loan obtained from his employer for the acquisition of any asset or property producing
income chargeable to tax under any head of income, (it is considered that an amount of interest equal to benchmark
rate on this loan is paid). Deduction provided against this loan is provided as follows:
(1) Where the loan is interest free or interest is charged at lower than the benchmark rate, the amount equal to
benchmark rate shall be allowed as deduction to employee against income from such asset.
OR
(2) If the interest charged at rate higher than benchmark rate, total amount of interest charged shall be allowed as
deduction against income from such asset.
Example:
Mr. Zahid is an employee of ABC Textiles Limited. His taxable salary income for tax year 2016 is Rs. 800,000. On 1st
July, 2015 he acquired loan of Rs. 600,000 (at 8% interest rate) from his employer. Compute his taxable income for
tax year 2016 in following situations:
a. Loan used for purchase of plot against which he received ground rent of Rs. 400,000 by letting out the same
under 99 years lease agreement.
b. Loan used for purchase of house. He received rent of Rs. 400,000 by letting out this house.
c. Assume that the interest rate charged by employer is 20%. Loan used for purchase of plot against which he
received ground rent of Rs. 400,000 by letting out the same under 99 year lease agreement.
Solution:

Mr. Zahid
Tax year 2016
Computation of taxable income Case (a) Case (b) Case (c)
Rs. Rs. Rs.
Income from salary:
Taxable salary (given) 800,000 800,000 800,000
Add: 2% of loan of Rs.600,000 as income of the employee 12,000 12,000 -
Income from salary 812,000 812,000 800,000

Income from other sources:


Income from open plot as ground rent 400,000 - 400,000
Less: Interest on loan
Higher of actual interest paid or interest at benchmark rate (60,000) - (120,000)
340,000 - 280,000
Income from property:
Rent of house - 400,000 -
(Property income is chargeable to tax under normal tax regime (NTR)
and deductions are also allowable against income from property hence, (80,000)
in this case,1/5th repair allowance and interest shall be deducted.) (60,000)
Less 1/5th fixed repair allowance
Mark up on loan
Net property income - 260,000 -
Taxable income 1,152,000 1,072,000 1,080,000
8. Employee share schemes [U/s 14]
"Employee share scheme" means any agreement or arrangement under which a company may issue shares in the
company to an employee of the company or an employee of an associated company or the trustee of a trust or an
employee of an associated company.
Right or option to acquire shares [U/s 14(1)]:
The value of a right or option to acquire shares under an employee share scheme granted to an employee shall
not be chargeable to tax because no benefit in the form of salary shall be received by the employee unless disposal
of right or option.
Example: Explain the taxability of the following under the head salary with reference to employees share schemes.
(a) Grant of a an option
(b) Exercise of an option granted in prior year

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Solution:
(a) Nothing shall be included in his salary income until disposal off option.
(b) The exercise of an option granted in prior year is chargeable to tax under the employee share scheme as the
difference between the FMV of the shares less consideration given by the employee for purchase of shares
and the cost of acquisition of right.
Disposal of right or option to acquire shares [U/s 14(5)]:
Where an employee disposes off a right or option to acquire shares under an employee share scheme, the amount
chargeable to tax to the employee under the head "Salary" for that year shall include the amount of any gain made on
the disposal computed as under:
Consideration received for the disposal of the right or option xxx
Less: Cost of right or option xxx
If balance is positive then add the same in salary income however if the answer is negative then the same shall be
ignored because deduction of expenses against salary are not allowable.
Shares issued without limitation or restriction [U/s 14(2)]
Where an employee is issued shares under an employee share scheme, the amount chargeable to tax to the
employee under the head "Salary" for that year shall include the fair market value of the shares at the date of
issue, as reduced by any consideration given by the employee for the shares including amount if any given for the
grant of a right or option to acquire the shares.
Shares issued subject to limitation or restriction [U/s 14(3)]
If shares issued to an employee under an employee share scheme are with restriction on the transfer of shares
(a) no amount shall be chargeable to tax to the employee under the head "Salary" until the earlier of the time the
employee has a free right to transfer the shares or disposes off the shares; and
(b) the amount chargeable to tax to the employee shall be the fair market value of the shares at the time the
employee has a free right to transfer the shares or disposes off the shares, as reduced by any consideration
given by the employee for the shares including amount if any given for the grant of a right or option to acquire
the shares.
Cost of shares [U/s 14(4)]
The cost of the shares to the employee shall be the sum of -
(a) the consideration, if any, given by the employee for the shares;
(b) the consideration, if any, given by the employee for the grant of any right or option to acquire the shares; and
(c) the amount chargeable to tax under the head "Salary".
Example: Mr. Kamran was issued shares under employee share scheme on July 01, 2015. Information regarding this
is given below:
- FMV of shares on date of issue Rs. 50,000
- FMV of shares on June 30, 2016 Rs. 60,000
- FMV of shares on January 01, 2016 Rs. 55,000
- Amount paid by him for shares Rs. 30,000
- Amount paid by him for right Rs. 1,000
He disposed of all the shares on June 30, 2016.
Required: Calculate the incomes chargeable to tax under the heads income from salary and capital gain in the
following cases:
(a) Shares were issued without any restriction on transfer
(b) Shares were issued with restriction that shares cannot be transferred before January 01, 2016
Solution: Case (a) Case (b)
Rs. Rs.
Income from salary
FMV of shares (Note 1) 50,000 55,000
Less: Amount paid for:
Shares 30,000 30,000
Right 1,000 1,000
31,000 31,000
Amount chargeable to tax under the head "Income from salary" 19,000 24,000

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Capital gain
Higher of FMV or actual amount received against shares at disposal time (Note 2) 60,000 60,000
Less: cost of shares:
Amount paid for shares and right (calculated above) 31,000 31,000
Amount taxable under head salary (calculated above) 19,000 24,000
50,000 55,000
Capital gain 10,000 5,000

Note 1:
Case (a) As shares were issued without any restriction on transfer, FMV on issue date shall be taken into account.

Case (b) As shares were issued with restriction on transfer, FMV on the date the employee has free right to transfer
the shares shall be taken into account.

Note 2: In case of employee share scheme FMV at the time of disposal shall be taken into account and the same
shall not be compared with actual consideration received.
Retirement benefits
Retirement benefits available to taxpayer are as follows:
Gratuity (treated as pay)
Super-annuation Fund (treated as Profit in lieu of or in addition to salary)
Provident fund (treated as Profit in lieu of or in addition to salary)
Gratuity
Gratuity is a sum which is paid at the discontinuation of the employment to the employee computed by applying the
total number of years of service of the employee with the determined/agreed amount of salary. Gratuity conditional
exemptions are as under:
Clause 13 Part I, 2nd Schedule to the Income Tax Ordinance, 2001:
Any income representing any payment received by way of gratuity or commutation of pension by an employee on his
retirement or, in the event of his death, by his heirs as does not exceed-
(i) in the case of an employee of the Government, a Local Government, a statutory body or corporation
established by any law for the time being in force, the amount receivable in accordance with the rules and
conditions of the employee's services;
(ii) any amount receivable from any gratuity fund approved by the Commissioner in accordance with the rules in
Part III of the Sixth Schedule;
(iii) in the case of any other employee, the amount not exceeding Rs.200,000 receivable under any scheme
applicable to all employees of the employer and approved by the Board for the purposes of this sub-clause;
and
(iv) in the case of any employee to whom sub-clause (i), (ii) and (iii) do not apply, 50% of the amount receivable or
Rs.75,000, whichever is the less:
Provided that nothing in this sub-clause shall apply -
(a) to any payment which is not received in Pakistan;
(b) to any payment received from a company by a director of such company who is not a regular employee of
such company;
(c) to any payment received by an employee who is not a resident individual and to any gratuity received by an
employee who has already received any gratuity from the same or any other employer.
CBR vide its Circular No. 17 of 1959 and Circular No. 16 of 1967 provided the option to a taxpayer to be assessed
at the rates applicable for the current year or at the average rate of tax of his last three years income.
The following further instructions are also attached with this option:
1. Where average rate for last 3 years worked out at Nil, then no tax would be payable by the said taxpayer.
2. Where the employee was taxable in 3 preceding years but due to his absence from Pakistan, he was not
charged to tax, gratuity received by him will be taxed at the average rate of tax at which he would have been
liable if he was a resident person in 3 preceding years.
3. Gratuity income will be ignored at the time of computation of taxable income of a deceased person, however
the same may be added to the income of his legal heirs as income from other sources.

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Example:
ABC Ltd. has paid gratuity amounting to Rs. 1,075,000 to Mr. A in addition to the taxable salary of Rs.2,500,000 in
the tax year 2016. The past 3 years assessed tax results of his assessment are as under:
Tax year Taxable income Tax Liability
2015 1,800,000 177,800
2014 2,400,000 435,600
2013 1,400,000 155,628
The ABC Ltd. maintains an unapproved gratuity Fund. Mr. A is interested to know the different options available to
him for taxation of gratuity.
Solution:
Option No. 1 Taxation under Normal Manner:
Particulars Rs.
Taxable Salary 2,500,000
Gratuity (Rs.1,075,000 75,000) (Lower of Rs.75,000 or 50% of Rs.1,075,000) 1,000,000
Taxable income 3,500,000

Tax on Rs. 3,500,000 [359,500 + 22.5% x (3,500,000 - 3,000,000)] 472,000


Option No. 2 Taxation under Average rate of last 3 years income
Particulars
Taxable income under option 2 as computed above (without gratuity received) 2,500,000

Tax on salary
Tax on Rs. 2,500,000 [137,000 + 17.5% x (2,500,000 - 1,800,000)] 259,500

Tax on (1,075,000 less Rs. 75,000) Rs. 1,000,000 x 769,028 / 5,600,000 N-1 137,326
Total tax 396,826
N-1 Determination of average rates of tax
Tax year Taxable income Tax liability (say)
2015 1,800,000 177,800
2014 2,400,000 435,600
2013 1,400,000 155,628
Total 5,600,000 769,028
Note: Tax under option 2 is lower than the option 1 hence it is more beneficial to opt for the said arrangements.
Pension
Pension received is exempt under clause 8, 9, 12, 13, 16 & 17 Part I Second Schedule to the Ordinance subject to
certain exceptions. Gratuity & commutation of pension both enjoys exemption under clause13 of Part I Second
Schedule to the Ordinance as discussed it the preceding Para. However, a taxpayer receiving pension has not been
allowed any option for taxation at average rate of last three years income. The most important feature of these
payments is that the most of pensions are exempt from levy of tax.
The various exemptions in addition to clause 13 are as under.

Under clause Particulars Exemption


8 Pension received by citizen of Citizen of Pakistan from a former employer, other
Pakistan. than where the person continues to work for the
employer (or an associate of the employer).
Provided that where the person receives more than
one such pension, the exemption applies only to
the higher of the pensions received.
9 Pension of Govt. & Armed forces Received in respect of services rendered by a
employees. member of the Armed Forces of Pakistan or Federal
Government or a Provincial Government;
Granted under the relevant rules to the families and
dependents of public servants or members of the
Armed Forces of Pakistan who die during service.

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12 Commutation of pension from Govt. or Payment in the nature of commutation of pension


under any pension scheme approved received from Government or under any pension
by FBR. scheme approved by the Board for the purpose of
this clause
13 Gratuity & commutation of pension
from
recognised fund As discuss above in gratuity
un recognised fund
scheme approved by FBR
other than above
16 & 17 Pension & income of dependent of Families and dependents of the "Shaheeds"
Armed forces & civil forces. belonging to Pakistan Armed Forces & Civil Armed
(Exemptions u/c 16 and 17 are not Forces of Pakistan from the (a) Special family
directly related to salaried persons) pension (b) Dependents pension & (c) Childrens
allowance

Annuities
Annuities or any supplement to annuity are taxable as salary even it is paid voluntarily without any contractual
obligation of the present or ex-employer. All the annuities are taxable in the normal manner as clause (20) of Part I of
2nd Schedule has been omitted from tax year 2016.
However the tax credit aspect on the annuities is discussed under section 63 of the Ordinance where the same has
been allowed on the contributed or premium paid on a contract of annuities. The said tax credit is discussed in detail
in the chapter of tax credits.
Superannuation fund
The income from the superannuation fund is taxable to the extent of employers contribution and the interest credited
thereon under the following Clause:
Clause 25 Part I, 2nd Schedule to the Income Tax Ordinance, 2001:
Any payment from an approved superannuation fund made on the death of a beneficiary or in lieu of or in
commutation of any annuity, or by way of refund of conditions on the death of a beneficiary.
The plain reading of the aforesaid provision of the ordinance clearly shows that taxation of superannuation Fund is
totally in the same manner as laid down for the gratuity under clause 13 Part I Second Schedule to the Ordinance.
Benevolent fund
Sum paid out of employee Benevolent Fund is taxable in the normal manner, however, clause 24 Part I Second
Schedule to the Ordinance deals with the exception to the aforesaid law in the following manner:
Any benevolent grant paid from the Benevolent Fund to the employees or members of their families in accordance
with the provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969.

Provident fund:
9. Introduction:
From salary of employee, a certain amount is deducted every month on account of provident fund. Employer also
contributes the same amount in the provident fund. At the time of retirement of employee, accumulated balance in the
provident fund consisting of employees contribution, employers contribution and interest on fund is paid to employee
for his benefit.
Types of Provident Funds:
There are three types of provident funds
Provident Fund formed under the Provident Fund Act, 1925.
Recognized Provident Fund under the Income Tax Ordinance, 2001.
Unrecognized Provident Fund under the Income Tax Ordinance, 2001.
9.1 Provident Fund Formed under Provident Fund Act, 1925
A fund formed under the provisions o the Provident Act, 1925 is also named as Statutory Fund. Such type of fund is
generally formed by the Federal Government, Semi Government Institutions and Local Authorities etc.
In this type of fund subscription or deposits of any class or classes of employees are received and held on their
individual accounts, and includes any contributions and any interest or increment accruing on such subscriptions,
deposits or contributions under the rules of the Fund. [The Provident Funds Act, 1925 Section 2(d)]

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9.2 Recognized Provident Fund and Unrecognized Provident Fund:


Any provident fund recognized by CIR is called recognized provident fund and if it is not recognized by the CIR, then
it is called unrecognized provident fund.
10. Taxation of Provident Fund:
Provident Fund Formed under Provident Fund Act, 1925
Any amount received from Provident fund to which the Provident Funds Act, 1925 applies is fully exempt
from tax. [Clause 22 of Part I 2nd Schedule of Income Tax Ordinance, 2001].
Recognized Provident Fund under the Income Tax Ordinance, 2001
In case of recognized provident fund, following shall be included in the income of employee in every tax year
[Clause 3 of Part I of sixth schedule to Income Tax Ordinance, 2001].
(a) Contributions made by the employer less lower of one-tenth of the salary or Rs.100,000; and
(b) Interest credited on the balance of provident fund less higher of:
1. 1/3 of salary (basic salary + dearness allowance); OR
2. Interest calculated @ 16% p.a. (Reference note attached)
Although under the aforesaid clause there is no rate of interest has been given however the Federal
Government vide its SRO No. 1097(I) 84 dated 27-12-1984 fixed the rate of interest at 16% for the purposes of
interest calculation.
Accumulated balance due and becoming payable to an employee from a recognized provident fund is
exempt. [U/c 23 of Part I 2nd Schedule to the Income Tax Ordinance, 2001]
Unrecognized Provident Fund under the Income Tax Ordinance, 2001
An unrecognised provident fund is the fund which is neither recognised nor statutory. Income of the said
provident fund is taxable to the extent defined in section 12(2)(e) which states that:
from a provident fund or other fund, to the extent to which the amount is not a repayment of contributions made
by the employee to the fund in respect of which the employee was not entitled to a deduction;
The following facts are evident from the above:
(a) The employee contribution (already taxed by including in the employee gross salary income) however
interest thereon is totally taxable in the hands of employee.
(b) No tax shall be charged on amount contributed by the employer and interest thereon because the same
are taxable on receipt of accumulated balance due to aforesaid section and non coverage of the same
under Clause 23 of Part I 2nd Schedule to the Income tax Ordinance, 2001.
The following table shows the above position of various Provident Funds:

PF formed under Recognized Provident Unrecognized Provident


Particulars
Provident Fund Act, 1925 Fund Fund
Employees Already included in taxable Already included in taxable Already included in taxable
contribution salary income of salary income of salary income of employees
employees employees
Employers contribution Exempt under clause 22 of Employers contribution Not taxable at the time of
Part I of 2nd Schedule to the less lower of 1/10th of the contribution
Income tax Ordinance, salary (Basic pay +
2001 dearness allowance) OR
Rs. 100,000
Interest credited for the Exempt under clause 22 of Interest credited for the Not taxable at the time of
year Part I of 2nd Schedule to the year less higher of 1/3rd of contribution
Income tax Ordinance, the salary (Basic pay +
2001 Dearness allowance) OR
the interest amount
computed at 16% p.a.
Payment of Exempt under clause 22 of Exempt under clause 23 of Employers contribution &
accumulated balance Part I of 2nd Schedule to the Part I of 2nd Schedule to the interest on accumulated
Income tax Ordinance, Income tax Ordinance, balance (including interest
2001 2001 on employees contribution)
is taxable on receipt.

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Important note: There is no treatment of employees contribution to any provident fund, as tax on the same has
already been paid by offering gross salary in his income tax return by the taxpayer.
Example: Aman Ali is an employee of Mano Limited and the amounts provided to her were as follows:
Basic salary 250,000 Dearness allowance 25,000
House rent allowance 80,000 Conveyance allowance 50,000
Employees contribution 30,000 Employers contribution 35,000
Accumulated balance 650,000 Interest credited @ 18%
Required: Compute taxable income of Aman Ali according to income tax rules under the following situations.
(a) If all contributions of Provident Fund are in Recognized Provident Fund.
(b) If all contributions of Provident Fund formed under Provident Fund Act, 1925.
(c) If all the contributions of Provident Fund are in Unrecognized Fund.

Solution for case (a): Rupees Rupees

Basic salary 250,000


Dearness allowance 25,000
House rent allowance 80,000
Conveyance allowance 50,000

Employees contribution (already included in salary) 30,000 -

Employers contribution 35,000


Less: 10% of salary (note attached) (275,000 x 10%) 27,500 7,500
Or 100,000 whichever is lower shall be deducted

Interest credited (Rs. 650,000 x 18%) 117,000


Less: interest credited @ 16% (Rs. 650,000 x 16%) (104,000)
Or 1/3rd of salary Rs. 275,000 / 3, hence higher is 16%
Amount included in salary income 13,000
Taxable income 425,500

NOTE: Salary for the computation of provident fund is equal to:

Salary = Basic salary 250,000 + dearness allowance 25,000= 275,000


Solution for case (b) and (c):
The answer in both (b) and (c) shall be same as nothing shall be added where the provident fund is formed under
Provident Fund Act, 1925 and in case of (c) the amount to be added in salary income shall be at the time when
accumulated balance received related to unrecognized provident fund. Hence taxable income shall be Rs. 405,000 in
both (b) and (c) cases that are without provident fund adjustment under the given cases.

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Pakistan & Foreign source salary income

Geographical source of salary


Received by Taxability
income
1. Pakistan source salary income
[Section 101]:
a. Received from any employment
exercised in Pakistan, wherever
paid, or Taxable [Section 11(5) and (6)]
Resident / Non-resident
b. Paid by, or on behalf of, the individual In case of non resident the terms of
Federal Government, a double taxation treaty agreement, if any
Provincial Government, or a shall also be relevant for PSI
Local Government in Pakistan,
wherever the employment is
exercised

[Section 102]
Any foreign-source salary received by a
resident individual shall be exempt from tax
if the individual has paid foreign income tax
on such salary or his employer has withheld
from the salary and paid to the revenue
authority of the foreign country in which the
employment was exercised.
a. Resident Individual
[Section 103]

A credit or exemption shall be allowed only


if the foreign income tax is paid within 2
years after the end of the tax year in which
the foreign income was derived by the
resident taxpayer otherwise in the absence
of double tax treaty agreement the same
shall be taxable in Pakistan.
b. Non-resident individual Not taxable [Section 11(6)]

[Section 50]
2. Foreign source salary income:
c. Short term resident An individual shall be exempt in respect of
Salary income other than above. his foreign-source income which is not
brought / received in Pakistan if he is
[For all foreign source
resident only by reason of his employment
income]
and he is present in Pakistan for not
exceeding 3 years.
d. Returning expatriate
[Section 51]
[Citizen of Pakistan If an individual citizen of Pakistan (returning
coming back in expatriate) is resident in the current tax year
Pakistan] but was non-resident in the 4 preceding tax
years, his foreign-source income shall be
exempt in current tax year and in the
[For all foreign source
following tax year.
income]

e. Individual leaving
Pakistan during the year
and remains abroad during
that tax year Exemption for salary income [Section 51]

[Citizen of Pakistan
leaves Pakistan]

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EXEMPTIONS UNDER VARIOUS SECTONS OF THE INCOME TAX ORDINANCE, 2001

SECTION PARTICULARS OF EXEMPTION


42 Diplomatic and United Nations exemptions
43 Foreign government officials
44 Exemptions under international agreements
45 Presidents honours
47 Scholarships
50 Foreign source income of short term resident individuals
1. Diplomatic and United Nations exemptions [42(1) and (2)]
(1) The income of an individual entitled to privileges under the Diplomatic and Consular Privileges Act, 1972 shall
be exempt from tax under this Ordinance to the extent provided for in that Act.
(2) The income of an individual entitled to privileges under the United Nations (Privileges and Immunities) Act,
1948 shall be exempt from tax under this Ordinance to the extent provided for in that Act.
Pension of United Nations' employees [42(3)]
Any pension received by a person, being a citizen of Pakistan, by virtue of the person's former employment in the
United Nations or its specialised agencies (including the International Court of Justice) provided the person's salary
from such employment was exempt under this Ordinance.
2. Employee of a foreign government [43]
Any salary received by an employee of a foreign government as remuneration for services rendered to such
government shall be exempt from tax under this Ordinance provided -
(a) the employee is a citizen of the foreign country and not a citizen of Pakistan;
(b) the services performed by the employee are of a character similar to those performed by employees of the
Federal Government in foreign countries; and
(c) the foreign government grants a similar exemption to employees of the Federal Government performing similar
services in such foreign country.
3. Exemption under a tax treaty [44(1)]
Any Pakistan-source income which Pakistan is not permitted to tax under a tax treaty shall be exempt from tax under
this Ordinance.
Salary income under an aid agreement [44(2)]
Any salary received by an individual (not being a citizen of Pakistan) shall be exempt from tax under this Ordinance to
the extent provided for in an Aid Agreement between the Federal Government and a foreign government or public
international organization, where -
(a) the individual is either not a resident individual or a resident individual solely by reason of the performance of
services under the Aid Agreement;
(b) if the Aid Agreement is with a foreign country, the individual is a citizen of that country; and
(c) the salary is paid by the foreign government or public international organization out of funds or grants released
as aid to Pakistan in pursuance of such Agreement,
4. Allowances attached to honours, awards, etc. [45]
Any allowance attached to any Honour, Award, or Medal awarded to a person by the President of Pakistan shall be
exempt from tax under this Ordinance.
Any monetary award granted to a person by the President of Pakistan shall be exempt from tax under this Ordinance.
5. Scholarships [47]
Any scholarship granted to a person to meet the cost of the persons education shall be exempt from tax under this
Ordinance, other than where the scholarship is paid directly or indirectly by an associate.
6. Income of short-term residents [50]
(1) Subject to sub-section (2), the foreign-source income of an individual -
(a) who is a resident individual solely by reason of the individual's employment; and
(b) who is present in Pakistan for a period or periods not exceeding three years, shall be exempt from tax
under this Ordinance.
(2) This section shall not apply to -
(a) any income derived from a business of the person established in Pakistan; or
(b) any foreign-source income brought into or received in Pakistan by the person.

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EXEMPTIONS OF TOTAL INCOME UNDER PART I OF SECOND SCHEDULE TO THE INCOME TAX ORDINANCE,
2001

CLAUSE PARTICULARS OF EXEMPTION


3 Salary of employees of Institutions of Agha Khan Development Network, (Pakistan)
4 Salary of employee of Pakistani seafarer working on a foreign vessel
5 Allowances and perquisites of Govt. employees posted abroad
8 Pension
9 Pension of Govt. and Armed forces employees
12 Commutation of pension
13 Gratuity
16 Pension to dependents of Armed Forces Shaheeds
17 Income of dependents of Civil Armed Forces Shaheeds
19 Encashment of leave preparatory to retirement
20 Exemption omitted from tax year 2016
22 TO 26 Funds
39 & 40 Special allowance
51 TO 56 Different perquisites
53A Perquisites by virtue of employment
139 Medical expenditure by individuals
1. Exemptions under 2nd Schedule Part I:
1.1 Salary of employees of institutions of Agha Khan Development Network, (Pakistan) clause 3
Any income chargeable under the head "Salary" received by a person who is not a citizen of Pakistan, and
engaged as an expert or technical, professional, scientific advisor or consultant or senior management staff by
institutions of the Agha Khan Development Network, (Pakistan).
1.2 Income of a Pakistani Seafarer clause 4
Any income chargeable under head "Salary" received by a Pakistani seafarer working on a foreign vessel or
on Pakistan flag vessels for 183 days or more during a tax year provided that such income is remitted to
Pakistan, not later than two months of the relevant income year, through normal banking channels.
1.3 Allowances or perquisites to citizen of Pakistan by Government clause 5
Any allowance or perquisite paid or allowed as such outside Pakistan by the Government to a citizen of
Pakistan for rendering service outside Pakistan.
1.4 Pension Received by a citizen of Pakistani clause 8 & Pension of Govt. and Armed forces employees
clause 9
Already covered above in retirement benefits portion.
1.5 Computation of pension clause 12 & Gratuity or computation of pension on retirement of employee
clause 13
Already covered above in retirement benefits portion.
1.6 Pension to dependents of Armed Forces Shaheeds clause 16 &Pension / income of dependents
of Civil Armed Forces Shaheeds clause 17
Already covered above in retirement benefits portion.
1.7 Leave encashment clause 19
Any sum representing encashment of leave preparatory to retirement of a member of the Armed Forces of
Pakistan or an employee of the Federal Government or a Provincial Government.
1.8 Annuity clause 20
Exemption omitted from tax year 2016.
1.9 Amount received from voluntary pension system clause 23A
The accumulated balance up to 50% received from the voluntary pension system offered by a pension fund
manager under the Voluntary Pension System Rules, 2005 at the time of eligible person's -
(a) retirement; or (b) disability rendering him unable to work; or (c) death by his nominated survivors.
1.10 Funds clause 22 to 26
Already covered in above retirement benefits portion.

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1.11 Special allowance clause 39 and 40


Any special allowance or benefit or other perquisite to employee under salary income specially granted to meet
expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit
other than entertainment or conveyance allowance.
1.12 Perquisites exemptions to President, Chief of Staff, Provincial Gonverners and Ministers etc.
[Clause (51 to 53)]
(1) The perquisite represented by the right of the President of Pakistan, the Provincial Governors and the
Chiefs of Staff, Pakistan Armed Forces to occupy free of rent as a place of residence any premises
provided by the Government. (51)
(2) The perquisite represented by free conveyance provided and the sumptuary (entertainment) allowance
granted by Government to Provincial Governors, the Chiefs of Staff, Pakistan Armed Forces and the
Corps Commanders. (52)
(3) The following perquisites and allowances provided or granted by Government to the Ministers of the
Federal Government, namely :- (53)
(a) rent-free accommodation exceeds 10% of the basic salary of the Ministers concerned;
(b) house-rent allowance paid by Government in lieu of rent-free accommodation in so far as it
exceeds Rs. 550 per month:
(c) free conveyance; and
(d) sumptuary allowance.
1.13 Residency and perquisites exemptions to Honourable Judges [Clause (55 and 56)]
Under clause (55) The perquisites represented by the right of a judge of the Supreme Court of Pakistan or
of a judge of High Court to occupy free of rent as a place of residence any premises provided by Federal or
Provincial Government, as the case may be, or in case a judge chooses to resident in a house not provided by
Government, so much of income which represents the sum paid to him as house rent allowance.
Under clause (56) The following perquisites, benefits and allowances received by a Judge of Supreme
Court of Pakistan and Judge of High Court, shall be exempt from tax.
(a) Perquisites and benefits derived from use of official car maintained at Government expenses-
(b) Superior judicial allowance payable to a Judge of Supreme Court of Pakistan and Judge of a
High Court.
(c) Transfer allowance payable to a Judge of High Court.
The following perquisites of the Judge of Supreme Court of Pakistan or High Court shall also be
exempt from tax during service, and on or after retirement.
(a) The services of a driver and an orderly.
(b) 1000 (one thousand) free local telephone calls per month.
(c) 1000 units of electricity as well as (25 hm3 of gas) per month and free supply of water; and
(d) 200 liters of petrol per month.
(e) If during service, a judge dies, exemption from tax in respect of benefits and perquisites provided
to widow as mentioned in sub-clause (2) shall also be available.
1.14 Perquisites by virtue of employment - clause 53A
The following perquisites received by an employee by virtue of his employment, namely;-
(i) free or subsidized food provided by hotels & restaurants to its employees during duty hours;
(ii) free or subsidized education provided by an educational institution to the children of its employees;
(iii) free or subsidized medical treatment provided by a hospital or a clinic to its employees; and
(iv) any other perquisite or benefit for which the employer does not have to bear any marginal cost, as
notified by the Board.
1.15 Medical treatment or reimbursement received and Medical allowance clause 139
Full amount is exempt for benefit given as free medical treatment or hospitalization or both by an employer to
his employee or reimbursement received by the employee of the medical charges or hospital charges or both,
where such provision or reimbursement is in accordance with the terms of employment:
Provided that NTN of the hospital or clinic is given and the employer also certifies and attests the medical or
hospital bills: or
Any medical allowance received by an employee, (if free medical treatment or hospitalization or
reimbursement of medical or hospitalization charges is not provided) then 10% of the basic salary of the
employee is exempt.

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MULTIPLE CHOICE QUESTIONS


Q.1 The income received by an employee from --------- employer is treated as salary income
(a) Present
(b) Past
(c) Future or
(d) All of the above
Q.2 Benchmark rate of interest on loan provided by the employee to his employer in tax year 2015 is: ________
(a) 1%
(b) 5%
(c) 8%
(d) 10% or
(e) none of the above
Q.3 The value of any right or option to acquire shares is ________.
(a) Chargeable to tax
(b) Chargeable at a concessional rate
(c) Not chargeable to tax or
(d) None of the above
Q.4 An amount required as compensation on termination of employment is a ________.
(a) Perquisite
(b) Profit in addition to salary
(c) Work conditions supplements or
(d) None of the above
Q.5 Salary income is chargeable to tax on ________
(a) Accrual basis
(b) Actual receipt basis or
(c) Both (a) and (b)
Q.6 Salary income is chargeable to tax at the rates specified in the ________schedule to the ITO, 2001.
(a) First
(b) Second
(c) Third or
(d) Fourth
Q.7 In case an employee receive shares from a company under the employee share scheme the cost of shares would
be________
(a) Face value
(b) Price paid by employee
(c) Fair market value or
(d) None of the above
Q.8 In case of rent free accommodation the amount to be included in the salary income of the employee is ________
(a) FM value of rent
(b) 45% of basic salary
(c) Lower of FMR or 45% of basic salary or
(d) Higher of FMR or 45% of basic salary
Q.9 In case of conveyance provided by the employer to his employee for business use, amount to be included in salary
is________
(a) 10% of FMV of car
(b) 5% of cost of car

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(c) Higher of cost or FMR or


(d) None of the above
Q.10 Where an employee has a salary income with bonus, the bonus received shall be ___________salary income:
(a) Included in
(b) Excluded from
(c) Ignored for
Q.11 In case of rent free accommodation, amount to be included in the salary income of the employee is ____________.
(a) 10% of basic salary
(b) 20% of basic salary
(c) 25% of basic salary
(d) 45% of basic salary
Q.12 The amount expended by the employer on leave fare assistance is included in the salary income of the employee
_______.
(a) Whole
(b) Half
(c) Proportionate
(d) None of these
Q.13 An employee is entitled to deduct ________ incurred in deriving salary income.
(a) travelling expenses
(b) personal expenses
(c) entertainment expenses
(d) None of above
Q.14 House rent allowance provided by employer to his employees is _______.
(a) taxable
(b) not taxable
(c) exempt up to 45% of basic salary
(d) none of the above
Q.15 Tax free salary paid to an employee will be included in the _________of the employee.
(a) business income
(b) tax payable
(c) salary
(d) income from other sources
Q.16 An amount of perquisite is treated as received by an employee if it is paid _____.
(a) to him
(b) applied on his behalf
(c) to any person on his behalf
(d) all of above
Q.17 Entertainment allowance for official performance received by the employee is _______.
(a) exempt
(b) taxable
(c) 50% exempt
(d) 80% taxable
Q.18 The option available to an employee in respect of salary ________ shall be exercised in writing.
(a) received in arrears
(b) for the current year
(c) to be received in next year

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(d) none of the above


Q.19 The utilities provided by the employer to his employee are chargeable to tax under the head _____________ of
employee.
(a) Income from salary
(b) Other sources
(c) Income from business
(d) Income from utilities
Q.20 Gross salary consists of _______.
(a) basic salary
(b) perquisites
(c) profit in lieu of or addition to salary
(d) all of the above
Q.21 When the employer charges a _____ interest rate than the benchmark rate, then nothing shall be included in the
salary income of the employee.
(a) higher
(b) lower
(c) equal
(d) both a or c
Q.22 Under employee share scheme shares can only be issued to the ______ of the company.
(a) employees
(b) directors
(c) shareholders
(d) chief executive
Q.23 The right or option given to an employee ________.
(a) is always free of cost
(b) is chargeable to tax as business income
(c) is chargeable to tax as property income
(d) none of above
Q.24 An employee may be a person who is engaged in __________.
(a) employment
(b) business
(c) trading
(d) all of above
Q.25 If the insurance premium of the employee paid by the employer then it should be included in the _____ income of the
employee.
(a) business income
(b) salary income
(c) property income
(d) insurance income
Q.26 In case of the self-hiring of the property, it has ____ effect(s) under the law on the income of the recipient.
(a) one
(b) two
(c) three
(d) no
Q.27 In case of golden handshake, employee has option to offer the amount of golden handshake as _________.
(a) SBI under NTR

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(b) FTR
(c) income from business
(d) all of the above
Q.28 The Commissioner Inland Revenue is empowered to charge tax on the salary income of the employee of a private
limited Company on ______ basis where he has reason to believe that the salary income has not been deliberately
been deferred.
(a) cash
(b) accrual
(c) tax
(d) accounting
Q.29 A salaried person income is taxable @ 0%, if his / her annual income is equal or less than _______.
(a) 1,000,000
(b) 350,000
(c) 400,000
(d) 500,000
Q.30 Commission paid to a part time employee director is chargeable to tax under the head ______ of such director.
(a) salary income
(b) commission income
(c) property income
(d) all of above
Q.31 Any amount payable by employee to employer that has been waived of by the employer is _______ in the hands of
the employee.
(a) not taxable
(b) taxable
(c) exempt
(d) all of above

ANSWERS
1 (d) 2 (e) 3 (c) 4 (d) 5 (b)
6 (a) 7 (b) 8 (d) 9 (d) 10 (a)
11 (d) 12 (a) 13 (d) 14 (a) 15 (c)
16 (d) 17 (a) 18 (a) 19 (a) 20 (d)
21 (d) 22 (a) 23 (d) 24 (a) 25 (b)
26 (b) 27 (a) 28 (a) 29 (c) 30 (a)
31 (b)

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ICMAP PAST PAPERS THEORECTICAL QUESTIONS


Q. No. 3(c) September 2013 An employer having established approved superannuation funds is required to
contribute annually to the funds on a reasonable basis. However, there is a certain limitations which have been
specified under rule 110 of the Income Tax Rules, 2002 on the initial and annual contribution to the aforesaid funds.
Required:
Identify those limits and the procedures for payment of contribution by the employer beyond the specified limits.
Q. No. 3(c) February 2013 Mr. Rafiq wants to calculate his tax liability of income from salary, Being his tax advisor,
explain perquisites and allowances regarding 'valuation of accommodation' as per rule 4 of the Income Tax Rules,
2002.
Q.2 (b) April 2012 Section 13 of the Income Tax Ordinance, 2001 deals with the valuation of perquisites provided by an
employer for the purposes of computing the income of an employee for a tax year chargeable to tax under the head salary.
How the following perquisites shall be treated?
(i) Services of a housekeeper, driver, gardener, or other domestic assistant.
(ii) Utilities provided by employer.
(iii) Obligation of an employee to repay an amount owing by employee to another person is paid by the employer.
(iv) Loan made to the employee by the employer with no profit payable or the profit payable is less than benchmark rate.
Q. NO. 2(b)(i) SUMMER 2011 To whom a company may issue shares of the company under employee share scheme?
Q. NO. 3(c)(i) WINTER 2010 State the Rule 4 of the Income tax Rules, 2002 for valuation of accommodation provided by an
employer to the employee for the purpose of computing the income chargeable to tax under the head salary.
Q. NO. 2(b) WINTER 2010 What are the various amounts received by an employee as profit in lieu of or in addition to salary
and wages, which would be considered as part of salary?
Q. NO. 2(a) WINTER 2007 An employer may provide medical facility to its employees in any of the following manners:
(i) Free medical treatment or hospitalization.
(ii) Re-imbursement of medical expenses incurred by an employee, and
(iii) Payment of medical allowance instead of providing medical facility
Discuss the legal provisions under the ITO, 2001 under each of the above stated situations.
NOW SOLVE NUMERICAL Q. NO. 2(b) IN PAST PAPER OF WINTER 2007

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CA MOD C PAST PAPERS THEORETICAL QUESTIONS


Q.NO.3 Spring 2015 Munir resigned from his employment with Ali Industries Limited (AIL) with effect from 31
December 2014. He received following amounts infinal settlement:
Rs. 150,000 as Leave Encashment.
Rs. 4,000,000 under a Golden Handshake Scheme.

Munir had received a salary of Rs. 350,000 per month for a period of six months upto December 2014. His
taxable income and tax liability during the preceding five tax years were as under:

Tax year 2010 2011 2012 2013 2014


Total taxable income (Rs) 2,000,000 2,450,000 2,700,000 3,100,000 3,650,000
Total tax paid (Rs) 300,000 392,000 472,500 542,500 650,000

Required: As a tax consultant, advise Munir about the amount of income tax payable by him for the tax year 2015,
under the Income Tax Ordinance, 2001.

Q.NO. 3(a) Autumn 2014 Zaman is working as the Chief Executive Officer in Yasir Limited (YL). Following are the details of
sale and purchase relating to his capital assets during the tax year 2014.
(a) Under an employee share scheme, 25,000 shares of YL were allotted to Zaman, on 1 December 2011 for Rs. 25 each.
According to the scheme, he was not allowed to sell/transfer the shares before completion of two years from the date of
transfer. The face value of each share is Rs. 10 per share. Fair market value of the shares was as follows:
Rs. 40 per share on 1 December 2011
Rs. 48 per share on 30 June 2012
Rs. 55 per share on 30 November 2013
Rs. 61 per share on 30 June 2014
Required: Compute the amount to be included in the taxable income of Zaman for the tax year 2014.

Q.NO. 3(b) Spring 2008 A company intends to launch an Employee Share Scheme for its employees and for the purpose of
educating its employees in this regard, the management wants to prepare a summary containing the taxability of the
following:
(i) Option granted to an employee.
(ii) Disposal of the option to acquire shares under the employee share scheme.
(iii) Shares issued to an employee under the option that are subject to restriction on transfer.
Explain the timing and valuation aspects in respect of the above, with reference to the ITO, 2001.
Q.NO. 1(a) Spring 2007 (a) Briefly explain the taxability or exemption of the following allowances or perquisites:
(i) Free passage provided by a transporter to its employees;
(ii) Leased motor vehicle provided to an employee, exclusively for his personal use. Running and maintenance cost and
drivers salary is also borne by the employer.
(iii) Medical allowance paid at10 percent of basic salary.
Q. NO. 7(a) Spring 2006 Mr. Ahmed is a senior executive of a company and has opted for an Employee Share Scheme,
announced by the company. As per the scheme, the shares are compulsorily retained in a Trust and time of free right to
transfer has not arrived. However, the shares have been issued and he enjoys all rights of ownership. During the retention
period, he has received dividends and bonus shares.
Comment on the chargeability of income tax on dividends and bonus shares received by him.
Q.NO.8 Autumn 2005 A nationalized bank after privatization has announced a Golden Hand Shake Scheme for its
employees under which lump sum payments are proposed to be made to employees who opt for the scheme.
Discuss the chargeability of above amounts in the hands of employees.
Q.9 April 1995 Indicate which of the following income is exempt whether fully or partly:
i. Casual receipts of non-recurring nature;
ii. Not chargeable to income from business, profession,
iii. Capital gains and salary

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iv. Salary income of a foreign diplomat


v. Balance payable to an employee from Provident Fund
vi. Special Allowance to meet certain expenses in the performance of official duties
vii. Sum paid to an employee for meeting gas, water and electricity charges
viii. Salary income of a working woman
x. Compensation on termination of employee's services
Autumn 1994 Q.9 Answer the following statements considering the keys given therein:
Amount received from an approved Gratuity Fund is exempt to the extent of:
a) Rs. 200,000
b) Rs. 75,000
c) Whole amount.
NOW SOLVE FOLLOWING NUMERICAL QUESTIONS OF MODULE C / AFC PAST PAPER RELATED TO THIS TOPIC

Q. NO. 1 AUTUMN 2013


Q. NO. 1 AUTUMN 2007
Q. NO. 2(B) AUTUMN 2006
Q. NO. 2 AUTUMN 2005
Q. NO. 2 SPRING 2004
Q. NO. 2 AUTUMN 2003
Q. NO. 7 SPRING 2003
Q. NO. 7(B) AUTUMN 2002
Q. NO. 7 AUTUMN 2001

110 Conceptual Approach to Taxes


Income From Property Chapter-08

Chapter

8 INCOME FROM PROPERTY

Topic covered
Section
(For CAF-6 and ICMAP students)
15 & 16 Property income, rent, & rent chargeable to tax
15A Deductions allowed against income from Property
68 Fair market value of rent
15 & 39 Examples of property not taxable under this head of income
Rates of income tax on property income as per 1st schedule
16 Treatment of advances
66 Liability in case of co-owners
11, 50, 51 & 101 Geographical source of property income & their taxability
Property income no taxable / entitled to tax credit
MCQs with solutions
ICMAP & CA Mod C past papers theoretical questions

For CAF-6 and ICMAP Students


1. Income from property [u/s 15]
The rent received or receivable by a person for a tax year, other than rent exempt from tax shall be chargeable to
tax in that year under the head income from property. It means it shall be chargeable to tax on accrual basis.
Property or rental income from the lease of immovable property in Pakistan shall be Pakistan source income.
2. Rent [U/s 15(2)]
Rent means any amount received or receivable (inclusive of forfeited deposit for sale of land or building) by an
owner of land or a building as consideration for the use or occupation of, or the right to use or occupy the land or
building.
Signing amount paid by the tenant is also taxable under the head property income for the owner as the same paid at
the time of entering into rent agreement that is not refundable to tenant.
Owner:
The term owner has never been defined in the Ordinance that means the intention of the legislature is to keep the
meaning of the term owner far larger than the registered owner.
The circular No 14 of 1959 dated 10-08-1959 throw the light on this situation:
A person may be the owner of the property without being the owner of the land on which the property is built. It is
wrong to think that if the land on which the property has been built belongs to one person but the building on it has
been constructed by another person, the person owning the land will automatically be the owner of building. Owner of
the building is the person who has financed the construction of the building and it is he who will be liable to tax in
respect of bonafide annual letting value that building.
Therefore, the owner of land and building may happen to be two persons. The owner of building will be the person
who financed the construction of the building.

Land or building: These terms are also not defined in the ordinance; however, considering the generic meaning,
we can say that it may include followings:
Land Open Plots, playgrounds, gardens, Buses stand, cattle sheds etc.
Building The building includes open air theatres, swimming pools, stadiums, residential houses, building
let out for office use, or for storage or for use of a factory, music halls, theatre hall, inns, lecture
halls and other public auditorium used for cinema and stage shows.

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Rent chargeable to tax includes:


(i) Actual rent received or receivable (including forfeited deposit) by a person or fair market rent whichever is
higher. ADD
(ii) 1/10TH of non adjustable advance (if any) [U/s 16(1)].
Fair market value (rent) [U/s 68]
Fair market value (rent) means the value of any property, rent, asset, service, benefit or perquisite at a particular time
shall ordinarily fetch on sale or supply in the open market. FMV shall be determined by CIR even where it is not
determinable for income tax purposes.
Example On the first day of July 2014, Mr. Kaleem rented out his house at a monthly rent of Rs.15,000 and also
received Rs.100,000 as advance not adjustable against rent. Compute rent chargeable to tax for the year.
Solution:
Rs.
Annual rent (15,000 x 12) (Higher of actual rent or FMR) 180,000
Add: 1/10th of advance not adjustable against rent (100,000/10) 10,000
Rent chargeable to tax 190,000
Example: On July 1st, 2015 Mr. Kaleem received Rs. 60,000 as advance from Mr. Faheem under a contract of sale
of his property for Rs. 600,000. After 2 months Mr Faheem failed to pay the remaining amount and advance of
Rs.60,000 was forfeited by Mr. Kaleem. Compute income of Mr Kaleem chargeable to tax under the head income
from property for the tax year 2016.
Solution:
Rs.
Advance deposit forfeited treated as property income 60,000
Rent Chargeable to Tax 60,000
Self Hiring of property: Where property owned by employee and after taking on rent from employee by employer
given the same for accommodation to employee [U/s 15(5)]
Where the employee is the owner of the property and FMV of accommodation has been included in the salary income
of the employee then actual rent shall be included under the head property income without comparing it with the FMV
of rented premises.
Example: Mr. Asif has received Rs. 30,000 as monthly basic salary from his employer. The accommodation facility
has also been provided by the employer. The accommodation is actually been in the ownership of the employee.
You are required to compute the income from salary and property income under the following situation.
Assuming that the actual rent of accommodation is Rs. 200,000 and FMV of the rented premises is Rs. 250,000.
Solution:
Income from salary Rs.
Annual salary income (Rs. 30,000 x 12 months) 360,000
Value of accommodation Higher of 45% of basic pay 162,000
and FMV of rented premises i.e. Rs. 250,000, hence 250,000
Taxable salary income 610,000
Income from Property
Actual rent (without comparing it with the FMV) 200,000
Total taxable income 810,000

3. Deductions in computing income chargeable under the head Income from Property [U/s 15A]
The following deductions or allowances shall be allowed in computing the income of a person chargeable to tax
under the head Income from Property for a tax year [U/s 15A (1)]:
(a) 1/5th repair allowance of rent chargeable to tax for the year, computed before any deduction allowed;
(b) any premium paid or payable in the year to insure the building against the risk of damage or destruction;
(c) any local rate, tax, charge, or cess in respect of the property or the rent from the property paid or payable by
the person to any local authority or government in the year, not being any tax payable under this Ordinance;
(d) any ground rent paid or payable in the year in respect of the property;
(e) any profit paid or payable in the year on any money borrowed including by way of mortgage, to acquire,
construct, renovate, extend, or reconstruct the property;

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(f) share in rent and share towards appreciation in the value of property (excluding the return of capital, if any)
from the property paid or payable to the House Building Finance Corporation or a scheduled bank under a
scheme of investment in property in the year under that scheme;
(g) where the property is subject to mortgage or other capital charge, the amount of profit or interest paid on such
mortgage or charge;
(h) any administration and collection charges (wholly and exclusively to earn rent chargeable to tax) paid or
payable in the year not exceeding 6% of the rent chargeable to tax computed before any deduction;
(i) any expenditure paid or payable in the tax year for legal services acquired to defend the persons title to the
property or any suit connected with the property in a Court; and
(j) Treatment of unpaid rent:
Where there are reasonable grounds for believing that any unpaid rent in respect of the property is
irrecoverable, an allowance equal to the unpaid rent where
(i) the tenancy was bona fide, the defaulting tenant has vacated the property or steps have been taken to
compel the tenant to vacate the property and the defaulting tenant is not in occupation of any other
property of the person;
(ii) the person has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid
rent or has reasonable grounds to believe that legal proceedings would be useless; and
(iii) the unpaid rent has been included in the income of the person chargeable to tax under income from
property for the tax year in which the rent was due and tax has been duly paid on such income.
Partly of fully recovery against already allowed unpaid rent [U/s 15A (2)]
Where any unpaid rent allowed above as a deduction is wholly or partly recovered, the amount recovered shall be
chargeable to tax in the tax year in which it is recovered.
Non payment of already allowed expenditure within three years [U/s 15A (3)]
Where a person has been allowed a deduction for any expenditure incurred in deriving rent chargeable to tax and the
person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of
the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under
income from property in the first tax year following the end of the three years.
Partial of full payment after disallowance of expenditure [U/s 15A (4)]
Where an unpaid liability is chargeable to tax as a result of the application of sub-section (3) and the person
subsequently pays the liability or a part of the liability, the person shall be allowed a deduction for the amount paid in
the tax year in which the payment is made.
Limitations on allowable expenditures [U/s 15A (5) & (6)]
Any expenditure allowed to a person under this section as a deduction shall not be allowed as a deduction in
computing the income of the person chargeable to tax under any other head of income. [U/s 15A (5)]
The provisions of section 21 shall apply in determining the deductions allowed to a person under this section in the
same manner as they apply in determining the deductions allowed in computing the income of a person chargeable to
tax under the head Income from Business. [U/s 15A (6)]
4. Examples of Income from Property not taxable under this head
(1) Lease income of a building that is let out together with plant and machinery e. g. a flour mill. [U/s 15(3) and
39(1)(f)]
(2) Rent from the sub lease (by tenant) of land or a building. [U/s 39(1)(e)]
Explanation: Any amount received or receivable as consideration for the use or occupation, or right to use or
occupy, of any land or building not owned by the taxpayer falls under the head income from Other Sources.
(3) Provisions of amenities, utilities or any other service connected with the renting of the building. (Quote
practical case) [U/s 15(3A) and 39(1)(fa)]
(4) Ground rent of land (Quote practical case) [U/s [39(1)(d)]; and
(5) Amount received as consideration for the provision, use or exploitation of property, including from the grant of
a right to explore for, or exploit natural resources. [U/s 39(1)(i)]
(6) Income from a building used as store house in the surrounding area of agri land. [U/s 41]
(7) 1/10th of excess from already deposited amount received by tenant on vacating the possession of a property.
[U/s 39(1)(k) & (2)]

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5. Treatment of utilities included in rent: [U/s 15(3A)]


Where any amount is included in rent received or receivable by any person for utilities or any other services
connected with the renting of the building, such amount shall be chargeable to tax under the head income from other
sources.
Example: Mr. Naeem received Rs. 20,000 as monthly rent from his tenant. As per rent agreement, Rs. 2,000 is
included in the amount of rent on account of electricity bill. Actual electricity bill paid by Mr. Naeem for the year is
Rs.8,000. Calculate his taxable income for the year.
Solution:
Income from Property
Property income (assumed after expenses) (20,000 - 2,000) x 12 216,000
Income from Other Sources
Amount received against electricity bills (Rs. 2,000 x 12) 24,000

Less: Expenses
Actual electricity bills paid 8,000
Taxable income from other sources 16,000
Total income covered under NTR 232,000

Example From the following information calculate the tax liability of Mr. Tayyab Zahid.
Annual rent 180,000
Property tax paid 20,000
Repair of property given on rent 50,000

Solution:

Mr. Tayyab Zahid


Computation of taxable income and tax liability:

Income from Property:


Annual rent 180,000

Less property tax paid (20,000)


1/5th fixed repair allowance (36,000)
124,000
Computation of tax liability:
Tax on property income:
(Tax @ 0% on Rs. 124,000) - -
6. Treatment of advances [u/s 16]:
(a) Adjustable advances:
Where the tenant paid advance which is adjustable against rent then no treatment is required while computing
the rent chargeable to tax because the same will automatically be included in the rent chargeable to tax.
(b) Non adjustable amounts (including pugree) received in relation to buildings: [U/s 16(1), (2) and (3)]
Amounts received from a tenant not adjustable against rent chargeable to tax under this section in the tax
year in which it was received and the following nine tax years in equal proportion.
Where the above amount received by the owner refunded to the tenant on termination of the tenancy before
the expiry of ten years, no portion of the amount shall be allocated in the tax year in which it is refunded or
to any subsequent tax year except provided as under.
Where the property is vacated and the owner let out the building or part to the succeeding tenant and
receives any amount not adjustable against rent from the succeeding tenant, the succeeding amount as
reduced by the earlier amount already charged to tax shall be treated as rent chargeable to tax in 10 years
in equal proportions. However, where the property is vacated by the earlier tenant after the expiry of 10 years
then succeeding amount shall not be reduced by the earlier amount already charged to tax and whole
amount received from succeeding tenant shall be charged to tax in 10 years in equal proportion.
Example: Mr. Sarfraz let out his house at a rent of Rs.10,000 p.m. He received a deposit of Rs.200,000 not
adjustable against rent, out of which he refunded Rs.100,000 to previous tenant, who vacated the house after 3
years tenancy. Calculate rent chargeable to tax

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Solution: Rs.
Calculation of rent chargeable to tax:
Rent receivable (10,000 x 12) 120,000
Not adjustable ( 200,000 amount already charged to tax [Rs.100,000 x 3 / 10)] /10 17,000
Rent chargeable to tax 137,000

Important note: Practically when the tenant paid amount which is adjustable against rent then there is no treatment
required while computing the rent income because the same shall be automatically (transferred by an adjusting
accounting entry) to rent chargeable to tax on expiry of the period for which the adjustable advance was received.
7. Liability in case of co-owners [U/s 66]
In case of co-ownership in property and the share of each co-owner is determinable then share received by each co-
owner from property shall be included in his total income but this principle will not apply to business income i.e.
business of renting out of land or building.
Signing amount from the tenant is taxable under the head "income from property". Signing means the amount paid by
the tenant to the owner to enter in the tenancy agreement which is neither refundable nor it can be termed as deposit.
Example Mr. A and Mr. B are co-owners of a property. Their share in the property is equal. They received net income
from property of Rs. 400,000. Calculate the tax liability of both co-owners.
Solution: Mr. A Mr. B
Income from property:
Share of Mr. A (400,000 x 50% assumed after expenses) 200,000
Share of Mr. B (400,000 x 50% assumed after expenses) 200,000
200,000 200,000
Computation of Tax liability:
Tax payable by Mr. A and Mr. B:
Tax on Rs. 200,000 @ 0% - -
i.e. 0% upto Rs. 400,000
Example: Mr. X and Mr. Y are partners in XY Associates. Principal business of XY Associates is running a hotel
including renting out of rooms. Net income after deductions received (including room rents) during the tax year was
Rs. 500,000. Calculate the tax liability of firm and each partner assuming that share of each partner in profits of the
firm is equal. Mr. X and Mr. Y has no other source of income.
Solution:
In this case income is chargeable to tax under the head Income from business not under the head income from
property.
(Rupees)

Income of the AOP 500,000

Tax liability [7% x (500,000 400,000)] 7,000


As partners have no other source of income hence nothing shall be included in the income of partners for rate
purpose, hence, no tax is payable by the partners. Tax liability of the firm is Rs. 7,000.

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8. Pakistan source & Foreign source property income


Geographical source of property
Received by Taxability
income
Pakistan source property income
[Section 101]: Taxable [Section 11(5) and (6)]
Resident / Non-resident Term and conditions of double
If it is derive from the lease of person taxation treaty agreements shall also
immovable property in Pakistan be considered for non residents
including a right to explore for, or having Pakistan source income.
exploit, natural resources in Pakistan.
a. Resident person Taxable [Section 11(6)]

[Section 50]
b. Short term resident
An individual shall be exempt in respect
of his foreign-source income which is not
[For all foreign source brought / received in Pakistan if he is
income] resident only by reason of his
employment and he is present in
Foreign source property income Pakistan for not exceeding 3 years.
Property income other than above
c. Returning expatriate [Section 51]

[Citizen of Pakistan If an individual citizen of Pakistan


coming back in Pakistan] (returning expatriate) is resident in the
current tax year but was non-resident in
[For all foreign source the 4 preceding tax years, his foreign-
income] source income shall be exempt in current
tax year and in the following tax year.
Non-resident individual Not taxable [Section 11(6)]

9. Property income not taxable / entitled to tax credit:


(1) Property used by owner for his own business or personal use are not taxable;
(2) Property owned by a Trust, welfare institution or and NPO etc. are now entitled to tax credit under section
100C of the Income Tax Ordinance, 2001 on fulfilment of specified conditions.

116 Conceptual Approach to Taxes


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MULTIPLE CHOICE QUESTIONS


Q.1 _______________ is taken as rent chargeable to tax.
(a) Actual rent
(b) Fair market rent
(c) Higher of FMR and actual rent plus 1/10th of non-adjustable advance, if any
(d) Lower of FMR and actual rent
Q.2 ____________ part of advance not adjustable against rent is charged to tax every year.
(a) 10%
(b) 5%
(c) 12%
(d) 50%
Q.3 Advances adjustable against rent_____________ the future rent chargeable to tax.
(a) Increase
(b) Decrease
(c) has no effect
Q.4 The amount received by employee to vacate the possession less amount for taking the possession is charged to tax
under__________ in ten equal proportions in the succeeding 10 years.
(a) Income from other sources
(b) Property income.
(c) Business income
(d) none of these
Q.5 The income of the persons having definite share in a joint property shall be taxed_________.
(a) As association of person
(b) the respective share in the hands of the members
(c) none of the above
Q.6 Where the rent includes charges for utilities, then __________should be charged to tax under income from property.
(a) Whole of the rent
(b) Rent less amount for utilities
(c) Rent less expenditure for utilities.
(d) (b) or (c)
Q.7 The property income is taxable __________
(a) Under FTR
(b) Under NTR
(c) SBI under FTR
(d) None of above
Q.8 An individual will not pay tax if his income under the head property is_____________.
(a) Zero
(b) Rs.400,000
(c) Rs.100,000
(d) Rs.150,000
(e) None of these
Q.9 Income tax is charged @ __________ of rent chargeable to tax till Rs. 400,000 received by a Company (other than a
small company).

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Income From Property Chapter-08

(a) 0%
(b) 5%
(c) 7%
(d) 33%
(e) none of the above
Q.10 Deduction for__________is allowed while computing income under the head property.
(a) 1/5th repair allowance
(b) Insurance premium for property damage
(c) Property tax for property
(d) All of the above
Q.11 If tax at source has been deducted or not from rent received even then the rent received shall taxable
under_________ for a company.
(a) FTR
(b) NTR
(c) Separate block of income
(d) None of above
Q.12 ____________of the forfeited deposit against sale of property is included in the rent chargeable to tax.
(a) 25%
(b) 50%
(c) 75%
(d) 100%
Q.13 The rent of the building let out together with the plant and machinery installed therein is taxable under ____________.
(a) Property income
(b) Business income
(c) Income from other sources
Q.14 Legal charges paid by the owner of property are allowed as deduction against property income under____________.
(a) NTR
(b) FTR
(c) Not allowed
(d) all of these
Q.15 In case where the property is hired by the employee and rent is payable by the employer then _________ shall be
included in the salary income of the employee.
(a) Actual rent
(b) Fair market value of rent
(c) none of these
Q.16 Where the employee or his / her spouse is the owner of the building and that building has been provided by the
employer against the entitlement of the rent free accommodation then it has ________________.
(a) One effect
(b) two effects
(c) no effect
Q.17 Obligation of the owner paid by the tenant included in the property income of the ___________ in the respective tax
year, where the same is as per terms of rent deed.
(a) Owner of the property
(b) Tenant
(c) None of these

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Q.18 Property income received by subletting of property by the tenant is taxable under______________.
(a) Property income
(b) Income from other sources
(c) FTR
Q.19 If portion of the rent and utilities cannot be segregated from each other then expenses incurred for provision of utilities
shall
(a) Be deducted from rent
(b) not be deducted from rent
Q.20 Where the property income of a small company is more than Rs.1,000,000 then rate of tax is__________.
(a) 35%
(b) 25%
(c) 33%
Q.21 The amount received for utilities is taxable under the head _________________, only if separable.
(a) Income from property
(b) Income from other sources
(c) Income from business
Q.22 The repair charges and insurance premium paid shall be____________________ against rent chargeable to tax.
(a) allowed as deduction
(b) not allowed
(c) 1/10th is allowed
(d) none of the above
Q.23 The amount received for utilities is taxable under the head income from __________.
(a) salary
(b) property
(c) other sources
(d) business
th
Q.24 1/10 of any amount of advance received by the owner as advance ________ against rent is included in rent
chargeable to tax.
(a) adjustable
(b) not adjustable
(c) payable
(d) receivable
Q.25 Security received as an advance is ________ against rent.
(a) adjustable
(b) not adjustable
(c) payable
(d) receivable
Q.26 Amount received by tenant for vacating the possession, less amount already paid is chargeable to tax under the head
Income from ____________.
(a) salary
(b) property
(c) other sources
(d) business

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Q.27 If the employee owned property after renting out to employer has been given to the employee for accommodation
then in such case the actual rent shall be taxable in the hands of employee without comparing it with the ________.
(a) FMV
(b) market value
(c) cost of asset
(d) none of the above
Q.28 Rent chargeable to tax includes ______________.
(a) amount forfeited under an agreement for sale of property
(b) accommodation allowance received from employer
(c) ground rent
(d) none of above
Q.29 Rent ________ is taxable against property income.
(a) received
(b) receivable
(c) payable
(d) both a and b
Q.30 Ground rent is chargeable to tax under the head income from _________.
(a) other sources
(b) salary
(c) property
(d) business
Q.31 Amount received from vacating possession is charged to tax in ten years in _______ proportion.
(a) equal
(b) unequal
(c) none of above
Q.32 Share of each person is taxable as ___ in case of property in co ownership.
(a) FTR
(b) NTR
(c) SBI under NTR
(d) all of above
Q.33 Rent chargeable to tax is _________ actual rent or FMR plus 1/10th of non adjustable advance.
(a) equal to
(b) higher of
(c) lower of
(d) none of above
Q.34 Any forfeited deposit received under a contract of sale of property by the owner of such property is taxable under the
head income from _______.
(a) property
(b) other sources
(c) salary
(d) business
Q.35 Income from any rented agricultural building derived will be treated as income from ______.
(a) property
(b) other sources
(c) salary
(d) none of above

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Income From Property Chapter-08

ANSWERS
1 (c) 2 (a) 3 (c) 4 (a) 5 (b)
6 (d) 7 (b) 8 (b) 9 (d) 10 (d)
11 (b) 12 (d) 13 (c) 14 (a) 15 (c)
16 (b) 17 (a) 18 (b) 19 (a) 20 (b)
21 (b) 22 (a) 23 (c) 24 (b) 25 (b)
26 (c) 27 (a) 28 (a) 29 (d) 30 (a)
31 (a) 32 (b) 33 (b) 34 (a) 35 (d)

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Income From Property Chapter-08

ICMAP PAST PAPERS THEORECTICAL QUESTIONS


Q.2 (c) April 2012 Answer the following as per Section 16 of the Income Tax Ordinance, 2001:
(i) Mr. Abubakar rented out his flat to Mr. Munnaf. At the time of rent agreement Mr. Abu bakar received an amount
from the tenant, which is not adjustable against monthly rent. How this amount shall be treated?
(ii) If on termination of the tenancy, the above mentioned amount is refunded to the tenant before expiry of ten years and
the house is not let out to any other person, how this situation shall be treated?
(iii) Where the circumstances as mentioned in (ii) above occur and the property is let out to another person (succeeding
tenant) and from the succeeding tenant an amount is received which is not adjustable against rent, how the refund of
the deposit of old tenant and the receipt of the new deposit shall be treated?
Q.NO. 2 (c) (ii) Summer 2011 List down the conditions in respect of a person not liable to pay tax on "Income from
property".

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Income From Property Chapter-08

CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q.NO.4 (a) Spring 2015
(i) Explain the term Rent in context of Income from property.
(ii) Specify the head of income under which the following amounts would be chargeable to tax:
rent from sub lease of a building.
amount included in rent for the provision of amenities, utilities and any other service connected with
renting of the building.

Q. No. 4 (b) Spring 2012 Yaqoot and Loha are joint owners of a bungalow which has been rented out for Rs. 70,000 per
month.
Required: Discuss the taxability of Yaqoot and Loha in respect of above income, in the light of Income Tax Ordinance, 2001.
Q.NO. 4(a) and (b) Spring 2009 Mr. Bukhari is a resident person and owns a property abroad. During the year, he received
rent amounting to Rs. 3 million from that property. The tax on rental income has been duly paid abroad and there is no tax
treaty between Pakistan and the country in which the property is situated.
(a) Explain the tax treatment of rental income received by Mr. Bukhari in Pakistan.
(b) Discuss the provisions of the Income tax Ordinance, 2001 regarding non-adjustable amount received from a tenant
by the owner of a building.
Q.NO. 1(a) Autumn 2006 Describe the term rent in the context of income from property.
(b) Autumn 2006 Through Finance Act, 2006 income from property has been subjected to final tax regime. However, the
provisions relating to taxability of income from property shall not apply to taxpayers who meet certain conditions. State these
conditions.
Q.NO. 1(c) Autumn 2006 Specify under which head of income, following amounts of rent would be chargeable to tax:
(i) Rent in respect of lease of a building together with plant and machinery.
(ii) Amount included in the rent of a building for the provision of amenities, utilities or any other service connected with
the renting of such building.
Q.3 Autumn 2002
(a) What is chargeable to tax under the head income from house property?
(b) Elaborate the terms house property and annual value.
(c) What is the rationale for allowing vacancy allowance?
(d) What are the rules prescribed for the allow-ability of unrealized rent?

NOW SOLVE FOLLOWING NUMERICAL QUESTIONS OF MODULE C / AFC PAST PAPER RELATED TO THIS TOPIC

Q. NO. 4(B) SPRING 2015


Q. NO. 4 SPRING 2014
Q. NO. 5 SPRING 2003
Q. NO. 4 AUTUMN 2002

Conceptual Approach to Taxes 123


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124 Conceptual Approach to Taxes


Income From Business Chapter-09

Chapter

9 INCOME FROM BUSINESS

Topic covered
Section Rule (Part - I for CAF-6 and ICMAP students)
Part - I
2(9) & 18 Business & income from business
18 Profit on debt, lease amounts, dividend income from mutual funds
19 Speculation business
20 Deductions in computing income from business
10 Entertainment expenditure
11 Agriculture produce used as raw materials
26 Scientific research expenditure
27 Employee training facilities
28 Profit on debt, financial cost & lease payments
Special purpose vehicle
29 Bad debts
21 Deductions not allowed
Deductible allowance
60 Zakat
60A Workers welfare fund
60B Workers participation fund
11, 50, 51 & 101 Geographical source of business income & their taxability
(Part - II for CA Mod F and ICMAP students)
29A Provisions regarding consumers loan
30 Profit on non performing debts of a banking company
31 Transfer to Participatory reserve
Exemptions
Practice questions with solutions
MCQs with solutions
ICMAP & CA Mod C past papers theoretical questions

PART I (For CAF-6 and ICMAP students)

1. Business [U/s 2(9)]


The term "business" includes any trade, commerce, manufacture, profession, vocation or adventure or concern in
such nature but does not include an employment.
2. Incomes from business [U/s 18(1), (2), (3) and (4)]
The following incomes of a person (other than exempt income), shall be chargeable to tax as "Income from
Business"-
PARTICULARS
(a) the profits and gains of any business carried on at any time in the year;
(b) Income derived from the members by any trade, professional or similar association from the sale of goods or rendering
of services;
(c) any income from the hire or lease of tangible movable property;

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Income From Business Chapter-09

(d) the fair market value of any benefit or perquisite derived by a person due to any past, present, or prospective
business relationship; and
Explanation: The word benefit includes any benefit derived by way of waiver of profit on debt or the debt itself under
the State Bank of Pakistan, Banking Policy Department, Circular No.29 of 2002 or in any other scheme issued by
the State Bank of Pakistan.
(e) any management fee derived by a management company.
Profit on debt [U/s 18(2)]
Where the business of a person is to earn such profit then such profit shall be taxed under the head business and not
under the head "Income from Other Sources".
Lease amount [U/s 18(3)]
Where a lessor being as a scheduled bank or an investment bank or a development finance institution or a
modaraba or a leasing company has leased out any asset (in the ownership of lessor or not) to a lessee then
such amount received in connection to lease arrangement shall be treated as business income of the lessor.
Dividend income from Mutual Funds [U/s 18(3)]
Any amount received by a banking company or a non-banking finance company from distribution by a mutual
fund or a Private Equity and Venture Capital Fund out of its income from profit on debt shall be treated as business
income and not as income from other sources.
3. Speculation business [U/s 19]
Speculation Business is considered separate from Non Speculation Business. The profits and gains arising from the
speculation business for a tax year shall be included in the persons income chargeable to tax under the head
"income from business". However u/s 58 the loss arising from speculation business carried on by the person
shall be set off only against the income of the person from any other speculation business of the person
chargeable to tax for that year, hence the same is treated as separate and distinct from any other business carried on
by the person.
"Speculation business" means any business in which a contract for the purchase and sale of any commodity
(including stocks and shares) is made otherwise than by the actual delivery or transfer of the commodity but does
not include contracts to guard against future loss in price of goods manufactured for sale or actual delivery,
holding of stocks and shares or contract to guard against loss that may arise due to forward market or stock
exchange related to jobbing and arbitrage are not included in speculation business.
4. Deductions in computing income chargeable under the head income from business [U/s 20]
4.1. Expenditure incurred wholly and exclusively for business [U/s 20(1)]
A person shall be allowed deduction in respect of expenditures incurred wholly and exclusively for business that
are covered under the main profit and loss heads i.e. cost of sales, administrative and selling expenses.
4.2 Use of animals for business [U/s 20(1A)]
Where animals which have been used for the purposes of business or profession (other than as stock in trade) and
have died or become permanently useless, the difference between the actual cost of the animals and the
amount, if any, realized in respect of the carcasses of animals.
4.3 Special provisions regarding normal depreciation, initial allowance and amortization of intangible assets [U/s
20(2)]
Where the expenditure is incurred in acquiring a depreciable asset or an intangible with a useful life of more than one
year or is pre-commencement expenditure, the person must depreciate or amortize the expenditure in accordance
with sections 22, 23, 24 and 25.
4.4 Legal, financial and administrative expenditure on amalgamation [U/s 20(3)]
Expenditure incurred by an amalgamated company on legal and financial advisory services and other administrative
cost related to amalgamation shall be allowed as expenditure.
Example: Following information is related to Mr. Kaleem who carries on the business of Dairy farm.
Rs.
Sale of milk and other dairy products 740,000
Amount realized on sale of died cow 2,000
Cost of died cow 40,000
Other expenses 350,000
Note: 20% of other expenses are not related to the business.
Required: Compute taxable income of the taxpayer by taking tax depreciation at Rs.15,000.

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Solution:
Mr Kaleem
Computation of taxable income: Rs. Rs.
Income from business:
Sales 740,000
Less: expenses
Cost of died cow 40,000
Less sale value of died cow (2,000)
38,000
Other expenses (350,000 x 80%) 280,000
Depreciation 15,000

333,000
Profit before tax 407,000
Note: 20% of the other expenses were not for the purpose of business, therefore, these expenses were not allowed.
Other deduction available in the Income tax Ordinance and Income Tax Rules
5. Entertainment expenditure [Rule 10]
Entertainment expenditure (including meals, refreshments and reasonable leisure facilities as per norms and customs
of the business in Pakistan) related directly to the business on satisfaction of the following conditions:
expenditure incurred outside Pakistan on entertainment or where such expenditure related to head office
expenditure;
expenditure incurred in Pakistan on entertainment of foreign customers and suppliers, customers and clients
at business premises;
expenditure incurred on entertainment at a meeting of shareholders, agents, directors or employees; or
expenditure incurred on entertainment at the opening of branches.
6. Agriculture produce used as raw materials [Rule 11]
This rule applies to a person who is a cultivator or receiver of agricultural produce as rent in kind and who
uses agricultural produce raised or received as raw material in a business the income from which is chargeable
to tax under the head "Income from Business" as under:
Taxable income = Total income LESS market value of the agricultural produce used in business as raw material
Only the market value of the agricultural produce is deducted and no further deduction shall be made in respect
of the any expenditure incurred by the taxpayer as cultivator or as a receiver of rent in kind. The market value shall
be computed as under:
6.1 Where the produce is ordinarily sold in the market
Where the product is ordinarily sold in the market either in the raw state or after application of any process required to
make to product fit to be taken to the market then the market value shall be determined on the date of use.
6.2 Where the produce is not ordinarily sold in the market
The aggregate of expenses on cultivation and the land revenue or rent paid for the area in which it is grown.
Example
Mr. B owns a floor mill. He also owned agricultural land from which wheat is being grown and used in the floor mill as
raw material. Profit and loss account of Mr. B for the year ended June 30, 2016 is as under
Rupees
Sale of floor 1,000,000
Less expenditure:
Wheat cultivation cost 600,000
Wheat conversion cost 100,000
Other expenses 50,000
250,000
Important note: Wheat used in floor mill, if purchased from open market, would have cost to Mr. B Rs. 725,000.

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Income From Business Chapter-09

Required:
(a) Taxable income of Mr. B, if wheat is ordinarily sold in the market.
(b) Taxable income of Mr. B, if wheat is not ordinarily sold in the market.
Solution:
(a) Taxable income of Mr. B, if wheat is ordinarily sold in the market in raw state.

Rupees
Sale of floor 1,000,000
Less expenditure:
Market value of wheat 725,000
Wheat conversion cost for floor 100,000
Other expenses 50,000
Taxable income 125,000

(b) Taxable income of Mr. B, if wheat is not ordinarily sold in the market in raw state.

Rupees
Sale of floor 1,000,000
Less expenditure:
Wheat cultivation cost (including land rent) 600,000
Wheat conversion cost 100,000
Other expenses 50,000
Taxable income 250,000

7. Scientific research Expenditure [U/s 26]


A person shall be allowed deduction on account of scientific research expenditures incurred in Pakistan wholly and
exclusively for business is admissible.
Scientific research means any activity undertaken in Pakistan in the fields of natural or applied science for the
development of human knowledge.
"Scientific research expenditure" means any expenditure incurred by a person on scientific research within
Pakistan for the purposes of developing the persons business, including any contribution to a scientific research
institution to undertake scientific research for the purposes of persons business, other than expenditure incurred:
in the acquisition of any depreciable asset or intangible;
in the acquisition of immovable property or
for the purposes of ascertaining the existence, location, extent or quality for a natural deposit.
8. Employee training and facilities [U/s 27]
A person shall be allowed a deduction for any expenditure (other than capital expenditure) incurred in a tax year in
respect of-
educational institution or hospital in Pakistan established for the benefit of employees and their
dependents;
institute in Pakistan established for the training of industrial workers recognized, aided, or run by the
Federal Government or a Provincial Government or a Local Government; or
training of any person as a citizen of Pakistan in connection with a scheme approved by the Board.
9. Profit on debt, financial costs and lease payments [U/s 28(1)]
The following shall be allowed as admissible expenses under the head business income:
1. PROFIT ON DEBT:
(a) profit on debt in the tax year to the extent that the proceeds or benefit of the debt used for the business
purposes;

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(b) any amount incurred in the tax year to a modaraba or a participation term certificate holder for funds
borrowed and used for the business purposes;
(c) any amount incurred by a scheduled bank in the tax year on profit or loss sharing account or a deposit with the
bank as a distribution of profits;
(d) any amount incurred by HBFC, NDLC, SME bank in the tax year on profit and loss basis the share in profits
to the SBP on its investment in property, leasing operations and credit line respectively.
(e) any amount incurred by a person in the tax year on profit and loss basis to a banking company under a scheme
of musharika;
(f) any amount incurred by a person in the tax year to a certificate holder under a musharika as share in the profits
of the musharika; or
2. LEASE RENT:

Lease rental expenses for the year to a scheduled bank, financial institution, an approved modaraba, an approved
leasing company or a Special Purpose Vehicle on behalf of the Originator for use of an asset for business purposes;
3. FINANCIAL COST:
The financial cost of the securitization of receivables incurred by an Originator in the tax year from a Special
Purpose Vehicle being the difference between the amount received by the Originator and the amount of receivable
securitized from a Special Purpose Vehicle.
Where assets are transferred by an Originator on securitisation to a Special Purpose Vehicle, it shall be treated as a
financing transaction irrespective of the method of accounting adopted by the Originator.

Example: Following information is related to Mr Bilal who carries on the business of trading clothes.
(a) Sales Rs. 740,000,
(b) Cost of sales Rs. 550,000,
(c) Administrative expenses Rs. 110,000
Notes:
Administrative and selling expenses include:
(a) Accounting depreciation Rs. 10,000,
(b) Interest on loan (for business purpose) Rs. 20,000,
(c) Interest on loan (for personal purpose) Rs. 5,000
Required: Compute taxable income of the taxpayer if the tax depreciation Rs.15,000.
Solution:
Mr Bilal
Computation of taxable income: Rs.
Income from business:
Sales 740,000
Cost of sales (550,000)
Gross profit 190,000
Less: Administrative expenses (110,000)
Add: accounting depreciation 10,000
Add: Interest on loan for personal use 5,000
Less: Tax depreciation (15,000)
Taxable income 80,000
Irrespective of the method of accounting adopted by the originator, where as a result of securitization any assets are
transferred by him to a SPV it shall be treated as a financing transaction. [S 28(2)]
10. Bad debts [U/s 29(1) and (2)]
A person shall be allowed a deduction for bad debts, in a tax year if the bad debts which were previously included
in incomes or in respect of money lent by a financial institution have now been written off and reasonable
grounds exist that they cannot be recovered.
The amount of allowed deduction for a tax year shall not exceed the amount of the debt written off in the accounts of
the person in the tax year.

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Income From Business Chapter-09

Recovery of bad debts in subsequent period or periods [U/s 29(3)]


If there is any recovery after allowing bad debts out of the allowed portion of bad debts and the recovery has
been accounted for in the books of account for accounting purposes, then the same shall be ignored for
computation of taxable business income in the tax year in which the recovery shall be made.
If there is any recovery after allowing bad debts out of the disallowed portion of bad debts and the recovery
has been accounted for in the books of account for accounting purposes, then the same shall be reversed for
computation of taxable business income in the tax year in which the recovery shall be made.
11. Deductions not allowed [U/s 21]
No deduction shall be allowed in computing the income of a person under the head business income in respect of the
following expenses.
(a) any cess (charge on the profit), rate or tax paid or payable in Pakistan or a foreign country that is levied
or assessed as percentage on the business profits (exceptions separately given);
(b) any amount of tax deducted from an amount derived by the person;
(c) Payments (including for the year, last year or advance) against salary, rent, brokerage or commission, profit
on debt, payment to non-resident, payment for services or fee paid where the same are either without
deduction of tax or tax deducted but not deposited;
(d) Entertainment expenditure shall not be allowed unless related directly to the business and fulfilling the
following limits specified under Rule 10:
Expenditure incurred outside Pakistan on entertainment or where such expenditure related to head
office expenditure;
Expenditure incurred in Pakistan on entertainment of foreign customers and suppliers, customers and
clients at business premises;
Expenditure incurred on entertainment at a meeting of shareholders, agents, directors or
employees; or
Expenditure incurred on entertainment at the opening of branches.
Entertainment expenditure includes meals, refreshments and reasonable leisure facilities as per
norms and customs of the business in Pakistan.
(e) any contribution made by the person to a fund that is not a recognized provident fund, approved pension fund,
approved superannuation fund, or approved gratuity fund;
(f) any contribution made by the person to any provident or other fund established for the benefit of employees
without deduction of tax u/s 149 from any payments;
(g) any fine or penalty paid or payable for the violation of any law, rule or regulation (exceptions given separately);
(h) any personal or capital nature expenditures;
(i) any amount carried to a reserve fund or capitalised in any way;
(j) any payment by an AOP of profit on debt, brokerage, commission, salary or other remuneration to its members
(separate important note given);
(k) any expenditure paid or payable under a single account head in aggregate exceeds fifty thousand rupees,
made other than by a crossed cheque or by crossed bank draft or crossed pay order or any other crossed
banking instrument showing transfer of amount from the business bank account of the taxpayer:
The online transfer and payments through credit cards shall be treated as through banking channel if the
same are verifiable from the business account of the payer to the business account of payee:
Provided further that this clause shall not apply in the case of-
Expenditures not exceeding Rs. 10,000;
expenditures of utility bills, freight charges, travel fare, postage and payment of taxes, duties, fee, fines
or any other statutory obligation;
(l) any salary paid or payable exceeding Rs.15,000 per month other than by a crossed cheque or direct transfer
of funds to the employee's bank account;
Example: Profit before tax of Sigma (Pvt) Ltd is Rs. 1,000,000. Following items have been included in the
computation of profit.
(a) Income tax paid (Tax deducted at source by others) Rs. 40,000
(b) Taxable salaries paid to employees without deduction of tax Rs. 425,000
(c) Donation to unapproved institution Rs. 20,000
Required: Compute taxable profit according to the provisions of Income Tax Ordinance, 2001.

130 Conceptual Approach to Taxes


Income From Business Chapter-09

Solution:
Taxable profit: Rs.
Profit before tax 1,000,000
Add: deductions not admissible:
Tax paid or deducted at source 40,000
Payment of salaries without deduction of tax 425,000
Donation to unapproved institution 20,000 485,000
Taxable profit 1,485,000
Example: The following payments of expenses made otherwise through crossed Cheque.
Nature of payment Rs.
Rent of one month paid to an AOP for Karachi rented office 50,000
Air tickets purchased 100,000
Payment of monthly wages of Mr. B 14,000
Bill paid for repair of car 22,000
Electricity bill paid 115,000
Telephone bill paid 48,000
Paid professional tax 30,000
Paid audit fee 60,000
Paid tax consultant 19,000
Compute the addition u/s 21(1) of the Income Tax Ordinance, 2001
Solution:
Calculation of addition u/s 21(1) Rs.

Rent paid to an AOP for Karachi rented office (N-5) 50,000


Air tickets purchased (N-1) -
Payment of wages of Mr. B (N-3) -
Bill paid for repair of car (N-2) -
Electricity bill paid (N-1) -
Telephone bill paid (N-1) -
Paid professional tax (N-1) -
Paid audit fee (N-4) 60,000
Paid tax consultant (N-2) -
Total inadmissible expenses 110,000

N-1 Condition of payment through cross cheques is not applicable on the said transactions.
N-2 Although single transaction exceeding Rs.10,000 but as the total under single head of account is not more
than Rs.50,000 therefore on the said transactions the provisions of section 21 are not applicable.
N-3 Wages less than Rs.15,000 per month are not required to be paid through banking channel.
N-4 These expenses are required to be paid through banking channel.
N-5 It has been assumed that other months payment against rent was made through banking channels.
Important notes on section 21
11.1 Tax, Charge or levy paid to the government [U/s 21(a)]
Although any cess (charge on the profit), rate or tax paid or payable in Pakistan or a foreign country that is
levied or assessed as percentage on the business profits is not admissible. However Workers Welfare Fund
and Workers Profit Participation Fund are payable on profit but the same are specifically allowed as deductible
allowances u/s 60A and 60B.
11.2 Penalty or Fine [U/s 21(g)]
Any fine or penalty for the violation of any law, rule or regulation is not admissible. However certain payments are
allowable as tax expenses which are not for the violation of any law, rule or regulation e.g.
1. Compensation for late repayment of loan instalment
2. Demurrage to custom authorities
3. Compensation / interest for breach of a contract in the ordinary course of business

Example: Profit before tax of Beta (Pvt.) Ltd. is Rs.1,000,000. Following items have been included in the
computation of profit.
(a) Income tax paid Rs. 40,000

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Income From Business Chapter-09

(b) WWF paid Rs. 25,000


(c) Penalty for late filing of sales tax returns Rs. 15,000
(d) Penalty for late repayment of loan instalment 2,000
Required: Compute taxable profit according to the provisions of Income Tax Ordinance, 2001.
Solution:
Taxable profit: Rs.
Profit before tax 1,000,000
Add: deductions not admissible:
Tax paid or deducted at source 40,000
Penalty for late filing of sales tax returns 15,000
55,000
Taxable profit 1,055,000
11.3 Certain Payments to a member by an Association of Persons [U/s 21(j)]
Profit on debt, brokerage, commission, salary or other remuneration by an AOP to its members is not admissible for
tax purposes.
However rent paid by a firm to partner for his residence is a part of salary expense of the firm and therefore not
admissible for tax purpose. However, if a partner's premises are used by the firm and rent is paid to the partner then
the same shall be treated as rent allowable tax expense and need not be added back in the income of the AOP.
Example on determination of share from AOP:
XYZ is an AOP with two partners Mr. Ajmal and Mr. Khan with ratio of sharing 40:60.
Rupees
Net profit as per accounts 1,200,000
Depreciation as per accounts 600,000
Salary to partner (Mr. Khan) 250,000
Brokerage to partner (Mr. Khan) 100,000
2,150,000
Less: Tax depreciation 900,000
Taxable Income 1,250,000
Income Tax [35,000 + 15% (1,250,000 750,000)] 110,000
Divisible Income 1,140,000
Share of profit from AOP shall be computed as under:

Partner Ajmal Partner Khan Total


Salary Nil 250,000 250,000
Brokerage Nil 100,000 100,000
Balance 316,000 474,000 790,000
316,000 824,000 1,140,000
Although share of profit from AOP (after tax) is exempt in the hands of individual members but the same shall be
included for rate purpose in other taxable income except income taxed under FTR / SBI. One should observe that
salary is included in the share of profit from AOP in the above calculation. In fact, if a member of an AOP receives
salary or other remuneration, interest, commission or brokerage from the same AOP it becomes part and
parcel of share of profit from AOP and not considered as a separate Income.
12. Deductible Allowances
The following allowances shall be deducted from total income for computation of taxable income for the tax year.
1. Zakat (u/s 60):
Where a person has paid any amount as Zakat (other than Zakat deducted on profit on debt) then he shall be
entitled to deduct this amount from his income chargeable to tax.
If the amount of Zakat is more than the income chargeable to tax then excess shall not be refunded, carried
forward or carried back.
2. Workers Welfare Fund (u/s 60A):
A person shall be entitled to a deductible allowance for the amount of any Workers Fund paid by the person in
tax year under Workers Welfare Fund Ordinance, 1971. WWF is chargeable and payable along-with income
tax return of a person.

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Income From Business Chapter-09

Section 4 of the said Act covers the following:


Every industrial establishment, the total income of which in any year of account commencing on or after the date
specified by the FG in the official Gazette in this behalf is not less than Rs. 500,000 shall pay to the fund in respect of
that year a sum equal to 2% of so much of its total income as is assessable under the Ordinance.
Every industrial establishment which is liable as above shall pay the amount due from it to the taxation Officer having
jurisdiction over the industrial establishment for purposes of the Ordinance.
The industrial establishment shall on or before the date prescribed for filing of returns of income or a statement
under the Ordinance, pay the amount due from it as above and furnish the proof of payment to the Taxation Officer or the
Commissioner as the case may be:
The term total income is defined as under in section 2(h) of the Act; and
(a) where return of income is required to be filed under the Ordinance, the profit before tax as per accounts or the
declared income as per the return of income, whichever is higher; and
(b) where return of Income is not required to be filed, the profit before tax as per accounts or 4% of the receipt as
per the statement filed u/s 115 of the Ordinance, whichever is higher.
Considering the above the salient features of the levy of WWF are as under:
WWF is chargeable on every Industrial undertaking whose taxable income exceeds the monetary threshold of
Rs. 500,000 and not on service sector taxpayers. An industrial undertaking is an undertaking which is engaged
in the manufacturing and subjection of goods either manually, electronically or through any other mode
WWF is equally chargeable on the incomes liable to tax under NTR and FTR.
Supreme Court of Pakistan has already held that the WWF is not chargeable on the exempt income.
WWF is not chargeable on the Government corporations and Institutions.
Rate of WWF is 2% of total income and u/s 60A of the Ordinance the same is an admissible deduction against
the total income of the person.
Circular No 1 of 2004 dated 3 January 2004 clarifies that the WWF payable expense is also admissible deduction
allowance in the cases where accrual based accounting is employed as regular method of accounting.
Example: Taxable income of Monika industries is Rs 800,000. Accounting profit of the company is Rs.625,000.
Compute the WWF on the taxable income of the company.
Rs.
Taxable income 800,000
WWF @ 2% 16,000
Taxable income 784,000
Example: Following information is related to Abbas Industries (Pvt) Ltd.
Sales 740,000
Cost of sales 550,000
Administrative expenses 110,000
Zakat 20,000
WWF 10,000
Notes:
1. Administrative and selling expenses include:
(a) Accounting depreciation 10,000
(b) Penalty for violation of law 2,500
2. Tax depreciation 15,000
Required: Compute taxable income of the taxpayer.
Solution:
Abbas Industries (Pvt) Ltd
Computation of taxable income: Rs.
Income from business:
Sales 740,000
Cost of sales (550,000)
Gross profit 190,000
Less: Administrative expenses (110,000)
Add: accounting depreciation 10,000

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Income From Business Chapter-09

Add: Penalty for violation of law 2,500


Less: Tax depreciation (15,000)
Total income 77,500
Less: Deductible allowance:
Zakat (20,000)
WWF (10,000)
Taxable income 47,500
3. Workers Participation Fund (u/s 60B):

A person shall be entitled to a deductible allowance for the amount of any Workers Participation Fund paid by the
person in tax year under Companies Profit (Workers Participation) Act, 1968.
In view of the above, any sum paid for Workers Profit Participation Fund is admissible deductible allowance. It is
important to place on record that under clause (4)(d) of the Schedule to the Companies Profit (Workers Participation)
Act, 1968, any amount of undistributed workers profit participation fund will be paid as Workers Welfare Fund to the
Tax Authorities.
Pakistan source & Foreign source Income from business

Geographical source of Income from business Received by Taxability


Pakistan source business income [Section 101]:
1. A permanent establishment (PE) of the non- Taxable [Section 11(5)
resident person in Pakistan; and (6)]
2. Sales in Pakistan of goods merchandise of the Term and conditions of
same or similar kind as sold by the person Resident / non-resident double taxation treaty
through a PE in Pakistan; individual agreements shall also be
3. Other business activities carried on in Pakistan of considered for non
the same or similar kind as those affected by the residents having Pakistan
non-resident through a PE in Pakistan; or source income.
4. Any business connection in Pakistan
a. Resident Individual Taxable [Section 11(6)]

[Section 50]
An individual shall be
exempt in respect of his
Foreign source business income:
b. Short term resident foreign-source income which
Income from business other than above is not brought / received in
[For all foreign source Pakistan if he is resident
income] only by reason of his
employment and he is
present in Pakistan for not
exceeding 3 years.
[Section 51]
c. Returning expatriate If an individual citizen of
Pakistan (returning
expatriate) is resident in the
[Citizen of Pakistan current tax year but was
coming back in non-resident in the 4
Pakistan] preceding tax years, his
foreign-source income shall
[For all foreign source
be exempt in current tax
income]
year and in the following tax
year.
Non-resident individual Not taxable [Section 11(6)]

134 Conceptual Approach to Taxes


Income From Business Chapter-09

PART II (For CA Mod F and ICMAP students)


13. Provision regarding consumer loans [U/s 29A]
A non-banking finance company or the HBFC shall be allowed a deduction, not exceeding 3% of the income for
the tax year, arising out of consumer loans for creation of a reserve to off-set bad debts arising out of such loans.
Where bad debt cannot be wholly set off against reserve, any amount of bad debt, exceeding the reserves shall be
carried forward for adjustment against the reserve for the following years.
"Consumer loan" means a loan of money or its equivalent made by a non-banking finance company or the HBFC to
a debtor (consumer) and the loan is entered primarily for personal, family or household purposes and includes
debts created by the use of a lender credit card or similar arrangement as well as insurance premium
financing.
14. Profit on non-performing debts of a banking company or development finance institution [U/s 30]
A banking company or development finance institution or Non-Banking Finance Company (NBFC) or
modaraba shall be allowed a deduction for any profit accruing on a non-performing debt where the profit is credited
to a suspense account in accordance with the Prudential Regulations for the above named category, issued by
the SBP or the SECP.
Any profit deducted as above that is subsequently recovered shall be included in the income of the company or
institution or NBFC or modaraba chargeable under the head "Income from Business" for the tax year in which it is
recovered.
15. Transfer to participatory reserve [U/s 31]
A company shall be allowed a deduction for a tax year for any amount transferred by the company in the year to a
participatory reserve created u/s 120 of the CO, 1984 in accordance with an agreement relating to participatory
redeemable capital entered into between the company and a banking company as defined in the Financial
Institutions (Recovery of finances), Ordinance, 2001.
The deduction allowed as above for a tax year shall be limited to 5% of the value of the company's participatory
redeemable capital.
No deduction shall be allowed as above if the amount of the tax exempted accumulation in the participatory reserve
exceeds 10% of the amount of the participatory redeemable capital.
Where any amount accumulated in the participatory reserve has been allowed as a deduction as above is applied
by the company towards any purpose other than payment of share of profit on the participatory redeemable
capital the amount so applied shall be included in the income from business of the company in the tax year in
which it is so applied.

Example: A company has received amount as Participatory redeemable capital Rs.10,000,000 in the tax year 2016.
You are required to compute the amount that should be allowed as expense against business income of the
Company u/s 31 under the following situations
A. If the amount transferred during the tax year 2016 to Participatory reserve is 5% of the amount received.
B. If the amount transferred to Participatory reserve is 3% of the amount received.
C. If the amount transferred to Participatory reserve is 8% of the amount received.
D. If the accumulated balance in Participatory reserve is 10%.
F. If the accumulated balance in Participatory reserve is 14%.
G. If the amount transferred during the tax year 2016 to Participatory reserve is 5% of the amount received
however the amount was used other than to redeem capital.

Solution: Under case A, B, C and D the company shall be allowed expense equal to 5% of Participatory reserve of
the respective years. However in case of E and F the company shall not be allowed any expense as it exceeds from
maximum limit of 10% and used for any purpose other than for redemption of redeemable capital.

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17. EXEMPTIONS FROM TOTAL INCOME [PART I OF SECOND SCHEDULE TO THE INCOME TAX ORDINANCE,
2001]

CLAUSE PARTICULARS OF EXEMPTION

9A Reduces tax to 2.5% in case of supply of locally produced motor cars

66 Income of certain charitable and other institutions


91 Income of Text Book Board
98 Income of Sports Boards (except Pakistan Cricket Board)
99 Income of Collective Investment or a REIT Scheme
99A Sale of immoveable property to Real Estate Investment Trusts
101 Profits of a Joint Venture Capital co. and Fund
107 Income of Subsidiary of Islamic Development Bank
107A Income derived by the Islamic development bank
117 Income from transport business in Azad Kashmir
126 Public Sector Universities
126A Income re: Gawadar services etc.
126B Profit and gains derived by coastal oil refinery at Khalifa point by IPIC for 20 years
126C Profits and gains derived by a taxpayer from an industrial undertaking set up in Larkano industrial estate
126D Profits and gains derived by a taxpayer from an industrial undertaking set up in Gawadar industrial estate
126E Profits and gains derived by corporate zone developers
126H Profits and gains derived by fruit processing, Malakand, Gilgit Baltistan and FATA
126I to 126K Profits and gains derived from industrial undertakings
131 Foreign income in respect of royalty, commission or fee etc.
132 Income of Private sector Power projects
132A Profits and gains derived by Bosicor oil Pakistan Limited
132B Coal mining project in Sindh
133 Income from export of computer software and IT services
136 Income of a special purpose vehicle for securitization of debts

REDUCTION IN TAX RATES [PART II OF SECOND SCHEDULE TO THE INCOME TAX ORDINANCE, 2001]

CLAUSE PARTICULARS OF EXEMPTION

2 Letting of petroleum pipelines


3 Services rendered outside Pakistan

REDUCTION IN TAX LIABILITY [PART III OF SECOND SCHEDULE TO THE ITO, 2001]

CLAUSE PARTICULARS OF EXEMPTION


The amount of tax payable, in a year in which the rupee is revalued or devalued, by a taxpayer
whose profits or gains are computed in accordance with the rules contained in the Fifth Schedule to the
2 Ordinance and who had entered with the Government into an agreement which provides for such reduction,
shall be reduced to the amount that would be payable in the absence of the revaluation or
devaluation of the rupee.
In respect of old and used automotive vehicles, tax under section 148 shall not exceed the amount specified
4 in Notification No. S.R.O. 577(I)/2005, dated the 6th June, 2005.

136 Conceptual Approach to Taxes


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PRACTICE QUESTIONS WITH SOLUTIONS


Q. NO. 1 Net loss for the tax year 2016 of an AOP (BS and Co.) as per accounts before tax is Rs.(1,000,000). You are
required to compute the taxable income of the AOP from following information:
Administrative expenses include the following:
1. Tax deducted on cash withdrawal Rs. 37,000. 2. Salary paid to partners Rs.150,000. 3. Interest on loan from partner
Rs. 20,000. 4. Provision for bad debts 10,000. 5. Charity to beggar Rs.37,000. 6. Donation in kind to approved institutions
worth Rs. 24,000 7. Depreciation as per accounts Rs.195,000 8. Property tax on personal property of current year Rs.
55,000. 9. Statutory depreciation is Rs. 237,000
Solution: BS and Co.
Computation of taxable income
For the tax year 2016
Rs.
Loss as per accounts before tax (1,000,000)
Less:
Tax deducted on cash withdrawal 37,000
Salary paid to partners 150,000
Interest on loan from partner 20,000
Provision for bad debts 10,000
Charity to beggar 37,000
Donation to approved institution 24,000
Depreciation as per accounts 195,000
Property tax on personal property 55,000
528,000
Add:
Tax depreciation 237,000
Loss as per tax (709,000 )
Note: Donation to approved institution is not admissible expense and the firm cannot claim tax credit as there is loss during
the year.
Q NO.2 Explain whether the following are admissible as business expenditure under the Income tax Ordinance, 2001:
(a) Repayment of principal amount of lease rentals of plant and machinery.
(b) Sales Tax paid on the purchase of raw material to be used in the production of exempt supply
(c) Dividend paid by company
(d) Provision in respect of doubtful debts
(e) Penalty for late filing of sales tax return
Solution:
(a) Repayment of principal amount of lease rentals is admissible.
(b) This is also admissible expense as it cannot be claimed as input tax by the business.
(c) This is not admissible expense.
(d) Provision in respect of doubtful debts is not admissible.
(e) Penalty for the violation of any law or rule is not admissible expense.

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MULTIPLE CHOICE QUESTIONS


Q.1 Any payment made on account of salary exceeding Rs.15,000 per month is not allowed as a deduction against
business income if made through
(a) cross cheque
(b) online transfer
(c) cash
(d) pay order
Q.2 Any donation to an approved institution is allowed as straight deduction against business income by
(a) Full amount
(b) Half amount
(c) Proportionate basis
(d) Amount calculated on average rate basis
Q.3 A deduction against business income is allowed for
(a) Provision for bad debts
(b) Actual bad debts
(c) Appropriation of profits
Q.4 Income tax is an
(a) Expense
(b) Provision against profits
(c) Appropriation of profits
Q.5 The expenditure or loss that was allowed as deduction if subsequently received is included in the income of the year
(a) In which it was allowed as expense
(b) In which it is received
(c) Following the year of receipt
(d) None of these
Q.6 A company is allowed a deduction on account of depreciation for
(a) Depreciable assets
(b) Intangibles
(c) Pre-commencement expenditures
(d) All of these
Q.7 Cash discount received is taxable under the head
(a) Income from Business
(b) Income from Capital Gains
(c) Income from other sources
(d) Not taxable
Q.8 Income from Business may be taxable under
(a) FTR
(b) NTR
(c) Separate block
(d) All of the above
(e) both (a) and (b)
Q.9 An income received by the lessor in connection with the lease is taxable under
(a) Income from property
(b) Income from Business
(c) Income from other sources
(d) None of these

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Q.10 Income from business comprises of


(a) Income from speculation business
(b) Income from non-speculation business
(c) Both a and b
(d) None of these
Q.11 A person is required to deduct tax at source, where applicable in respect of payments against
(a) Salary
(b) Rent
(c) Dividend
(d) All of these
(e) only (a) and (c)
Q.12 _______ allowed as deduction against business income
(a) Accounting depreciation
(b) Tax depreciation
(c) Both of these
(d) None of these
Q.13 Any payment made to the employees as _______ will be allowed as deduction to employer.
(a) Brokerage
(b) Commission
(c) Salary
(d) all of the above
Q.14 Single transaction not exceeding _____ are allowed as deduction against business income
(a) 5,000
(b) 1,000
(c) 10,000
(d) 20,000
Q.15 Income tax is allowed as deduction against business income in the year
(a) In which income is earned
(b) In the following year
(c) Not allowed
(d) None of these
Q.16 Apportionment of common expenditure is necessary when income is derived from _______ class of income
(a) One
(b) Two
(c) Three
(d) More than one
Q.17 If a liability in respect of an expense allowed as deduction is not paid within ______, it shall be treated as income in
the year on expiry of the said ____________.
(a) One year
(b) Two years
(c) Three years
(d) Four years
Q.18 In case the asset is not owned by the lessor, amount received in connection with the lease is taxable under
(a) Income from property
(b) Income from business
(c) Income from other sources

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(d) Capital gains


Q.19 The amount of deduction allowed on account of bad debts may be _______ to trade debtors
(a) Higher
(b) Less
(c) Equal
(d) Both b and c
Q.20 An amalgamation company is allowed a deduction on account of __________
(a) Legal expenses
(b) Selling expenses
(c) Management expenses
(d) None of these
(e) only (a) and (c)
Q.21 Where a person has been allowed a deduction in respect of a trading liability then the benefits from such liability shall
be chargeable to tax under____________.
(a) Business Income
(b) Income from other sources
(c) none of these.
Q.22 Any expenditure incurred on training of any Pakistani in connection with a scheme specially approved by Board for
the purpose of business is __________
(a) Deductible
(b) not deductible
Q.23 Expenditure incurred on the rental of a building for the scientific research, outside the Pakistan are __________
(a) allowable expenditure under IFB
(b) Allowable Expenditure under Income from other Sources
(c) not allowable
Q.24 If the lease rentals have been paid to the ____________then it shall be an allowable expenditure to the taxpayer.
(a) Schedule Banks
(b) modaraba
(c) Both of them
Q.25 __________ value of any benefit or perquisite arising from the past, present or prospective business relationship is
chargeable under the head
(a) Business Income
(b) Income from other sources
(c) none of these
Q.26 The function of buying and selling of financial securities by the dealer is called __________
(a) Jobbing
(b) arbitrage
(c) both
Q.27 Repair Charges and insurance premium of any asset used for the business and private purposes are _______under
the head of business income
(a) Allowable
(b) not allowable
(c) Proportionately allowed
Q.28 Provisions and P and L appropriations items are ________ expense.
(a) allowable
(b) not allowable
(d) manufacturing

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(d) factory
Q.29 Which of the following expenses is not admissible?
(a) provision for doubtful debts
(b) bad debts
(c) penalty
(d) both a and c
Q.30 Depreciation is allowed as per ___________.
(a) accounts
(b) tax
(c) estimates
(d) not allowed
Q.31 Which of the following donations are allowed as straight deduction?
(a) donation to unapproved institution
(b) donation to institution under section 61
(c) donation to institution specified in clause 61
(d) none of above
Q.32 In an AOP the members are allowed only to receive ___________.
(a) salary
(b) commission
(c) profit on debt
(d) none of above
Q.33 Depreciation is allowed as per _____ schedule of the Income Tax Ordinance, 2001
(a) 1st
(b) 2nd
(c) 3rd
(d) 4th
Q.34 Expenses other than utility, postage and freight charges must be paid through cross cheques where any of them
exceeds Rs.______.
(a) 8,000
(b) 10,000
(c) 5,000
(d) 6,000
Q.35 Any expenditure is admissible if the same is wholly and exclusively __________.
(a) for business
(b) for personal use
(c) for personal expenses of members in case of AOP or company
(d) all of above
Q.36 Where the bad debts are recovered from the amount not allowed earlier then the same would be ___________.
(a) included in taxable income
(b) ignored
(c) reversed from accounting profit
(d) all of above
Q.37 Any amount received by a banking company or a non-Banking finance company out of profit on debt is taxable under
income from _________.
(a) salary
(b) property

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(c) business
(d) other sources
Q.38 Expenses on entertainment of foreign customers and suppliers are ________.
(a) admissible
(b) not admissible
(c) both a and b
(d) none of above
Q.39 Any expenditure (unless otherwise stated) under a single account head exceeding Rs.50,000 is admissible if the
payment is made only through ___________.
(a) cash
(b) cross cheque
(c) bearer cheque
(d) all of above
Q.40 For tax purposes, business does not include ___.
(a) employment
(b) trading
(c) manufacturing
(d) service providing
Q.41 Income from speculation business is kept separate from _____ business incomes.
(a) non-speculation business
(b) other speculation business
(c) trading business
(d) business of service providing
Q.42 Arbitrage is a _________________.
(a) speculation business
(b) non-speculation business
(c) illegal business
(d) none of above
Q.43 Salary paid to sleeping partner of AOP is __________.
(a) admissible
(b) not admissible
(c) none of above
Q.44 Any amalgamated company is allowed a deduction against ________ in respect of all expenses incurred by it.
(a) business income
(b) salary income
(c) property income
(d) all of above
Q.45 The financial cost of securitization incurred by the ___ is allowed as an admissible deduction.
(a) APV
(b) SPV
(c) bank
(d) financial institution
Q.46 Which of the following is allowed as deductible allowance against business income?
(a) WWF
(b) WPPF
(c) Zakat under Zakat and Usher Ordinance
(d) all of above
142 Conceptual Approach to Taxes
Income From Business Chapter-09

Q.47 Tax credit is allowed on donation to ___________.


(a) Beggars
(b) financial institution
(c) banks
(d) approved institution u/s 61
Q.48 Any expenditure in nature of fine or penalties for violation of any law is _________ against business income.
(a) Admissible
(b) inadmissible
(b) both a or b
(c) none of above
Q.49 _______ receipts mean all receipts less deduction of expenditures.
(a) Gross
(b) net
(c) final
(d) all of above
Q.50 If any expenditure is allowed as business expense however the liability against the same has not been paid within
____ years including the year of its allow-ability then the same will be treated as income of the taxpayer after expiry of
the ____ years.
(a) 5
(b) 3
(c) 10
(d) 15
Q.51 If a deduction is allowed as expense and subsequently any benefit against the same, such as cash discount received
then the same will be taxable under the head income from _____.
(a) Business
(b) other sources
(c) salary
(d) property

ANSWERS
1 (c) 2 (d) 3 (b) 4 (b) 5 (b)
6 (a) 7 (a) 8 (d) 9 (b) 10 (c)
11 (a) 12 (b) 13 (d) 14 (c) 15 (c)
16 (d) 17 (c) 18 (b) 19 (d) 20 (e)
21 (a) 22 (a) 23 (c) 24 (c) 25 (a)
26 (b) 27 (c) 28 (b) 29 (d) 30 (b)
31 (c) 32 (d) 33 (c) 34 (b) 35 (a)
36 (c) 37 (c) 38 (a) 39 (b) 40 (a)
41 (a) 42 (b) 43 (b) 44 (a) 45 (b)
46 (d) 47 (d) 48 (b) 49 (b) 50 (b)
51 (a)

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ICMAP PAST PAPERS THEORECTICAL QUESTIONS


Q. No. 2 (c) Spring 2013 M/s. National Corporation is a non-banking finance company. The main business of the company
is to provide a loan to consumers for small businesses, car financing, personal and household purposes.
Required: The corporation is seeking your advice in respect of the following under the provision of the Income Tax
Ordinance, 2001:
(i) M/s National Corporation is willing to segregate consumer loan and other loans, therefore, want to know the clear
definition of consumer loan. Define.
(ii) Explain how the provision against consumer loan is allowed as deduction to the corporation.
(iii) Where bad debt in respect of consumer loan cannot be wholly set off against reserve created for this purpose,
then what would be the treatment for setting off the bad debt?
Q. No. 3(a) February 2013 Write short answers of the following questions:
(iii) Whether the income of a university or an educational institution established for educational purpose and making profit is
exempt from income tax or not ?
(iv) Upto what period the income from export of computer software of IT Services or IT enabled services are exempt from
income tax?
Q. No. 3(b) February 2013 M/s. Kotton Limited, a holding company of five companies is engaged in the business of cotton
farming, ginning, spinning, weaving and trading. Approximately 60% of the output of each company is consumed by the
next follower, The remaining 40% is being sold in the open market through the trading company out of which 60% is
exported and 40% is sold in the market. Mr. Zaidi, Director Finance of the group of companies has received a notice from tax
department regarding applicability of section 108 of the Income Tax Ordinance, 2001' transactions between associates' Mr.
Zaidi approached you to seek advice about the following:
(i) What are the methods which may be applied to determine arm's length results under the Income Tax Rules, 2002?
(ii) Which method will be used where the arm's length results cannot be reliably determined under any of the methods as
mentioned at (i) above?
Q. No. 3 (a) August 2012 As per section 20 of the Income Tax Ordinance, 2001 a deduction is allowed in computing the
income of a person chargeable to tax under the head Income from Business for a tax year for any expenditure incurred
wholly and exclusively for the purpose of business. Rule 10 of the Income Tax Rules, 2001 laid down some conditions on a
deduction for entertainment expenditure incurred by a person.
Required:
(i) What are the conditions laid down in the rule 10 of the Income Tax Rules, 2002 for the deduction of entertainment
expenditures?
(ii) What is the benchmark for the allow-ability of the entertainment expenditures under the above rule?
(iii) Define the term entertainment under the rule 10 of the Income Tax Rules, 2002.
Q.3 (a) SUMMER 2012 As per Section 29 of the Income Tax Ordinance, 2001 relating to Bad Debt reply the following:
(i) Under what conditions a person shall be allowed deduction for bad debts in a tax year?
(ii) What will be the maximum amount of deduction?
(iii) Where a person was allowed a deduction in a tax year for bad debt and in a subsequent tax year the person receives
in cash or kind any amount in respect of that debt, how this amount shall be treated?
Q. NO. 3 (a) SUMMER 2010 As per Rule 10 of the Income Tax Rules, 2002:
(i) Define the term entertainment expenditure.
(ii) What is the condition of admissibility of entertainment expenditure?
(iii) What are the limitations on the deduction of entertainment expenditure?
Q. NO. 3 (a) WINTER 2009 Explain the provisions of section 29 of the ITO, 2001 with regard to recovery of bad debts in
subsequent years.
Q. NO. 2 (a) SUMMER 2007 Discuss the provisions u/s 29 of the ITO, 2001, regarding deduction of bad debts.
Q. NO. 2 (b) SUMMER 2006 State the expenses, which are not allowed as deduction while calculating the income under the
head Income from business under ITO, 2001.
Q. NO. 2 WINTER 2005 What are the incomes of a person for a tax year other than income exempt from tax & chargeable
to tax under head Income from Business
Q. NO. 3 SUMMER 2003 Discuss the deductions not allowed in computing income chargeable under the head Income from
Business.

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CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q.No.2 (b) Autumn 2014 Briefly discuss the provisions of Income Tax Ordinance, 2001 in respect of the following situations:
ABC (Private) Limited has decided to provide a loan of Rs. 5 million to one of its shareholders, for the purchase of a house.

Q. No. 5 (a) Spring 2012 Tamba Pakistan (Pvt.) Limited is engaged in the manufacture of pharmaceutical products. Its
board of directors has approved a 3-year loan to one of its major shareholders.
Required: Explain the tax implications of the above transaction on the company as well as the shareholder.
Q.3 Spring 2011 Carrot Ltd (CL) is engaged in the manufacture, import and sale of electronic appliances for the past twenty
years. When reviewing the companys tax provisions, you noticed the following amounts appearing in the tax calculation for
the year ended June 30, 20X2.
(i) Profit on debt of Rs. 500,000 paid on a working capital loan obtained from a foreign bank. CL did not deduct
withholding tax while paying profit on debt considering the bank does not have a Permanent Establishment in
Pakistan.
(ii) Expenditure of Rs. 450,000 on promotion of a product which is expected to generate revenue for twelve years.
(iii) Bad debt in respect of a staff loan, Rs. 25,000.
(iv) Reimbursement of expenses of Rs. 300,000 to CL by the parent company. This amount was incurred by CL in 20X1
on marketing a new product imported from Dubai.
(v) Initial allowance of Rs. 4,000,000 on a used equipment acquired locally from MSD Limited.
(vi) Financial charges amounting to Rs. 100,000 and depreciation amounting to Rs. 300,000 on a vehicle acquired on
finance lease from Radish Leasing. Lease rentals paid during the year amounted to Rs. 400,000.
Required: Under the provisions of ITO, 2001 discuss the admissibility of the above amounts for tax purposes.
Q.NO. 4(a) Spring 2008 Discuss the taxability of the following under the Income Tax Ordinance, 2001:
(i) Bad debts
(ii) Non-adjustable rent
(iii) Speculation business
Q.NO. 2 (a) Autumn 2007 What do you understand by the concept apportionment of expenditures as explained in the
Income Tax Ordinance, 2001?
Q.NO. 3 (a) Spring 2006 Explain with reasons, as to whether or not the following expenses are admissible business
expenditures:
(i) Penalty paid by a banking company on contravention of State Bank of Pakistans regulations.
(ii) Freight charges to forwarding agent amounting to Rs 60,000 paid in cash.
(iii) Payment of salary to employee from which tax was not deducted by the employer. However, the employee paid the
tax himself.
(iv) Tax deducted u/s 153 from payments received by a resident person on account of services rendered.
Q. NO. 3 (b) Autumn 2006 One of your clients, Japan and Company, a partnership having three partners, has sent you its
financial statements for the year ended June 30, 2006. Following items are appearing under the head Other income:
(i) Accounting profit on disposal of fixed assets.
(ii) Reversal of provision for doubtful debts related to year ended 30-06-2004
(iii) Dividend received from a listed company.
(iv) Profit on debt.
You are required to explain with reasons as to how the above items will be treated in the computation of taxable income.
Q.NO. 3 (c) Spring 2006 Explain the provisions of section 29 with regard to the recovery of bad debts in subsequent years.
Q.NO. 4 (b) Autumn 2006 Describe conditions mentioned in ITO, 2001 under which a loan will be classified as a consumer
loan.
Q.NO. 5 (a) Autumn 2006 Any income arising from any asset transferred by a person to his spouse is to be treated as
income of the transferor. Describe the circumstances under which this rule shall not be applicable.
Q.NO. 3 Spring 2005 Describe any five types of expenses that are not allowed to deducted under the head income from
business.
Q.NO. 7 Spring 2005 Discuss under what circumstances an expenditure incurred by a person are required to be
apportioned for the purpose of claiming a deduction under the Income Tax Ordinance, 2001?

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Q.NO. 4 Autumn 2004 Describe the expenses which are allowable as a deduction on account of employees training &
facilities?
Q.NO 5 Autumn 2004 Discuss the conditions required to be fulfilled for claiming a deduction on account of bad-debts?
Q.5 Spring 2002 Explain whether the following are admissible as business expenditure under the Income Tax Ordinance
1979:
(a) Repayment of principal amount of lease rentals of plant & machinery.
(b) Sales tax paid on the purchase of raw material to be used in the production of exempt supply.
(c) Dividend
(d) Provision in respect of doubtful debts.
(e) Penalty levied u/s 108 of the Income Tax Ordinance, 1979 for failure to file statement u/s 139.
Q.5 Autumn 2002 Dreamland (Pvt) Ltd. has requested you to advice as regards the important aspects of law for
disallowance of expenses incurred in cash [u/s 24ff] and excess perquisites[u/s 24(i)]. Please write an advisory letter in
this regard explaining the law with suitable examples.
Q.2 Autumn 2001 Discuss briefly the legal position with respect to the admissibility or otherwise of the following as business
expenditure under the Income Tax Ordinance, 1979:
(a) Amount paid as income tax.
(b) Capital expenditure incurred on scientific research in Pakistan.
(c) Share of profit paid to a bank under a scheme of musharika.
(d) Interest paid by a firm to a partner of the firm.
(e) Salary paid otherwise through a crossed bank cheque etc. not exceeding Rs. 5,000..
Q. NO. 4 March 2000 Enumerate 12 in-admissible deductions fort computing income from business or profession contained
in section 21 of the Income Tax Ordinance.
Q. NO. 3 March 1999 Mr. B is MD of a public company. He is master of science in petroleum engineering with a little
background of accounting and tax. He has been informed that the assessing officer may question the method of accounting
of the company in the context of determination of business income. Whilst section 20 of the Income Tax Ordinance specifies
admissible deductions, section 21 of the Ordinance stipulate certain deductions which are not admissible under the law.
MD is not clear about certain things stated above and has asked you, as chief accountant of explain him the following in a
write up:
(a) What types of income are chargeable under the head business income?
(b) What are the six inadmissible deductions u/s 21 of the ordinance for computing business income.
How many types of method of accounting exist and under what circumstances assessing officer may not accept the tax
payers method of accounting.
Q. NO. 2 Nov 1996 Which income shall be chargeable under the head income from business and what deductions are
admissible while computing such income?
Q. NO. 4 Nov 1996 Answer the following statements, considering the keys given therein:
I) Income from business or profession is computed u/s: (a) 19 (b) 18 (c) 22
Q. NO. 9 May 1994 Which of the following appear to be correct in the given choices?
i) Rental income earned by a taxpayer engaged in the business of letting out shops in a large shopping plaza is taxed
as:
(a) Income from business or professions
(b) Property income
(c) Income from other sources
(d) Capital gains
ii) The profit on sale of building used for the purposes of taxpayers business is taxed as:
(a) Capital gains (b) Business income
(c) Exempt from tax (d) Taxed at reduced rate
Q. NO. 9 Nov 1994 Answer the following statement considering the keys given therein:
i) Income from business or profession is computed under: (a) Section 19 (b) Section 18 (c) Section 27

146 Conceptual Approach to Taxes


Assets and Depreciation Chapter-10

Chapter

10 ASSETS AND DEPRECIATION

Topic covered
Section Rule
(For CAF-6 and ICMAP Students)
PART I (FOR CAF-6 & ICMAP STUDENTS)
22 12 & 224 Depreciable asset
23 12 & 224 Initial allowance
23A 12 & 224 First year allowance
23B Accelerated depreciation to alternate energy projects [Part-II of Third Schedule]
24 Intangibles
25 Pre-commencement expenditure
Disposal of assets
Assets of leasing companies
75 Disposal & acquisition of assets
76 Cost of assets under various situations
77 Consideration received under various situations
PART II (FOR CA MOD F & ICMAP STUDENTS)
78 Non-arm's length transactions
79 Non-recognition rules
MCQs with solutions
ICMAP & CA Mod C past papers theoretical questions

PART - I (For CAF-6 and ICMAP Students)


DEPRECIATION
1. Depreciation
Where a person is using depreciable asset to derive income from business, then he shall be allowed to deduct
depreciation of the depreciable asset from his income from business.
2. Depreciable asset [U/s 22(15)]
Any tangible moveable or immovable property (other than unimproved land) or structural improvement to immoveable
property, owned by a person that;
has normal useful life of more than one year;
is likely to lose value as a result of normal wear and tear or obsolescence; and
is used by the person for his business purposes (wholly or partly)
but shall not include any tangible movable property, immovable property, or structural improvement to immovable
property in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of
the property or improvement in the tax year in which the property is acquired or improvement made by the person;
The depreciable asset includes building, plant and machinery, furniture and fixtures, computer hardware, technical
books, vehicles, air-craft, ships, below ground installation, offshore platforms and production installation in mineral oil
concerns.
Structural Improvement
Structural improvement in relation to immovable property includes any building, road, driveway, car park, railway line,
pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewerage
pipes, drainage, landscaping or dam.

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3. Eligible Depreciable asset [U/s 23(5)]


All depreciable assets are eligible depreciable assets except following:
(a) Any road transport vehicle not plying for hire. (Trains and busses are example of vehicles plying for hire.)
(b) Furniture and fittings
(c) Any plant and machinery that has been previously used in Pakistan
(d) Any asset whose total cost has already been allowed as deduction in the tax year in which it is acquired

Particulars to be furnished to claim depreciation / amortisation [Rule 12]


An allowance for depreciation and amortization shall be allowed u/s 22, 23 and 24 on furnishing to CIR the following
particulars and information with the return of income for the tax year:
Description of each depreciable asset and intangible.
The extent of part used for business
In case of acquisition during the tax year, the date of acquisition
The tax WDV of each asset at beginning of tax year
The amount of capital expenditure incurred on addition, alteration, improvement and extensions
Total value of each asset on which depreciation is allowable
WDV at beginning add: capital expenditure during tax year less: initial deprecation allowed, rates and amount
of initial and normal depreciation stating separately, normal useful life for each intangible, total depreciation or
amortization allowed for tax year
WDV of each depreciable asset and the cost of asset or its remaining useful life. and
On disposal of asset the sale proceed of the asset disposed of with WDV at beginning of tax year and the
excess or deficit on disposal.
Practically there is a separate annexure for furnishing of above information that is filed along-with the return of
income.
4. Conditions for leasing companies for claim of depreciation deduction [U/R 224]
The following conditions shall be fulfilled by a leasing company or a modaraba to claim deduction for depreciation on
lease of depreciable assets;-
(i) The leasing company is engaged principally in the business of leasing of assets and has been issued a licence
by the SECP to operate under the terms and conditions specified therein; and
(ii) the leasing company or a modaraba doing leasing business undertakes that where a motor vehicle is given on
lease, the purchase value thereof shall be restricted to the amount specified in the 3rd Schedule to the
Ordinance, for the purposes of claiming depreciation or the expenditure on such lease.

CALCULATION OF DEPRECIATION:
Depreciation shall be allowed only on depreciable assets. Rules regarding calculation of depreciation are as follows:
5. Where an asset not used for the whole of the year:
The depreciation on such asset shall be charged for the whole year e.g. assets used partly on seasonal basis in
sugar industry. [U/s 22(1)]
6. Where the useful life of an asset is one year:
No depreciation allowance shall be allowed however renewal or replacement cost shall be allowed as revenue
expenditure. [U/s 22(15)]
7. Rates of depreciation:
Depreciation shall be computed by applying the following rates against the written down value of the asset at the
beginning of the year [U/s 22(2)]:

SR. Type of Assets Rate


1. Building (all types) 10%
2. Furniture (Including fitting) and machinery and plant, Motor vehicles (all types), ships, technical 15%
or professional books.
3. Computer hardware including printer, monitor and allied items, Machinery and Equipment used 30%
in manufacture of IT products, aircrafts and aero engines, Aerial photographic apparatus.

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4. In case of mineral oil concerns the income of which is liable to be computed with the rules in
Part I of the Fifth Schedule.
Below ground installations 100%
Offshore platforms and production installations. 20%
5. A ramp build to provide access to persons with disabilities not exceeding Rs.250,000 each. 100%

7.1 Written down value at the beginning of the year [U/s 22(5)]
The above mentioned rates are applied on the written down value (WDV) of the asset at the beginning of the year,
which is determined as below:
(a) In case of asset acquired during the year:
Cost xxx
Less: Initial allowance (if asset is eligible depreciable asset) (xxx)
WDV at the beginning of the year xxx
(b) In any other case:
Cost xxx
Less: Initial allowance allowed in previous years (xxx)
Less: Depreciation allowed in previous years (xxx)
WDV at the beginning of the year xx
7.2 Asset partly used for business:
Where an asset is partly used for business and partly for some other purpose then:
(a) Depreciation shall be allowed in proportion to the use of asset in the business [U/s 22(3),
(b) However, WDV shall be calculated in the normal way [U/s 22(6)].
Following example will demonstrate this situation:
Example - 1: A person acquired machinery in year 1 for Rs. 500,000 for business purpose. In year 2 he used that
machinery for business purpose for six months and for remaining six months he used that for some other purpose
while in year 3 he used that machinery wholly for business use.
Required: Calculate (a) depreciation allowed and (b) closing WDV for three years.
Solution: (a)
Year 3 Year 2 Year 1
Rs. Rs. Rs.
Cost 500,000
Less: initial allowance @ 25% 125,000
WDV at the beginning of the year (A) 270,937 318,750 375,000

Depreciation @ 15% (B) 40,641 47,813 56,250


Less: Depreciation not allowed because of non business use - 23,907 -
Depreciation allowed 40,641 23,906 56,250
WDV at the end of year (A - B) 230,296 270,937 318,750
8. Initial allowance [U/s 23]
A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year
shall be allowed a deduction of 25% for plant and machinery and 15% for building where the asset is used
by the person for the purposes of his business for the first time or the tax year in which commercial
production is commenced, whichever is later.
A deduction allowed to a leasing company or an investment bank or a modaraba or a scheduled bank or a
development finance institution in respect of assets owned and leased to another person shall be deducted
only against the leased rental income derived in respect of such assets.
"Eligible depreciable asset" means a depreciable asset other than -
any road transport vehicle unless the vehicle is plying for hire;
any furniture, including fittings;
any plant or machinery that has been used previously in Pakistan; or
any plant or machinery that has been allowed as deduction under another section for the entire cost of the
asset.
Important note: It is worthwhile to mention here that under this section there is no concept of number of days
because either the initial allowance shall be allowed or not allowed.

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Example 2: In tax year 2015, Jazz Limited purchased a new plant and building for Rs.1,200,000 and Rs. 500,000
respectively. Calculate initial allowance if any, tax depreciation and closing WDV.
Solution:
Plant Building Total
(Rupees)

Cost 1,200,000 500,000 1,700,000


Initial allowance (25% for plant) and (15% for building) 300,000 75,000 375,000
900,000 425,000 1,325,000
Tax depreciation @ (15% and 10%) 135,000 42,500 177,500
Closing WDV 765,000 382,500 1,147,500
9. First year allowance [U/s 23A]
With effect from 01-07-2008 first year allowance @ 90% of the cost shall be allowed in respect of plant,
machinery and equipment installed by any industrial undertaking set up in specified rural and
underdeveloped areas or engaged in the manufacturing of cellular mobile phones and qualifying for
exemption under clause (126N) of Part I of the Second Schedule and owned and managed by a
company in lieu of initial allowance on "eligible depreciable assets". Except the above the provisions of the
Initial Allowance shall mutatis mutandis apply. The Federal Government may notify "specified areas" for the
purposes of this section.
Important note: It is worthwhile to mention here that under this section there is no concept of number of days
because either the first year allowance shall be allowed or not allowed.
Example 3: In tax year 2015, A new plant for Rs.1,200,000 was purchased by an industrial undertaking set up in
area specified by Federal Government for first year allowance. Calculate closing WDV of the plant.
Solution: In this case, first year allowance @ 90% shall be allowed instead of initial allowance.
Rs.
First year allowance (1,200,000 x 90%) 1,080,000
Tax depreciation ((1,200,000 1,080,000) x 15%) 18,000
Closing WDV (1,200,000 1,080,000 18,000) 102,000
10. Accelerated depreciation to alternate energy projects [23B and Part-II of Third Schedule]
Any plant, machinery and equipment installed for generation of alternate energy by an industrial undertaking set up
anywhere in Pakistan and owned and managed by a company shall be allowed first year allowance in lieu of initial
allowance u/s 23, at the rate of 90% against the cost of the eligible depreciable assets put to use after July 01, 2009.
A deduction allowed to a leasing company or an investment bank or a modaraba or a scheduled bank or a
development finance institution in respect of assets owned and leased to another person shall be deducted only
against the leased rental income derived in respect of such assets.
"eligible depreciable asset" means a depreciable asset other than -
(a) any road transport vehicle unless the vehicle is plying for hire;
(b) any furniture, including fittings;
(c) any plant or machinery that has been used previously in Pakistan; or
(d) any plant or machinery that has been allowed as deduction under another section for the entire cost of the
asset.
Important note: It is worthwhile to mention here that under this section there is no concept of number of days
because either the accelerated depreciation shall be allowed or not allowed.
Chart presentation of initial allowance, First year allowance & accelerated depreciation to alternate energy projects:
11. Intangibles [U/s 24]
Introduction:
The nomenclature of this term gives the impression that it only includes the cost of non-physical assets. However,
definition of this term under the tax law is far wider than this general impression. The definition of intangible in section
24 of the Ordinance is as under:

"intangible" means any patent, invention, design or model, secret formula or process, copyright, trade mark, scientific
or technical knowledge, computer software, motion picture film, export quotas, franchise, licence, intellectual property,
or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period
of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved land).

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The above definition reveals that it also includes any expenditure that provides an advantage or benefit for a period of
more than one year. Therefore, amortization of any cost which has useful life of a period exceeding on year is
allowed.
Intangible eligible for amortization
A person shall be allowed an amortisation deduction in a tax year for the cost of the person's intangibles;
that are wholly or partly used by the person in the tax year in deriving income from business
chargeable to tax and
that has a normal useful life exceeding one year.
The term cost of intangible in this section means any intangible, means any expenditure incurred
in acquiring or creating the intangible, including any expenditure incurred in improving or renewing
the intangible;
Limitation on amortization and method to compute amortization:
No deduction shall be allowed where a deduction has been allowed under another section of this
Ordinance for the entire cost of the intangible.
The total deductions allowed to a person under this section in the current tax year and all previous
tax years shall not exceed the cost of the intangible.
Formula to compute amortization deduction is as under:
Cost of intangible / Normal useful life of the intangible in whole years
Where an intangible asset useful life is more than ten years or not ascertainable:
An intangible with a normal useful life of more than ten years or that does not have an ascertainable
useful life shall be treated as if it had a normal useful life of ten years.
Where an asset not used for the whole of the year:
Where an intangible is used in a tax year partly in deriving income from business chargeable to tax
and partly for another use, the deduction allowed for that year shall be restricted to the fair
proportional part of the amount that would be allowed if the intangible were wholly used to derive
income from business chargeable to tax.
Where an intangible is not used partly only to derive income from business chargeable to tax, the
amortization shall be computed according to the following formula, namely-
Amount of amortization x Number of days in the tax year the intangible is used in deriving
income from business chargeable to tax / Number of days in the tax year
Amortization in case of disposal:
Where, in any tax year, a person disposes of an intangible, no amortization deduction shall be
allowed under this section for that year;
Gain / loss on disposal of intangibles:
if the consideration received by the person exceeds the WDV of the intangible at the time of
disposal, the excess shall be income of the person chargeable to tax in that year under the
head "Income from Business"; or
if the consideration received is less than the WDV of the intangible at the time of disposal,
the difference shall be allowed as a deduction in computing the person's income chargeable
under the head "Income from Business" in that year.
WDV in case of disposal of and intangible asset:
The WDV of an intangible at the time of disposal shall be the cost of the intangible reduced by
the total deductions allowed to the person in respect of the intangible or, where the intangible is
not wholly used to derive income chargeable to tax, the amount that would be allowed if the
intangible were wholly so used; and
The consideration received on disposal of an intangible shall be determined in accordance with
section 77. An intangible that is available for use on a day (including a non-working day) is
treated as used on that day.
Chart presentation of depreciation under section 22 and intangibles under section 24:

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12. Pre-commencement expenditure [U/s 25]

Particulars Pre-commencement expenditure U/S 25


(1) (2)

1. To whom available A person shall be allowed deduction for the any above related expenditure.

2. Basis 20% straight line method

3. Limitation on pre- The total deductions allowed under this section in the current and all previous
commencement tax years shall not exceed the amount of the expenditure.
expenditure
No deduction shall be allowed for any pre-commencement expenditure where a
deduction has been allowed under another section of this Ordinance for the entire
amount of the pre-commencement expenditure.

4. Pre-commencement "Pre-commencement expenditure" means any expenditure incurred;


expenditure
before the commencement of a business wholly and exclusively to derive income
chargeable to tax,
cost of feasibility studies,
construction of prototypes
trial production activities, but
shall not include any expenditure which is incurred in acquiring land, or which is
depreciated or amortized.

EXCEPTION TO THE RULE COST INCURRED AND CONSIDERATION RECEIVED / SPECIAL POINTS ON DISPOSAL OF
DEPRECIABLE AND NON DEPRECIABLE ASSETS:
In case of disposal of the asset, following rules shall apply:
a. Total deduction (normal and initial allowance) allowed to a person during the period of ownership of a depreciable
asset shall not exceed the cost of the asset [U/s 22(7)].
b. No depreciation shall be allowed in the year of disposal [U/s 22(8)].
c. Gain / loss on disposal of depreciable asset;
If the consideration received against the disposal of depreciable asset is more than its WDV, then excess
shall be chargeable to tax under the head income from business [U/s 22(8a)].
If consideration received against the disposal of a depreciable asset is less than WDV, then the difference
shall be deducted from income chargeable to tax under the head income from business [U/s 22(8b)].
d. Where an asset was partly used for business and partly for some other purpose, then WDV at the time of
disposal shall be increased by depreciation not allowed on account of non business use [U/s 22(9)]. (See example
4)
e. If the cost of passenger transport vehicle not plying for hire is more than Rs. 2.5 million, then it shall be
considered equal to Rs.2.5 million and in this case disposal consideration shall also be reduced as per following
formula [U/s 22(10)]: (See example 5)
(Amount received on disposal of the vehicle x 2.5 million) / Actual cost of vehicle
Note: If the passenger transport vehicle in plying for hire then there is no limitation on cost of transport vehicle under
the aforesaid section.
f. The cost and consideration received in respect of a depreciable asset received as already discussed shall be
determined u/s 75 to 79 of the Income Tax Ordinance, 2001 [U/s 22(11)].
g. In case of disposal of immovable property, where consideration received exceeds the cost of asset then
consideration received shall be treated as the cost of asset [U/s 22(13)]. (See example 6)
h. Where a person exports an asset after using in Pakistan, then consideration received shall be treated as equal to
the cost of asset [U/s 22(14)]. (See example 7)
Example - 4: Consider the situation of example 1. What would be the treatment if asset is sold in year 4 for Rs. 500,000.

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Solution: Rs.

Consideration received 500,000


Less: WDV
WDV at the beginning of year 4 230,296
Depreciation not allowed in year 2 23,906
254,203
Income chargeable to tax 245,797

Important Note: It is worthwhile to mention here that although section 22(8)(a) states that the profit on disposal of
depreciable asset is equal to the difference between sale price and written down value of depreciable asset, however
the same shall be read with the limitations imposed under this section by sub section 13(d) and 14 on various assets
disposal.
Example - 5: A person acquired a passenger transport vehicle for Rs. 3,000,000 for business purpose. This vehicle was
then sold for Rs.1,800,000 in year 2. Calculate gain on sale of vehicle in year 2.

Solution: Calculation of WDV at the end of year 1: Rs.

Cost for tax purpose 2,500,000


Depreciation @ 15% 375,000
WDV at the end of year 1 2,125,000

Calculation of allowed portion in disposal consideration: Allowed portion


(1,800,000 x 2,500,000 / 3,000,000) 1,500,000
Calculation of profit / (loss) on disposal:

Consideration received WDV as above (Rs.1,500,000 2,125,000)= (625,000)


Example - 6: From the following information compute gain on sale of immovable property (including building that is for
personal use or otherwise non depreciable):
Cost 400,000
Consideration received on disposal 500,000
Solution: As consideration received is more than cost of the immovable property, hence consideration received shall be
treated as cost of the property.
Consideration received 500,000
Cost of asset (treated as equal to consideration received) 500,000
Difference Nil

Example 7: From following information compute gain on sale of asset which has been exported after using in Pakistan:
Cost Rs.100,000, WDV Rs.40,000, Consideration received Rs.160,000.
Solution: In this case cost shall be equal to the consideration received:
Rs.
Consideration received (equal to cost of asset for tax) 100,000
Less: WDV 40,000
Profit on disposal (equal to accumulated depreciation) 60,000

ASSETS OF LEASING COMPANIES


A deduction allowed on account of normal depreciation to a leasing company or an investment bank or a modaraba or a
scheduled bank or a development finance institution in respect of assets owned and leased to another person shall be
deducted by the aforesaid respective persons. [U/s 22(13)(c)]
The total of deductions u/ss 22 to 23B allowable to a leasing company or an investment bank or a modaraba or a
scheduled bank or a development finance institution in respect of assets owned and leased to another person shall be
deducted only against the leased rental income derived in respect of such assets.
Example: From following information compute the depreciation admissible to the leasing company for two years;
- Lease rentals per year 1,200,000
- Cost of machinery 5,000,000
- Lease period 5 years
- Initial allowance 1,250,000
- Annual depreciation year 1 (15% of WDV) 562,500

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- Annul depreciation year 2 (15% of WDV) 478,125


- Annul depreciation year 3 (15% of WDV) 270,938
- Annul depreciation year 4 (15% of WDV) 406,406
- Annul depreciation year 5 (15% of WDV) 345,445
Solution: The computation of depreciation for five years is as under:
Rs.
Year 1 Depreciation for the year 1,812,500
Less annual lease rentals 1,200,000
Balance depreciation C/F 612,500
Year 2 Add: depreciation for the year 478,125
Total depreciation 1,090,625
Less annual lease rentals 1,200,000
Balance depreciation C/F -

Important note: From the second year to onwards the lessor is entitled to claim full amount of depreciation as the lease
rentals exceeds from the total depreciation from third year to onwards.

DISPOSAL AND ACQUISITION OF ASSETS

Disposal and acquisition of assets [U/s 75]


(A) Disposal of asset arises under the following cases:

S. No. Disposal of assets U/S 75


(1) (2)
1. A person who holds an asset shall be treated as having made a disposal of the asset at the time the
person parts with the ownership of the asset or when an asset is sold, exchanged, transferred or
distributed or cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
2. The transmission of an asset by succession or under a will shall be treated as a disposal of the asset
by the deceased at the time asset is transmitted.
3. The application of a business asset to personal use shall be treated as a disposal of the asset by the
owner of the asset at the time the asset is so applied.
4. Where a business asset is discarded or ceases to be used in business, it shall be treated to have
been disposed of.
5. A disposal shall include the disposal of a part of an asset.

(B) Acquisition of asset arises under the following cases:

S. No. Acquisition of assets U/S 75


(1) (2)
1. A person shall be treated as having acquired an asset at the time the person begins to own the asset,
including at the time the person is granted any right.
2. The application of a personal asset to business use shall be treated as an acquisition of the asset by the
owner at the time the asset is so applied.

Example: Distinguish between disposal and acquisition of asset under the following situations.
(a) Application of a business asset to personal use.
(b) Application of a personal asset to business use.
(c) Mr. Adnan sold a part of his business building for Rs. 1,000,000.
(d) There in no demand of Product-A produced by M/s Azeem and Co. Therefore proprietor discarded the
machinery which was used in production of Product-A.
(e) Factory building of AB and Co. was destroyed by earthquake.
(f) Mr. Amir exchanged his business vehicle for machinery.

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Solution:
(a) Application of business asset to personal use is treated as disposal of asset.
(b) Application of a personal asset to business use is treated as acquisition of asset.
(c) Disposal of a part of asset is treated as disposal of asset.
(d) When an asset is discarded, it is treated as disposal of asset.
(e) When an asset is destroyed / lost, it is also treated as disposal of asset.
(f) In this case, there is a disposal of vehicle and acquisition of machinery.
COST OF ASSETS UNDER VARIOUS SITUATIONS [U/S 76]

The Board may prescribe rules for determination of cost for any asset, however except otherwise provided in the Income
Tax Ordinance, 2001 the cost of an asset shall be determined as under.
1. Cost of an asset purchased:
The cost of an asset purchased by a person shall be the sum of the following amounts:-
The total consideration given for the asset, including the FMV of any consideration in kind determined at the
time the asset is acquired;
any incidental expenditure incurred in acquiring and disposing of the asset; and
any expenditure incurred by the person to alter or improve the asset.
but shall not include any expenditure above that has been fully allowed as a deduction under this Ordinance.
Example: Determine the cost of asset from following information.
Rs.
Cash paid for purchase of asset 50,000
FMV of motorcycle given for purchase of asset 30,000
Legal expenses incurred on purchase of asset 10,000
Repair expenses (fully allowed as deduction) 5,000

Solution:
Rs.
Cash paid for purchase of asset 50,000
FMV of motorcycle given for purchase of asset 30,000
Legal expenses incurred on purchase of asset 10,000
Total 90,000
Note: As repair expenses have already allowed therefore the same shall not be added in the cost of asset.
2. Cost where personal asset applied for business use The cost of an asset treated as acquired shall be the FMV
of the personal asset determined at the date it is applied to business use.
Example: Rs.
Cost of personal asset purchased 100,000
Book value of asset as on June 30, 2016 85,000
You are required to compute the cost of asset if the same asset put to use for business purposes as on June 30,
2015 under the following situations:
A. If the fair market value of the personal asset as on June 30, 2016 is Rs.100,000.
B. If the fair market value of the personal asset as on June 30, 2016 is Rs.80,000.
C. If the fair market value of the personal asset as on June 30, 2016 is Rs.150,000.
Solution: In all the above cases the fair market value as on June 30, 2016 shall be taken as cost of asset irrespective
of its cost or book value for business purposes.
3. Cost of an asset produced or constructed
The cost of an asset produced or constructed by a person shall be the total cost incurred by the person in producing
or constructing the asset plus any expenditure in acquiring and disposing, alter or improving the asset incurred by the
person.
Example: Determine the cost of plant manufactured by an AOP for its own use from the following information.
Rs.
Salary of engineer (fully engaged in manufacture of plant) 50,000
Raw material purchased for manufacture of plant 550,000
Wages to labour (40% for manufacture of plant) 100,000

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Solution:
Rs.
Salary of engineer (fully engaged in manufacture of plant) 50,000
Raw material purchased for manufacture of plant 550,000
Wages to labour (40% portion related to manufacture of plant) 40,000
Total 640,000
4. Cost of an asset acquired through foreign currency
Where an asset has been acquired by a person with a loan denominated in a foreign currency and before full and
final repayment of the loan, there is an increase or decrease in the liability of the person under the loan as expressed
in Rupees, the amount by which the liability is increased or reduced shall be added to or deducted from the cost of
the asset, as the case may be:
Explanation: Difference, if any, on account of foreign currency fluctuation, shall be taken into account in the year of
occurrence for the purposes of depreciation.

Example: On July 1, 2015, Mr. Zahid acquired a machine with loan in foreign currency ($50,000) equivalent to
Rs.4,000,000. On June 30, 2016, exchange rate was ($1 = RS. 85). Calculate the amount of tax depreciation and
initial allowance for tax year 2016.
Solution: In this case, change in value of loan shall not be considered for depreciation.
Cost of asset 4,000,000
Initial allowance [4,000,000 x 25%] 1,000,000
WDV for depreciation u/s 22 3,000,000
Depreciation for the year [3,000,000 x 15%] 450,000
Important note: Although the plain reading of the section states that any increase and decrease in exchange rate
before the final settlement of loan shall either be added or deducted from the cost of asset but the position is not so
as only that difference in exchange rate shall be recognized that will arise on actual repayment or availing further
foreign currency loan. The mere change in exchange rate without any repayment or acquiring loan will have no effect
on the cost of asset.
Explanation: Difference, if any on account of foreign currency fluctuation, shall be taken into account in the year of
occurrence for the purposes of depreciation.
The above position may be examined from the FBR Circular 3 of 2009 dated 17-07-2009 & CBRs Circular No.3 of
1991 dated March 09, 1991 that is also approved by the ATIR vide ITA No.1448/HQ 1989-90 dated 15Th November,
1990.
It is worthwhile to mention here that the above circular is still saved by virtue of provisions of section 239(10) of the
ITO, 2001.
5. Cost of an asset acquired under hedging agreement
In determining whether the liability of a person has increased or decreased as above the consideration shall be taken
of the person's position under any hedging agreement relating to the loan.
Example: On July 01, 2014, Mr. Zahid acquired a machine with loan in foreign currency ($50,000) equivalent to
Rs.4,000,000. This loan is covered under hedging agreement and he shall not be liable to pay any increase in the
amount of loan due to change in exchange rate. On June 30, 2015, exchange rate was ($1 = RS. 85). Calculate the
amount of tax depreciation and initial allowance for tax year 2015.
Solution: In this case, change in value of loan shall not be considered for depreciation purpose.
Initial allowance [4,000,000) x 25%] 1,000,000
Depreciation for the year [(4,000,000 1,000,000) x 15%] 450,000
6. Cost of an asset sold in parts
Where a part of an asset is disposed of by a person, the cost of the asset shall be apportioned between the part of
the asset retained and the part disposed of in accordance with their respective FMVs determined at the time the
person acquired the asset.
Example: On July 01, 2015, Mr. Zahid acquired a building for Rs. 500,000. In May, 2015 he disposed of 1/4th of
building for Rs. 300,000. On the date of acquisition, fair value of part sold was Rs. 200,000 and fair value of
remaining part was Rs.400,000. Determine gain / loss on disposal and cost of building retained.

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Solution: Gain / loss on disposal: Rs.

Consideration received on disposal 300,000


Less: Cost apportioned on the basis fair value
(500,000 x 200,000 / 600,000) 166,667
Gain on disposal 133,333

Cost of asset retained: Rs.

Cost of total asset 500,000


Less: Cost of asset disposed of (as above) 166,667
Cost of asset retained 333,333

7. Cost of an asset acquired from the amount chargeable to tax


Where the acquisition of an asset by a person is the derivation of an amount chargeable to tax, the cost of the
asset shall be the amount so charged plus any amount paid by the person for the asset.
8. Cost of an asset acquired from the amount exempt from tax
Where the acquisition of an asset by a person is the derivation of an amount exempt from tax, the cost of the
asset shall be the exempt amount plus any amount paid by the person for the asset.
Example: Mr. Ahmed purchased vehicle to be used for his business purpose for Rs. 800,000. Rupees 200,000 was
paid from taxable income while remaining Rs. 600,000 was paid from an amount which is exempt from tax. What is
the cost of asset?
Solution: Cost of asset is determined by the amount paid and it is immaterial whether the amount paid as purchase
price of asset is taxable or exempt. Hence, the cost of asset is Rs. 800,000.
9. Cost of an asset acquired from the grant not chargeable and chargeable to tax
The cost of an asset does not include the amount of any grant, subsidy, rebate, commission or any other
assistance (other than a loan repayable with or without profit) received or receivable by a person in respect of the
acquisition of the asset, except to the extent to which the amount is chargeable to tax under this Ordinance.
Example: Mr. Naeem received grant of Rs. 500,000 from Government for purchase of an asset. Forty percent (40%)
of this grant is taxable and balance sixty percent 60% is exempt. Asset was purchased by Mr. Naeem for Rs.
700,000. You are required to determine the cost of asset.

Solution Rs.
Consideration paid for purchase of asset 700,000
Less: Exempt Government grant 420,000
Cost of asset 280,000

CONSIDERATION RECEIVED UNDER VARIOUS SITUATIONS [U/s 77]


The Board may prescribe rules for determination of consideration received for any asset, however except otherwise provided
in the Income Tax Ordinance, 2001 the disposal consideration shall be determined as under.
10. Disposal consideration on sale:
The consideration received by a person on disposal of an asset shall be the total amount received by the person
for the asset or the FMV thereof, whichever is the higher, including the FMV of any consideration received in kind
determined at the time of disposal.
Example: Mr. Jamshed sold his factory building to Mr. Amir for Rs. 1,000,000. However, the fair value of building was
Rs. 1,200,000. Compute gain / loss on disposal if WDV of building is Rs.600,000.
Solution:
Rs.
Consideration received
(Higher of actual amount or fair value) 1,200,000
Less: WDV 600,000
Gain on disposal 600,000

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11. Disposal consideration for lost or destroyed asset


Where an asset has been lost or destroyed by a person, the consideration received for the asset shall include any
compensation, indemnity or damages received by the person under:-
an insurance policy, indemnity or other agreement;
a settlement; or
a judicial decision.
Example: Mr. Jamsheds factory building was destroyed because of earthquake during the tax year 2016. He
received Rs. 500,000 from insurance company in respect of this building. Compute gain / loss on disposal if WDV of
building is Rs. 1,600,000.
Solution:
Rs.
Consideration received
(Amount received from insurance company) 500,000
Less: WDV 1,600,000
Loss on disposal 1,100,000
12. Disposal consideration for business asset applied to personal use or discarded or ceased to be used
The consideration received for an asset treated as disposed shall be the FMV of the asset determined at the time it
is applied to personal use or discarded or ceased to be used in business, as the case may be.
Example: In tax year 2015 Mr. Khan discarded his business car from business and applied that car for his personal
use. Fair Value on the date of application to personal use was Rs. 500,000. Compute gain / loss on disposal if WDV
of car at the beginning of tax year is Rs. 400,000.

Solution: Consideration received Rs.

Fair value 500,000


Less: WDV 400,000
Gain on disposal 100,000
13. Disposal consideration in respect of leased assets
The consideration received by a scheduled bank, financial institution, modaraba, or leasing company approved by the
CIR in respect of an asset leased by the company to another person shall be the residual value received by the
leasing company on maturity of the lease agreement provided that the residual value plus the amount realized
during the term of the lease towards the cost of the asset is not less than the original cost of the asset,

Example: A leasing Company has lease out its plant and machinery on the following terms and conditions;
Rs.
Lease rentals for five years (Principal plus mark-up price) 6,000,000
Cost of plant and machinery to leasing Company 4,000,000
You are required to compute the disposal consideration of lease asset under the following situations:
(a) If the principal amount in total lease rental is Rs. 3,500,000 and its residual value is Rs. 200,000.
(b) If the principal amount in total lease rental is Rs. 3,800,000 and its residual value is Rs. 100,000.
(c) If the principal amount in total lease rental is Rs. 4,000,000 and its residual value is Rs. 200,000
Solution:
In case A and B as the principal amount plus residual amount is less than the cost of asset to the lessor therefore the
disposal consideration shall be taken as Rs. 4,000,000 that is not less than the cost of asset to the lessor. However in
case of C no adjustment shall be made in the disposal consideration as the same is more than the cost of asset to the
lessor.
14. Disposal consideration in respect combined sale of two or more assets
Where two or more assets are disposed of by a person in a single transaction and the consideration received for
each asset is not specified, the total consideration received by the person shall be apportioned among the assets
disposed of in proportion to their respective FMVs determined at the time of the transaction.
Example: In tax year 2016 Mr. Khan disposed of his two business cars for a sum of Rs. 1,200,000. WDV of car-1 is
Rs. 300,000 and car-2 is Rs.400,000. Fair Value on the date of this transaction was as follows:
Car-1 700,000, Car-2 300,000
Required: Compute gain on sale of these two cars.

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Solution:
Rs. Rs.
Car-1 Car-2
Consideration received (apportioned on the basis of
fair values) i.e. 70% : 30% 840,000 360,000
Less: WDV 300,000 400,000
Gain / (loss) on disposal 540,000 (40,000)
Important note: The tax department shall accept the value that will be higher from FMV and disposal consideration
received of respective asset. As the in the said example the consideration received is higher the same has been
taken into account however where the fair value will be higher than the same shall be taken into account.
15. Determination of consideration received by board
Notwithstanding anything contained in this section, the Board may prescribe rules for determination of consideration
received for any asset.

PART - II (For CA Mod F and ICMAP Students)


NON ARMS LENGTH TRANSACTIONS AND NON RECOGNITION RULES

1. Non-arm's length transactions [U/s 78]


Where an asset is disposed of in a non-arm's length transaction
(a) the person disposing of the asset shall be treated as having received consideration equal to the FMV of the
asset determined at the time the asset is disposed; and
(b) the person acquiring the asset shall be treated as having a cost equal to the amount determined under (a)
above.

Example: Mr. Jamshed sold his factory building to his relative Mr. Amir for Rs. 500,000 i.e. transaction was non-
arms length transaction. However, the fair value of building was Rs. 1,200,000. Compute gain / loss on disposal if
WDV of building is Rs. 600,000.

Solution:
Rs.
Consideration received equal to FMV of building both for buyer and seller
irrespective of sale proceeds) 1,200,000
Less: WDV 600,000
Gain on disposal 600,000

2. Non-recognition rules for gain or loss on disposal [U/s 79]

No gain or loss shall be taken to arise on the disposal of an asset


(a) between spouses under an agreement to live apart;
(b) by reason of the transmission of the asset to an executor or beneficiary on the death of a person;
(c) by reason of a gift of the asset;
(d) by reason of the compulsory acquisition of the asset under any law where the consideration received for the
disposal is reinvested by the recipient in an asset of a like kind within one year of the disposal;
(e) by a company to its shareholders on liquidation of the company; or
(f) by an AOP to its members on dissolution of the association where the assets are distributed to members in
accordance with their interests in the capital of the association-
Provided the above provisions shall not apply where the person acquiring the asset is a non-resident person at
the time of the acquisition.
In the above all the cases the person acquiring the asset shall be treated as
(a) acquiring an asset of the same character as the person disposing of the asset; and
(b) acquiring the asset for a cost equal to the cost of the asset for the person disposing of the asset at the time of
the disposal.

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Cost of replacement assets under compulsory acquisition:


The persons cost of a replacement asset referred to in clause (d) above shall be the cost of the asset disposed of
plus the amount by which any consideration given by the person for the replacement asset exceeds the
consideration received by the person for the asset disposed of. The formula for the above is as under:
Cost of asset disposed
Plus consideration given Less consideration received on disposed of asset
Example: Explain in which of the following cases gain or loss on disposal shall not be recognized:

a. Mr. Adnan gave his business car to his wife under an agreement to live apart.
b. Business car of Mr. Ikram was completely destroyed in an accident in current tax year and he received claim
from insurance company.
c. Mr. Adnan gave his business car to his wife under an agreement to live apart. His wife is a non-resident in tax
year 2015.
d. A company disposed of its assets to its shareholders on liquidation of the company.
e. An AOP disposed of its assets to its members on dissolution of the AOP in accordance with their interest in the
capital of the association, all the members are non-resident.
f. Mr. Amir gave his factory to his brother as gift. His brother is a non-resident.
Solution:
a. this case no loss or gain shall be recognized.
b. this case gain or loss shall be recognized which is equal to insurance claim received less WDV of the car.
c. this case gain or loss shall be recognized as car was given to non-resident person.
d. gain or loss shall be recognized.
e. n or loss shall be recognized as the members are non-resident.
f. n or loss shall be recognized as the brother is non-resident.

MASTER QUESTION
Briefly explain the tax treatment in respect of each of the following independent situations:
a) Aiza (Pvt.) Ltd has re-valued its Building in accordance with International Accounting Standards and
consequently charged depreciation on the re-valued amount.
b) Aiza (Pvt.) Ltd during the year has opened an overseas office in France and has claimed initial allowance and
depreciation on eligible depreciable assets purchased by the office.

c) Uzair Limited has charged impairment in respect of one of its depreciable assets. The Commissioner is of the
view that impairment expense will not be allowed as an expense.

d) Uzair Limited has discontinued a major product line of its business and envisages selling off the machinery
related to this product line over a period of one to two years to get the right price. Uzair Ltd wants to claim
depreciation on the idle machinery until disposed of.
e) Ms. Sana sells a number of personal vehicles in a tax year and makes a significant amount of profit in the
process. She is of the view that the said income is exempt from tax.

f) XYZ Ltd has recorded a gain on revaluation of its foreign currency balances at the year end. The gain
comprises of both realized and unrealized amount.
g) On July 2014, Ms. Sana purchased a vehicle not plying for hire amounting to Rs. 4,210,000 to be used solely
for the purpose of her business. While preparing the tax return she has claimed initial allowance and
depreciation as per the prescribed rates given in the Income Tax Ordinance, 2001 for the full year on
Rs.4,210,000.

h) In August 01, 2014 Mr. Azhar purchased accounting software amounting to Rs. 5 million for his business. The
software has a useful life of 13 years. Mr. Azhar has charged full year amortization on straight line basis over
the useful life of the software.

i) Entertainment expense payable amounting to Rs. 210,000 has been debited to profit & loss account of ABC
Ltd. The company has not deducted any tax on the said expense.

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Assets and Depreciation Chapter-10

j) ABC (Pvt.) Ltd has charged depreciation according to the rates admissible under the tax law amounting to Rs.
125,000 on machinery taken on a finance lease from a scheduled bank in August 2009. Lease rentals paid
during the tax year 2015 amounted to Rs. 220,000. The leased machinery was transferred to owned assets
on maturity on 30 April 2015. On maturity the accounting WDV of the assets was Rs. 500,000, market value
was Rs. 800,000 whereas residual value of the asset was Rs. 50,000.

Solution:
a) Deduction for depreciation is associated with tax written down values of assets calculated with reference to
specific provisions. Accounting revaluation of assets has no bearing on tax written down value of assets.
Consequently, depreciation will be allowed on tax written down values of building without taking into account
the effect of revaluation. [Ref:S22(5)]
b) Initial allowance is only available on assets used in Pakistan. Accordingly, the company will not be entitled to
deduction on account of initial allowance on assets purchased by the branch for use in business outside
Pakistan. The company will however be allowed to claim normal depreciation on all depreciable assets. [Ref:
S 23 (1) and S 22]
c) The contention of the Commissioner is correct. Charge for impairment of fixed assets is not a tax deductible
expense. As the impairment charge will be ignored for tax purpose, the written down value of assets will not
be reduced by the charge and depreciation will be calculated as if no impairment has taken place.
d) One of the criteria for an asset to qualify as depreciable asset is that it should be used partly or wholly for
deriving business income. As the product line has been discontinued and the machinery is no more in use,
therefore, it ceases to qualify as a depreciable asset. Accordingly, no deduction will be allowed for
depreciation. [Ref: S 22 and S75(3A)]
e) Income from sale of personal motor vehicles is not taxable under the head Capital Gains. If the vehicles are
bought and sold with the motive of trade, the resultant gain will constitute business income. However, vehicle
intended for personal use are excluded from the definition of capital assets. [Ref: S 37(5) (d)]
f) Unrealized gain on revaluation of foreign currency balances is notional income in nature and is not liable to
tax. Foreign exchange gains will be included in the taxable income for the tax year in which realized.
g) Full year depreciation should be charged on restricted value of Rs. 2,500,000. As vehicle is not an eligible
depreciable asset, therefore, initial allowance cannot be claimed.
h) Amortization should be allowed for 91 days over the useful life of 10 years only. (S. 24(4), 24(6))

i) Tax is required to be deducted at the time of payment. Since the expense is still payable, therefore, company
has rightly claimed the said expense.

j) In case of assets taken on finance lease, lease rentals are an admissible deduction instead of depreciation.
Further, as the asset was transferred during the tax year 2015, therefore, full year depreciation will be allowed
on the residual value of the asset. No initial allowance will be allowed as the asset was already in use. [(S. 22,
S.28(1)(B),S23)].

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Assets and Depreciation Chapter-10

MULTIPLE CHOICE QUESTIONS


Q.1. Pre commencement expenditure is a_______________.
(a) Fictitious asset
(b) Depreciable asset
(c) Eligible depreciable asset
(d) None of these
Q.2. Disposal consideration on sale of an asset is
(a) Amount received on sale
(b) FMV
(c) Lower of FMV and amount received
(d) Higher of FMV and amount received
Q.3. Disposal consideration in case of lost asset comprises of______________.
(a) Salvage value
(b) Insurance claim
(c) both aand b
(d) none of these
Q.4. An approved leasing company is the one approved by _________________.
(a) FBR
(b) SECP
(c) CIR
(d) Provincial government
Q.5. Depreciation calculated under _________ is allowed as deduction against business income.
(a) First schedule
(b) Second schedule
(c) Third schedule
(d) Fourth schedule
Q.6. FMV is determined in relation to _______________.
(a) Property
(b) Services
(c) Perquisites
(d) All of these
Q.7. In case of an asset partly used only for business then depreciation will be allowed as deduction on _________basis.
(a) Full year
(b) Half year
(c) Proportionate
(d) Not allowed
Q.8. The depreciation charged in case of non-depreciable asset used wholly for business would be _______.
(a) Zero
(b) Half
(c) Full
(d) Proportionate
Q.9. The question of depreciation allowance does not arise if the income from business is ____________.
(a) Permanently exempt
(b) Exempt for specific period
(c) not exempt
(d) all of the above

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Q.10. Initial allowance on eligible depreciable assets (plant and machinery) is allowed at the rate of _________of asset.
(a) 40% of cost
(b) 40% of FMV
(c) 50% of WDV
(d) 25% of Cost
Q.11. In case of assets with a useful life of one year, depreciation is ___________allowed:
(a) Not
(b) on full year basis
(c) Proportionate basis
(d) All of these
Q.12. The initial allowance for depreciation is allowable for ___________.
(a) Depreciable assets
(b) Eligible depreciable assets
(c) Intangibles
(d) All of these
Q.13. Depreciation u/s 22 on assets partly for personal and partly for business use is allowable on basis
(a) Monthly
(b) Half yearly
(c) Quarterly
(d) Annual
(e) proportionate
Q.14. Where an intangible is not used for the business for the whole year, then amortization deduction would be on
______basis.
(a) Half of the charge
(b) Full year charge
(c) Proportionate
(d) None of these
Q.15. A person shall be allowed a deduction of amortization of pre-commencement expenditure on straight line basis
at_______.
(a) 10%
(b) 20%
(c) 25%
(d) 50%
Q.16. Amortization in any case cannot be___________ to / from total cost of intangible.
(a) Equal
(b) Less
(c) Higher
(d) None of these
Q.17. A deduction for amortization is allowed only when the intangible has a useful life of _________.
(a) Less than one year
(b) Equal to one year
(c) Higher than one year
(d) Indefinite period
Q.18. In case of export of an asset, disposal consideration would be treated as the __________________.
(a) Cost of asset
(b) FMV at the time of export
(c) Consideration received
(d) None of these

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Assets and Depreciation Chapter-10

Q.19. The cost of passenger transport vehicles plying for hire for Tax year 2011 for depreciation purposes would be equal
to ____.
(a) Actual cost
(b) Rs. 2,500,000
(c) Higher of actual cost and 2,500,000
(d) Lower of 2,500,000
Q.20. Initial allowance for depreciation on passenger transport vehicles not plying for hire is _______________.
(a) Allowed in the first year
(b) Allowed in last year
(c) Not allowed
(d) none of these
Q.21. In case of intangibles not used for the whole year, amortization allowed would be ___________.
(a) or the full year
(b) Not to charged
(c) Charged on number of days basis
(d) none of the above
Q.22. Any gain or loss on disposal of intangible shall be treated as income or deduction under income from ___________.
(a) Business income
(b) Other sources
(c) Capital gains
(d) None of these
Q.23. When an asset is sold, exchanged, transferred or distributed or cancelled, redeemed, relinquished, destroyed, lost,
expired or surrendered, it shall be treated as ___________________.
(a) Acquisition of asset
(b) disposal of an asset
(c) none of the above
Q.24. The application of a business asset to personal use shall be treated as _______________________.
(a) Acquisition of asset
(b) disposal of an asset
(c) none of the above
Q.25. The cost of an asset purchased by a person shall be_____________________.
(a) Total consideration given
(b) incidental expenditure in acquiring and disposing
(c) any expenditure to alter or improve the asset
(d) all of these
(e) none of the above
Q.26. Where an asset has been acquired with a foreign currency loan the cost of an asset shall be fluctuated due to
__________________.
(a) increase in exchange rate without payment of loan
(b) decrease in exchange rate without payment of loan
(c) No effect unless loan is repaid
Q.27. Where the person disposing of the asset under non-arms length transaction, the consideration shall be treated as
having received equal to _______________________.
(a) Actual consideration received
(b) Fair Market Value
(c) none of the above.
Q.28. Depreciation shall be computed on Building (all types) against the written down value at the beginning of the year at
the rate of _______________.
(a) 10%

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Assets and Depreciation Chapter-10

(b) 15%
(c) 30%
(d) 100%
(e) 20%
Q.29. Depreciation shall be computed on Furniture (Including fitting) and machinery and plant, Motor vehicles (all types),
ships, technical or professional books against the written down value at the beginning of the year at the rate of
_______________.
(a) 10%
(b) 15%
(c) 30%
(d) 100%
(e) 20%
Q.30. Depreciation shall be computed on computer hardware including printer, monitor and allied items, machinery and
equipments used in manufacture of IT products, aircrafts and aero engines, Aerial photographic apparatus against the
written down value at the beginning of the year at the rate of _______________.
(a) 10%
(b) 15%
(c) 30%
(d) 100%
(e) 20%
Q.31 Initial allowance on building is allowed at ____% of cost of building.
(a) 50
(b) 40
(c) 15
(d) 25
Q.32 Expenditures for acquiring land is included in _____.
(a) cost of land
(b) WDV of land
(c) depreciation of land
(d) all of above
Q.33 Depreciation in respect of asset acquired on lease is _________.
(a) admissible
(b) inadmissible
(c) equal to tax depreciation
(d) none of above
Q.34 Full year depreciation is charged in the year of _____.
(a) disposal
(b) destruction
(c) acquisition
(d) all of above
Q.35 Amount of depreciation allowed to ________ is restricted to the lease rental income derived during the year in
respect of leased assets.
(a) leasing companies
(b) individuals
(c) AOP
(d) all of above
Q.36 The cost of asset is allowed as expense where the asset with a useful life is ___ one year.
(a) less than or equal to
(b) more than
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Assets and Depreciation Chapter-10

(c) none of above


Q.37 The amount of any grant receivable in respect of acquisition of asset shall be included in the cost of such asset
where such grant is _______.
(a) exempt
(b) taxable
(c) none of above
Q.38 The cost of land and the cost of immovable property on such land are shown ________.
(a) separately
(b) together
(c) in profit and loss account
(d) all of above
Q.39 The consideration received on disposal of an immovable properly shall be treated as its ___ if it exceeds the original
cost of asset.
(a) cost
(b) WDV
(c) depreciation
(d) all of above
Q.40 The ___ of an asset is treated as disposal consideration in case of export of a depreciable asset.
(a) cost
(b) WDV
(c) depreciation
(d) all of above
Q.41 Value of motor vehicle not plying for hire is restricted to Rs. ____ for income tax purposes.
(a) 1,500,000
(b) 2,000,000
(d) 2,500,000
(d) 3,000,000
Q.42 _____ of a discarded asset at the date when it is discarded is treated as its disposal consideration of the discarded
asset.
(a) cost
(b) WDV
(c) FMV
(d) accumulated depreciation
Q.43 When an asset is acquired with a loan in foreign currency and exchange rate fluctuates before any repayment then
the difference on account of foreign currency fluctuation should be ___ for depreciation purposes.
(a) ignored
(b) taken into account
(c) exempt
(d) none of above
Q.44 When an asset is wholly used in the tax year and sold at the end of year, then _____ shall be charged.
(a) full year depreciation
(b) no depreciation
(d) 50% depreciation
(e) none of above
Q.45 Rate of depreciation for building is 10% of __________.
(a) cost
(b) accumulated depreciation
(c) WDV
(d) cost of land

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Q.46 The rate of depreciation for a ramp build to provide access to persons with disabilities not exceeding Rs.250,000
each is _____%.
(a) 50
(b) 70
(c) 80
(d) 100
Q.47 The normal useful life of an intangible asset is restricted upto ___ years from the date of purchase, where the life of
the intangible is either more than 10 years or not determinable.
(a) 20
(b) 10
(c) 5
(d) 2
Q.48 While considering non arms length transaction it ____ is considered as consideration received.
(a) WDV
(b) FMV
(c) cost
(d) all of above
Q.49 Where the consideration received is against assets sold in bulk, it would be apportioned on the basis of _________of
respective assets.
(a) WDV
(b) FMV at the date of disposal
(c) cost
(d) all of above
Q.50 _____ of an asset includes transfer of an asset between spouses under an agreement to live apart.
(a) acquisition
(b) destruction
(c) disposal
(d) none of above
Q.51 Tax depreciation is also known as _________ depreciation.
(a) statutory
(b) accounting
(c) actual
(d) all of above

ANSWERS
1 (a) 2 (d) 3 (b) 4 (c) 5 (c)
6 (d) 7 (a) 8 (a) 9 (a) 10 (d)
11 (a) 12 (b) 13 (e) 14 (c) 15 (b)
16 (c) 17 (c) 18 (a) 19 (a) 20 (c)
21 (c) 22 (a) 23 (b) 24 (b) 25 (d)
26 (c) 27 (b) 28 (a) 29 (b) 30 (c)
31 (c) 32 (a) 33 (b) 34 (c) 35 (a)
36 (a) 37 (b) 38 (a) 39 (a) 40 (a)
41 (d) 42 (c) 43 (a) 44 (b) 45 (c)
46 (d) 47 (b) 48 (b) 49 (b) 50 (c)
51 (a)

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ICMAP PAST PAPES THEORECTICAL QUESTIONS


Q. No 2(a) March 2015 In the light of section 24 of the Income Tax Ordinance, 2001:
(i) Define the term, intangibles.
(ii) Briefly explain that how the allowable deduction will be computed, if and intangible asset is not used for the whole
tax year in deriving income from business chargeable to tax?
Q. No 2(b) March 2015 Ms. Sara is a resident individual of Pakistan. She is moving to Canada and planning to sell all
assets of her business to Sigma (private) Limited, a resident company of Pakistan and a wholly owned company. Before
leaving Pakistan, Sara intends to file her income tax return and seeking your advice in respect of the conditions where no
gain or loss will be accounted for on disposal of her baseness to Sigma.

Required: Being a Tax consultant briefly state Ms. Sara regarding conditions where no gain or loss will be accounted for on
disposal of all the assets to Sigma as per section 95 of the income tax ordinance, 2001

Q. No. 2 (a) (i) Spring 2013 Define the term depreciable asset in accordance with the provisions of section
22(15) of the Income Tax Ordinance, 2001.

Q. No. 2 (a) (ii) Spring 2013 Considering the depreciable asset is used in a tax year partly for deriving
income from business chargeable to tax and partly for another use, describe the extent to which the deduction
may be admissible on account of depreciation.
Q. NO. 3(a) SUMMER-2008 What is treatment of a depreciable asset under section 22 of the Income Tax Ordinance, 2001 if
it is disposed of in a tax year?
Q. NO. 3 (d) SUMMER 2007 Describe in detail:
(i) Disposal and acquisition of assets u/s 75 of the Income Tax Ordinance, 2001.
(ii) Business and personal assets u/s 75(7) of Income Tax Ordinance, 2001.
Q. NO. 6(a) WINTER-2006 Briefly state assets eligible for initial depreciation allowance u/s 23(5) of the Income Tax
Ordinance, 2001.
Q. NO. 4(b) WINTER 2005 Explain the terms b. Non-arms length transactions
Q. NO. 2 WINTER-2004 What do you understand by the following terms as described in Income Tax Ordinance, 2001?
1- Disposal of Assets 2- Initial allowance u/s 23 3- Eligible depreciable assets 4- Business assets and personal assets
Q. NO. 2 WINTER-2003 Describe amortization of intangibles as an allowable expense under section 24 of the Income Tax
Ordinance, 2001.

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Assets and Depreciation Chapter-10

CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q.NO.4 Autumn 2014 In Income Tax Ordinance, 2001 the term disposal has a wider connotation than sale
because it includes exchange, relinquishment, and extinguishment.
List the situations under which an asset owned by a person shall be treated to have been disposed of.

Q.6 Autumn 2012 In the context of Income Tax Ordinance, 2001,


(a) state the meaning of Intangible.
(b) discuss the rules relating to claiming of amortization deduction on intangibles.
Q. NO. 3(a) Autumn 2009 State the conditions which a tangible asset should meet to qualify as a depreciable asset.
Q. NO.6(b) Autumn 2007 A person who places an eligible depreciable asset into service in Pakistan for the first time in a
tax year shall be allowed initial depreciation allowance. List down the assets which do not come under the purview of
eligible depreciable assets for the purposes of initial allowance.
Q. NO.4(a) Spring 2005 Describe the assets that are not eligible for the purpose of claiming initial depreciation allowance.
Q. NO.3(a) Autumn 2004 List down the assets on which Initial allowance can not be claimed?
Q. NO.3(b) Autumn 2004 What are the prescribed rates of normal depreciation on the following assets as per the Third
Schedule to the Income Tax Ordinance, 2001?
(i) Factory building
(ii) Residential quarter for labour
(iii) Furniture
(iv) Plant and machinery
(v) Computer and hardware
(vi) Technical books
(vii) New ships
(viii) Motor vehicle
Q.4 Nov 1995 For each of the following questions / select the correct answer from the choices given:
Where a fixed asset (on which tax depreciation is allowed) is actually sold, sales proceed is determined to be:
(a) Sale price
(b) Fair Market Value (FMV)
(c) Sale price or Fair Market Value (FMV) whichever is higher
(d) Amount deemed to be the sale proceeds by the tax authorities.

NOW SOLVE FOLLOWING NUMERICAL QUESTIONS OF MODULE C / AFC PAST PAPER RELATED TO THIS TOPIC

Q. NO. 3(I) & (II) AUTUMN 2013


Q. NO. 3(B) AUTUMN 2009

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Assets and Depreciation Chapter-10

170 Conceptual Approach to Taxes


Method of Accounting and Records Chapter-11

Chapter

11 METHOD OF ACCOUNTING AND


RECORDS

Topic covered
Section Rule (For CAF-6 and ICMAP students)

32 Method of accounting
Change in method of accounting
33 Cash basis of accounting
34 Accrual basis of accounting
Trading liability not paid & its recovery
35 Stock in trade
Computation of cost
36 Long term contracts
174 Records
28 to 31 Books of accounts prescribed
32 General form of Books of accounts, documents & records
33 Books of account, documents & record to be kept at specific place
MCQs with solutions
ICMAP & CA Mod C past papers theoretical questions

For CAF-6 and ICMAP students


1. Method of accounting [u/s 32(1), (2) and (3)]
A person income chargeable to tax shall be computed according to the method of accounting regularly
employed (that may be cash or accrual basis) by such person.
A company shall account for its income chargeable to tax under the head Income from business on accrual
basis (if company is deriving income chargeable to tax under any other head other than business
income, company can adopt cash basis method of accounting).
Any other person: on accrual or cash basis.
The Board may prescribe that any class of persons shall account for income chargeable to tax under the head
income from business on a cash or accrual basis.
2. Approval from Commissioner Inland Revenue (CIR) for change in method of accounting [u/s 32(4) and (5)]
A person may apply to the CIR in writing for change in method of accounting and such approval by the CIR in
writing shall be allowed only on satisfaction that such change is necessary to clearly reflect the business income
of such person.
After change in method of accounting the person shall make adjustments to all the items affected by the
change so that no item is omitted and no item is taken into account more than once.
Cash basis of accounting [Section 33]
"Income from Business" on a cash basis shall derive income when it is received and shall incur expenditure when it is
paid.
Accrual basis of accounting [u/s 34(1), (2) and (3)]
A person while accounting for "Income from Business" shall use accrual basis when it is due to the person and shall
incur expenditure when it is payable by the person.
(A) Under accrual when revenue is recognised:
An amount shall be due to a person when the person becomes entitled to receive it even if the time for
discharge of the entitlement is postponed or the amount is payable by instalments.

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(B) Under accrual when expenditure is recognised:


An amount shall be payable by a person when all the events that determine liability have occurred and the
amount of the liability can be determined with reasonable accuracy.
Example (covering both cash and accrual accounting methods): In tax year 2016 there was payment of
Rs.100,500 on account of electricity bills however the Rs.8,005 bill for the month of June-2016 was paid in July-2016.
Under cash accounting system:
The payment of Rs.100,500 shall be recorded under the cash accounting system whereas there will be no recording
of June bill paid in July-2016 in the books of account for the tax year 2016.
Under accrual accounting system:
The electricity bill of June paid in July-2016 shall be recorded in the books of account along-with payment of
Rs.100,500 related to first eleven months under the accrual accounting system.
3. Trading liability not paid and its subsequent full or part payment [u/s 34(5) and (6)]
Non-payment of an allowed expenditure (under the head business income) after a period of three years of the end
of the tax year in which the deduction was allowed will result into inclusion of the same in the business income in the
first tax year following the end of the 3 years. However where a person subsequently after the aforesaid
disallowance pays the liability or a part of liability the person shall be allowed a deduction for the amount paid in the
tax year in which payment is made.
Important Note: The aforesaid section is not applicable on where the debit side of a liability is not a tax expense e.g.
loan payable or advance from customers.
Example: Mr. A purchased goods on credit worth Rs.5,000 in tax year 2012. However, he paid this amount in tax
year 2016. Explain the treatment of this transaction.
Solution:
Tax year 2012 (the year in which expense claimed)
Amount of Rs. 5,000 shall be treated as admissible expense.
Tax year 2015 (on expiry of said three years)
Amount of Rs. 5,000 shall be added in taxable income as it has not been paid within three years from the end of the
tax year in which it was treated as admissible expense.
Tax year 2016 (on payment after disallowance of expense)
Rs.5,000 shall be deducted from taxable income.
4. Stock in trade [u/s 35(1), (2), (3) and (4)]
For "Income from Business" the cost of stock in trade disposed of by the person in the year shall be
computed as under, namely:
Stock consumed = Opening stock + Cost of stock acquired during the year - closing stock
The opening value of stock for a tax year shall be as under:
the closing value of stock-in-trade at the end of the previous year; or
Where business has started in the year, the FMV of any stock-in-trade at the date when such stock
ventured in the business.
Valuation of inventory shall be lower of cost and NRV at the end of the year.
where NRV stands for = Net Realizable Value
Example: From the following information provided by Zamir Ltd, compute the cost of stock in trade.
Opening stock (at fair value) Rs. 10,000, Purchases Rs.40,000 and Closing stock (cost) Rs. 5,000
Note: The NRV of closing stock is Rs. 4,000.
Solution:
Cost of stock in trade: Rs.
Opening stock 10,000
Add: purchases 40,000
Less: closing stock (at cost) (5,000)
Cost of stock in trade 45,000

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Method of Accounting and Records Chapter-11

Important note: The effect of NRV less than the cost has not been considered as it is abnormal loss and the same
will be charged to profit and loss account.
5. Computation of cost [u/s 35(5) and (6)]
Cash basis of accounting (Has two options for cost of stock in trade):
A person accounting for Income from Business on a cash basis may compute cost of stock on either prime cost
method or absorption cost method, and
Accrual basis of accounting (has only one method for cost of stock in trade:
a person accounting for business income on accrual basis shall compute the cost of stock on absorption cost
method.
For stock in trade not readily identifiable:
Where particular items of stock in trade are not readily identifiable, a person may account for stock on
first in first out method or weighted average cost method
Once chosen a stock valuation method may be changed with the written permission of the CIR on such
conditions as imposed by the CIR.
Definitions
Absorption-cost method means the generally accepted accounting principle under which the cost of
an item of stock-in-trade is the sum of direct material costs, direct labour costs, and factory overhead
costs;
Average-cost method means the generally accepted accounting principle under which the valuation of
stock-in-trade is based on a weighted average cost of units on hand;
Direct labour costs means labour costs directly related to the manufacture or production of stock-in-
trade;
Direct material costs means the cost of materials that become an integral part of the stock-in-trade
manufactured or produced, or which are consumed in the manufacturing or production process;
Factory overhead costs means the total costs of manufacturing or producing stock-in-trade, other than
direct labour and direct material costs;
First-in-first-out method means the generally accepted accounting principle under which the valuation
of stock-in-trade is based on the assumption that stock is sold in the order of its acquisition;
Prime-cost method means the generally accepted accounting principle under which the cost of stock-
in-trade is the sum of direct material costs, direct labour costs, and variable factory overhead costs;
Stock-in-trade means anything produced, manufactured, purchased, or otherwise acquired for
manufacture, sale or exchange, and any materials or supplies to be consumed in the production or
manufacturing process, but does not include stocks or shares; and
Variable factory overhead costs means those factory overhead costs which vary directly with changes
in volume of stock-in-trade manufactured or produced.

6. Income from long term contracts [u/s 36]


A person income from business on an accrual basis shall compute such income for a tax year under a
long term contract on the basis of percentage of completion method.
The percentage of completion of a long term contract by using cost basis formula is as under:
Percentage of completion = Contract cost to date / Contract cost to date plus further expected contract cost x
100
A contract which is not completed within the tax year in which work is commenced is treated as long term
contract. However if it is estimated to be completed within 6 months from the date of its commencement
then it will not be treated as long term contract.
Example: Mr. Zahid entered into a contract for construction of building on July 01, 2014. Total contract price is
Rs.4,500,000 and it shall be completed in 4 years. It has been estimated that total cost to complete the contract is
Rs.3,375,000. In tax year 2016 cost of Rs.843,750 has been incurred on the contract.
Required: Compute the income chargeable to tax in respect of this contract for tax year 2016.

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Method of Accounting & Records Chapter-11

Solution:
Income chargeable to tax in tax year 2016:
Percentage of completion:
(Cost incurred to date / Total contract cost x 100)
843,750 / 3,375,000 x 100 25%
Income chargeable to tax:
Total price of contract x percentage of completion (Rs. 4,500,000 x 25%) 1,125,000
Less total contract cost x percentage of completion (Rs. 3,375,000 x 25%) 843,750
Gross profit for the year 281,250
7. Records [u/s 174]
Except where allowed by the CIR, every taxpayer shall maintain in Pakistan such accounts, documents and records
as may be prescribed.
The CIR may disallow or reduce a taxpayer's claim for a deduction if the taxpayer is unable, without reasonable
cause, to provide a receipt, or other record or evidence of the transaction in support of the claim for
expenditure.
The accounts and documents required to be maintained shall be kept for six years after the end of the tax year to
which they relate;
Provided where any proceeding is pending before any authority or court the taxpayer shall maintain the
record till final decision of the proceedings.
The CIR may require any person to install and use an Electronic Tax Register of such type and description as may be
prescribed for the purpose of storing and accessing information regarding any transaction that has a bearing on the
tax liability of such person.
In this section deduction means any amount debited to trading account, manufacturing account, receipts and
expenses account or profit and loss account.
8. Prescribed books of account [RULE 28 to Rule 31]
Application through Rule 28
These rules apply for records to be kept by the taxpayer u/s 174.
The purpose of these rules is to prescribe the minimum level of books of accounts, documents and records to
be maintained by taxpayers;
A taxpayer accounting for income chargeable under the head "Income from Business" may maintain additional
records, add further columns or particulars in the forms or may keep such records in the manner that suits to the
taxpayer's business.
In this chapter:
"Legal practitioner" includes an advocate, pleader, tax practitioner and advisor or consultant on income tax,
sales tax, customs, central excise or salt tax laws.
"Medical practitioner" includes a doctor, surgeon, physician, dentist, psychiatrist, physiotherapist, tabib,
homeopath, vaid, veterinarian and any person practicing medicine under any other name.
Books of account, documents and records to be maintained [Rule 29]
Every taxpayer deriving income chargeable under the head "Income from business" shall maintain proper books of
account, documents and records with respect to -
all sums of money received and expended by the taxpayer and the matters in respect of which the receipt and
expenditure take place;
all sales and purchases of goods and all services provided and obtained by the taxpayer;
all assets and liabilities of the taxpayer; and
in case of a taxpayer engaged in assembly, production, processing, manufacturing, mining or like activities, all
items of cost relating to the utilization of materials, labour and other inputs.
If a taxpayer uses fiscal electronic cash register or computerized accounting software, it may issue cash-
memo/invoice/receipt generated by the electronic cash register or computer.
Duplicate copies and electronic or computer records of the cash-memo / invoice / receipt / patient-slip to be issued,
shall be retained by the taxpayer and form part of the records to be maintained.
The books of account, documents and records to be maintained for 5 years after the end of the tax year to which they
relate.

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The following are the various Rules regarding books of account to be maintained by various taxpayers.

S. No. Class of tax payers Rule


1 Taxpayer with business income up to Rs.200,000 or a new taxpayer 30(1)
2 Taxpayer with business income exceeding Rs.200,000 30(2)
3 Professionals 30(3)
4 Manufacturers having turnover more than Rs.2.5 million 30(4)
5 Electronic Tax Register (ETR) 30A
6 Non business taxpayers 31
1. Taxpayer with business income upto Rs.200,000 or a new taxpayer [Rule 30(1)]
Serially numbered and dated cash-memo / invoice / receipt for each transaction of sale or receipt containing the
following:
taxpayer's name or the name of his business, address, NTN and sales tax registration number, if any; and
the description, quantity and value of goods sold or services rendered;
Provided that where each transaction does not exceed Rs.100, one or more cash-memos per day for all such
transactions may be maintained;
Daily record of receipts, sales, payments, purchases and expenses, a single entry in respect of daily receipts, sales,
purchases and different heads of expenses will suffice; and
Vouchers of purchases and expenses.
2. Taxpayer with business income exceeding Rs.200,000 [Rule 30(2)]
Taxpayers with business income exceeding Rs. 200,000 and wholesalers, distributors, dealers and commission
agents:
Serially numbered and dated cash-memo / invoice / receipt for each transaction of sale or receipt containing the
following:
taxpayer's name or the name of his business, address, NTN and sales tax registration number, if any;
the description, quantity and value of goods sold or services rendered; and
in case of a wholesaler, distributor, dealer and commission agent, where a single transaction exceeds
Rs.10,000, the name and address of the customer;
Provided that where each transaction does not exceed Rs.100, one or more cash-memos per day for all such
transactions may be maintained;
Cash book and /or bank book or daily record of receipts, sales, payments, purchases and expenses, a single entry in
respect of daily receipts, sales, purchases and different heads of expenses will suffice;
General ledger or annual summary of receipts, sales, payments, purchases and expenses under distinctive heads;
Vouchers of purchases and expenses and where a single transaction exceeds Rs. 10,000 with the name and address
of the payee; and
Where the taxpayer deals in purchase and sale of goods, quarterly inventory of stock-in-trade showing description,
quantity and value.
3. Professionals [Rule 30(3)]
Professionals (like medical practitioners, legal practitioners, accountants, auditors, architects, engineers etc.):
Serially numbered and dated patient-slip / invoice / receipt for each transaction of sale or receipt containing the
following:
taxpayer's name or the name of his business or profession, address, NTN and sales tax registration number, if
any;
the description, quantity and value of medicines supplied or details of treatment/ case/ services rendered
(confidential details are not required) and amount charged; and
the name and address of the patient / client;
Provided that the condition of recording address of the patient on the patient slip under this clause shall not apply to
general medical practitioners;
Daily appointment and engagement diary in respect of clients and patients:
Provided that this clause shall not apply to general medical practitioners;

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Daily record of receipts, sales, payments, purchases and expenses; a single entry in respect of daily receipts, sales,
purchases and different heads of expenses will suffice; and
Vouchers of purchases and expenses.
4. Manufacturers having turnover more than Rs.2.5 million [Rule 30(4)]
Serially numbered and dated cash-memo / invoice / receipt for each transaction of sale or receipt containing the
following:
taxpayer's name or the name of his business, address, NTN and sales tax registration number, if any;
the description, quantity and, value of goods sold;
where a single transaction exceeds Rs. 10,000 with the name and address of the customer;
Cash book and / or bank book;
Sales day book and sales ledger (where applicable);
Purchases day book and purchase ledger (where applicable);
General ledger;
Vouchers of purchases and expenses and where a single transaction exceeds Rs. 10,000 with the name and address
of the payee; and
Stock register of stock-in-trade (major raw materials and finished goods) supported by gate in-ward and outward
records and quarterly inventory of all items of stock-in-trade including work-in-process showing description, quantity
and value.
5. Electronic tax register (ETR) [Rule 30A]
A person required to use an ETR shall -
Install the ETR within 7 days of its authentication by CIR holding jurisdiction over such case and obtain a register
identification number (RIN) for permanent affixture on the ETR;
Use the ETR to record only his own sales and ensure that each sale is made through it and print the receipt of each
safe containing the information in accordance with sub-rules(3) and (4) of rule 29 and rule 30, and to deliver the
original receipt to the purchaser;
In case of non-availability for use of the ETR, the safes may be recorded with the use of a substitute ETR, duly
authenticated by the CIR;
Prepare a daily and a monthly Accounting report containing the information as prescribed in these rules;
Ensure that the ETR operates correctly with particular regard to correct programming of the names of goods and
services and the correct allocation of their tax rates;
Promptly report any malfunctioning of the ETR to the person responsible for its servicing;
On demand by an authorized person, produce the ETR for inspection;
Ensure the inspection of the ETR before the authorized service management after 6 months;
Keep copies of ETR reports for a period of 5 years and produce the same for inspection by the CIR whenever
required to do so;
Safely keep the ETR ledger in the ETR casing and produce it whenever required by the CIR to do so; and
Ensure the inspection before further use of an ETR which has been or is suspected to have been interfered or
tempered with.
6. Non business taxpayers [Rule 31]

S. # Head of Income Record to be kept by the taxpayer


1. Income from salary Salary certificate indicating the amount of salary and tax
deducted there from.
2. Income from property Tenancy agreement, if executed;
Tenancy termination agreement, if executed;
Receipt for amount of rent received; and
Evidence of deductions claimed in respect of premium
paid to insure the building, local rate, tax, charge or cess,
ground rent, profit / interest or share in rent on money
borrowed, expenditure on collecting the rent, legal
services and unpaid rent.

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Method of Accounting and Records Chapter-11

3. Capital gains Evidence of cost of acquiring the capital asset;


Evidence of deduction for any other costs claimed; and
Evidence in respect of consideration received on disposal
of the capital asset.

4. Income from other sources


(a) Dividend Dividend warrants

(b) Royalty Royalty agreement

(c) Profit on debt Evidence and detail of profit yielding debt;


Evidence of profit on debt and tax deducted thereon, like
certificate in the prescribed form or bank account
statement; and
Evidence of Zakat deducted, if any.

(d) Ground rent, rent from the sub-lease of Lease agreement and
land or building, income from the lease Lease termination agreement.
of any building together with plant or
machinery and consideration for
vacating the possession of a building or
part thereof:
Annuity or Pension Evidence of amount received.

(e) Prize money on bond, winning from a Evidence of income and tax deducted thereon, like
raffle, lottery or cross word puzzle certificate in the prescribed form.

(f) Provision, use or exploitation of Agreement


property
(g) Loan, advance, deposit or gift Evidence of mode of receipt of a loan, advance, deposit or
gift i.e., by a crossed cheque or through a banking
channel.
(h) General Evidence of deduction for any other expenditure claimed.

General form of books of accounts, documents and records [Rule 32]


The books of accounts, records and other documents required to be maintained by a taxpayer under these rules
may be kept on electronic media, provided sufficient steps have been taken to ensure the sanctity and safe keeping
of such accounts, documents and records.
The books of accounts, documents and records required to be maintained by a company under these rules shall
be maintained in accordance with international accounting standards and as required under the Companies
Ordinance, 1984.
Books of account, documents and records to be kept at the specified place [Rule 33]
(A) Where person derives business income:
The books of accounts, documents and records required to be maintained by a taxpayer under these rules shall be
kept at the place where the taxpayer is carrying on the business or, where the business is carried on in more
places than one, at the principal place of business or at each of such places if separate books of accounts are
maintained in respect of each place.
(B) Where person derives income other than business:
Where a person derives income from sources other than from business, books of accounts, documents and
records shall be kept at person's place of residence or such other place as may be so declared by such person.
The place or places where the books of accounts, documents and records are kept shall be clearly stated on the tax
return in the required column.

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Method of Accounting & Records Chapter-11

MULTIPLE CHOICE QUESTIONS


Q.1. Companies account for their business transactions on
(a) Cash basis
(b) Accrual basis
(c) Both a and b
(d) None of these
Q.2. Individual and AOP may account for their all heads of income transactions on
(a) Cash basis
(b) Accrual basis
(c) optional from (a) or (b)
(d) None of the above
Q.3. The value of closing stock is computed on
(a) Cost basis
(b) NRV
(c) Lower of cost and NRV
(d) Higher of cost and NRV
Q.4. A person may change the method of accounting with the approval of
(a) No approval required
(b) CIR or
(c) Taxation Officer
Q.5. _______method may be used by the persons using cash basis of accounting.
(a) Marginal cost
(b) Absorption cost
(c) optional from (a) or (b)
(d) None of these
Q.6. Where particular items of stock in trade are not identifiable, _______cost method should be used.
(a) Prime
(b) Absorption
(c) FIFO
(d) LIFO
(e) none of (a) to (d)
Q.7. Under the ITO, 2001 long-term contracts take ________tax year to get completed
(a) More than one
(b) More than three
(c) More than five
(d) More than ten
Q.8. The income arising out of long term contracts is computed on basis.
(a) Cash
(b) Accrual
(c) Percentage of completion computed on revenue basis
(d) None of these
Q.9. The record maintained by a taxpayer required to be kept for a period of ________years after the end of year to which
they relate.
(a) one
(b) Two
(c) Three
(d) Six

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Method of Accounting and Records Chapter-11

Q.10. The books of accounts of companies should be maintained in accordance with


(a) International Accounting Standard
(b) Companies Ordinance, 1984
(c) Both a and b
(d) None of the above
Q.11. An individual deriving income from business is required to maintain books at
(a) Residence
(b) Place of business
(c) any other place
(d) None of these
Q.12. A person deriving income from property is required to maintain _________ documents.
(a) Rent deed
(b) Tenancy termination agreement
(c) Receipt of rent
(d) All of the above
Q.13. In Prime cost method the cost of stock in trade consists of
(a) Direct material cost
(b) Direct labour cost
(c) Variable factory cost
(d) All of these
Q.14. A person deriving income from royalty is required to maintain
(a) Royalty agreement
(b) Rent deed
(c) Cost of acquisition
(d) All of these
Q.15. Where the person has commenced the business during the year, the opening value of stock shall be ---- at the time
when the stock is ventured in business.
(a) Fair market value
(b) Actual value
(c) none of these
Q.16. Person who is required to use the ETR shall keep the copies of ETR for the period of -------.
(a) 2 years
(b) 5 years
(c) 6 years
Q.17 Dividend income received by a company shall be taxed on_________.
(a) Accrual basis
(b) cash basis
(c) both a or b
(d) none of above
Q.18 Method of accounting for companies for business income is ____________.
(a) Accrual basis
(b) cash basis
(c) both a or b
(d) none of above
Q.19 A long term contract is a contract which is not completed in ______.
(a) one year

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(b) two years


(c) three years
(d) four years
Q.20 A long term contract may be for ____:
(a) Manufacture
(b) installation
(c) lease of assets
(d) all of above
Q.21 A person deriving income from other sources may keep his books of account at his ________.
(a) College
(b) university
(c) residence
(d) all of above
Q.22 A person may add ________ in the prescribed forms, according to his own requirements.
(a) Columns
(b) particulars
(c) both a and b
(d) none of above
Q.23 A person with a business income up to Rs.________ is required to maintain the vouchers of purchases and
expenses.
(a) 100,000
(b) 200,000
(c) 300,000
(d) 400,000
Q.24 __________ issued is the minimum document that is required to be maintained by a salaried taxpayer.
(a) Salary certificate
(b) salary slips
(c) detail of personal expenses
(d) all of above
Q.25 Certificate for the tax deducted at source is the evidence of _________.
(a) Filing of income tax return
(b) deduction of tax
(c) none of above
Q.26 Deduction means any amount _____ to trading account, manufacturing account, receipts and expenses account or
profit and loss account
(a) Debited
(b) credited
(c) added
(d) all of above

ANSWERS
1 (b) 2 (c) 3 (c) 4 (b) 5 (c)
6 (e) 7 (a) 8 (d) 9 (d) 10 (c)
11 (b) 12 (d) 13 (d) 14 (a) 15 (a)
16 (b) 17 (b) 18 (a) 19 (a) 20 (d)
21 (c) 22 (c) 23 (b) 24 (a) 25 (b)
26 (a)

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ICMAP PAST PAPERS THEORECTICAL QUESTIONS


Q. No. 3 (b) Spring As per rule 29 of the Income Tax Rules, 2002 every taxpayer deriving income chargeable under the
head Income from business shall maintain proper books of accounts, documents and records. List down such
documents and records and also state the period for which these records shall be maintained by the taxpayer.

Q. NO. 1(c) February 2013 (i) You have been appointed as Tax Adviser of Mr. Lodhi who has various residential and
commercial properties in the various parts of the city, He has rented out his properties to different tenants. Advise
Mr. Lodhi about the list of records which shall be issued and maintained by every taxpayer deriving income from
property.
Q. NO. 3 (b) SUMMER 2011 List down the minimum books of account, documents and records of taxpayers with business
income upto Rs. 200,000 under Rule 30 of the Income Tax Rules, 2002:
Q. NO. 3 (a) SUMMER 2009 What records are required to be maintained under Rule 29 of the Income Tax Rules, 2002 to
determine income from business?
Q. NO. 2 (b) SUMMER 2007 Define the following terms as per the provisions of Section 35 of the Income Tax Ordinance,
2001:
- Prime-cost-method
- Stock-in-trade
Q. NO. 2(a) SUMMER 2006 How are following defined under the Income Tax Ordinance, 2001?
(i) Cash-basis accounting
(ii) Accrual basis accounting
Q.NO. 3(b) Spring 2006 What is the basis of stock-in-trade computation under the Income Tax Ordinance, 2001 when the
taxpayer follows the cash basis of accounting?
Q.NO. 4(a) Autumn 2006 A company may account for income chargeable to tax under the head income from business on
cash basis or on accrual basis. Briefly discuss the rules relating to accrual of income and expenditure as explained in the
ITO, 2001.
Q. NO. 3 (a) WINTER 2005 Explain the following terms as defined in Income Tax Ordinance, 2001.
(i) Absorption cost method
(ii) Factory overhead costs
(iii) Prime cost method
(iv) Stock-in-trade
Q.NO. 3(a) Autumn 2003 Describe the method of accounting to be adopted by a person deriving business income from a
Long Term Contract?

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Method of Accounting & Records Chapter-11

CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q. No. 4 (a) Spring 2013 Inspired Pakistan Limited (IPL) wants to change its accounting year from 30 June to 31 December
as the income year of its parent company in USA ends on 31 December.
Required:
Advise IPL about the requirements of the Income Tax Ordinance, 2001 regarding the change for tax year from Normal to
special.
Q. No. 5 (a) Spring 2013 Describe the methods of accounting that may be adopted under the Income Tax Ordinance, 2001
by following persons deriving income chargeable to tax under the head ' Income from Business'.
(i) A company
(ii) Any person other than a company
(iii) An AOP deriving business income from a ' Long Term contract'
(b) State the provisions of the Income Tax Ordinance, 2001 relating to the change in method of accounting for income
chargeable to tax under the head ' Income from Business'.
Q.2 (b) March 2007 Discuss the provisions of the Income tax Ordinance, 2001 relating to the computation of opening and
closing stock.
Q. NO. 2(b) Spring 2007 Discuss the provisions of the Income tax Ordinance, 2001 relating to the computation of opening
and closing stock.
Q.3 (b) March 2006 What is the basis of stock-in-trade computation under the Income Tax Ordinance when the taxpayer
follows the cash basis of accounting?
Q. NO. 4(a) Spring 2004 Briefly explain when the expenditure is considered as incurred with reference to accrual basis of
accounting defined in the Income tax Ordinance, 2001.
Q. NO. 4(b) Spring 2004 Please mention the costing method(s) and stock valuation method(s) to be applied by a person
following accrual basis of accounting to account for income chargeable to tax under the head income from business under
the Ordinance.
Q. NO. 7(b) Spring 2004 For how many years the tax payer is required to maintain accounts and documents under the
relevant provision of the ITO, 2001.
Q. NO. 9 Autumn 2003 Briefly describe the minimum books of accounts, documents, and records that are required to be
maintained by the following taxpayers?
(a) Taxpayer (other than a company) deriving business income up to Rs.200,000.
(b) Taxpayer (other than a company) deriving business income exceeding Rs.200,000.
Q. NO. 6(b) Spring 2003 What method of accounting is required to be employed by a company deriving income from
business.
Q. NO. 6(c) Spring 2003 Briefly state the provisions relating to the change in the method of accounting of income from
business.

182 Conceptual Approach to Taxes


Capital Gains Chapter-12

Chapter

12 CAPITAL GAINS

Topic covered
Section
Rule (For CAF-6 AND ICMAP students)

37 Capital assets
Procedure to determine capital gain
37A 13F & 13H Gains on sale of securities
100B
Special provision relating to capital gain tax on securities [with Eight Schedule]
Loss u/s 37 & 37A
11, 50, 51 &
Geographical source of capital gains & their taxability
101
Capital gain exempt from tax
Treatment of bonus shares
Disposal
MCQs with solutions
Practice questions with solutions
ICMAP & CA past papers theoretical questions

For CAF-6 and ICMAP students


1. Definition
A gain arising on the disposal of a capital asset by a person in a tax year, (except exempt gain) shall be
chargeable to tax under the head capital gains.
Taxation of capital assets is split into two categories as:
A. Capital assets u/s 37.
B. Capital assets u/s 37A.
1.1 Capital assets: [Section 2(10) and 37(5)]
Capital asset means property of any kind held by a person, whether or not connected with a business, but
does not include the following:
Any stock-in-trade, consumable stores or raw materials held for the purpose of business;
Any depreciable and intangible property; or
Any movable property [(excluding the capital assets defined in section 38(5)] held for personal use by the
person or any member of the persons family dependent on the person. U/s 38(5) has stated the following are
capital assets:
A painting, sculpture, drawing or other work of art;
Jewellery;
A rare manuscript, folio or book;
A postage stamp or first day cover;
A coin or medallion; or
An antique.
Example: From the following information provided by Mr. Hamid, compute income chargeable to tax under the
head capital gains. (Ignore holding period of the assets)
(a) Profit on sale of finished goods Rs. 100,000.
(b) Gain on sale of jewellery Rs.50,000.

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Capital Gains Chapter-12

(c) Gain on sale of personal car Rs. 350,000.


(d) Gain on sale of Antique Rs.10,000
Solution:
Mr. Hamid
Computation of taxable income and tax liability:
Capital gains: Rs.
Gain on sale of jewellery 50,000
Gain on sale of antique 10,000
Taxable income 60,000
Note: Item (a) and (c) have not been considered, as the same are not capital assets.
1.2 Capital assets u/s 37A:
Under this section capital assets are termed as securities. Securities include the following:
Shares of a public company,
Voucher of Pakistan Telecommunication Corporation,
Modarba Certificate,
An instrument of redeemable capital: defined in the Companies Ordinance, 1984 includes finance
obtained on the basis of participation term certificate (PTC), musharika certificate, term finance
certificate (TFC), or any other security or obligation not based on interest, other than ordinary share of a
Company, representing an instrument or a certificate specified denomination, called the face value or
nominal value, evidencing investment of the holder in the capital of the company on terms and
conditions of the agreement for the issue of such instrument or certificate or such other certificate or
instrument as the Federal Government may, by notification in the official Gazette, specify for the
purpose.
Debt securities means;
(a) Corporate debt securities such as TFCs, Sukuk Certificates (Sharia Compliant Bonds),
registered bonds, commercial paper, PTCs and all kinds of debt instruments issued by any
Pakistani or foreign Company or corporation registered in Pakistan; and
(b) Govt. debt securities such as treasury bills (T-bills), Federal Investment Bonds (FIBs), Pakistan
Investment Bonds (PIBs), Foreign Currency Bonds, Govt. papers, Municipal Bonds,
infrastructure Bonds and all kinds of debt instruments issued by foreign Govt., Provincial Govt,
local authorities and other statutory bodies.
Derivative products: Derivative products means a financial product which derives its value from the
underlying or other asset, may be traded on a stock exchange of Pakistan and includes deliverable
future contracts, cash settled future contracts, contracts of rights and options.
Public company u/s 2(47) means
A Company listed in Pakistan at the year end; or
A Company in which 50% or more shares are held by the Federal or Provincial Government or a foreign
Government or a foreign company wholly owned by a foreign Government or
A unit Trust.
Example: Which of the following capital assets are securities?
1. Jewellery
2. Shares of private company
3. Shares of public company
4. Painting
5. Musharika certificates
6. Vouchers of Pakistan Telecommunication corporation
7. First day cover
Solution: Item No. 3, 5 and 6 are securities, whereas the others fall in the definition of capital assets u/s 37.

184 Conceptual Approach to Taxes


Capital Gains Chapter-12

2. Procedure to determine capital gain: [U/s 37(2), (3) and (4)]


2.1 The gain arising on the disposal of a capital asset by a person shall be computed in accordance with the
following formula:
Consideration received by the person on disposal
(Higher of fair market value or actual amount received)
Less: cost of the asset [consist of the following u/s 76(2)]
Consideration given for the asset
Incidental expenditure incurred in acquiring and disposing off the asset
Any expenditure incurred to alter or improve the asset
Balance shall be the capital gain or loss
2.2. No amount shall be included in the cost of a capital asset for any expenditure incurred by a person that is
or may be deducted under another provisions of the Ordinance or that is referred as inadmissible u/s 21.
[U/s 38(4)]
2.3 Where a capital asset (other than immovable property) has been held by a person for more than one year
(other than capital assets defined in section 37A) the amount of gain arising on disposal of the asset shall
be taken as 3/4th while the balance 1/4th shall automatically be excluded from the taxable capital gain.
However if there is capital loss under this section the same shall be fully recognized without the
application of said exemption. [U/s 37(3)]
2.4 Capital gain on disposal of immovable property [U/s 37(3)
The exemption of 25% on disposal of capital assets is not available to immovable property.
Gain arising on the disposal of immovable property, held for a period up to 2 years, by a person in a tax
year, shall be chargeable to tax in that year under the head Capital Gains at the rates specified below:

S. No. Holding period Rate of tax


1. Where holding period of immovable property is up to one year. 10%
Where holding period of immovable property is more than one year but not
2. 5%
more than two years.

2.5 Where the capital asset becomes the property of the person under a gift, bequest, will, by succession,
inheritance, devolution, distribution of assets on dissolution of an AOP, or distribution of assets on
liquidation of a company the fair market value of the asset on the date of its transfer or acquisition shall
be treated to be the cost of the asset at the time of its disposal. [U/s 37(4A)] (Example B attached)
However no gain or loss shall be recognized at the original dates when the capital asset becomes the property
of the person under a gift, bequest and will etc. [U/s 79]
Example A Following information has been provided by Mr Ali:
Rs.
Consideration received on sale of share of a private company 96,000
Purchase price of the shares 20,000
Expenses incurred on purchase of shares 2,000
Expenses incurred on sale of shares 3000
Required: Compute income chargeable to tax under the head capital gains assuming:
(a) Holding period of the shares is 8 months.
(b) Holding period of the shares is 15 months.
Solution: (a)
Rs.
Consideration received 96,000
Less: Cost of shares:
Purchase price 20,000
Expenses on purchase 2,000
Expenses on disposal 3,000
25,000
Gain on disposal of shares (totally chargeable to tax as sold within one year) 71,000

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Capital Gains Chapter-12

Solution: (b) Rs.


Actual capital gain as above = 71,000
Taxable capital gain (71,000 x 3/4th) = 53,250

Example B Mr Amir purchased 10,000 shares of a private limited company in tax year 2010 for Rs. 100,000.
In tax year 2016 he transferred 5,000 shares to his wife under an agreement to live apart. Further he has
gifted to his son 2,000 shares and sold remaining shares for Rs.60,000. Compute taxable income of Mr. Amir
under the head capital gain for tax year 2016.

Solution:
M R. AMIR
TAX YEAR 2016 Rs.

Capital gains:
3,000 shares sold for Rs. 60,000 60,000
Less: cost of 3,000 shares sold (100,000 x 3,000 / 10,000) (30,000)
Total capital gain 30,000
Taxable capital gain 3/4th of Rs.30,000 22,500
Note: No gain or loss has been recognised on disposal of 5,000 shares to his wife under an agreement to live
apart and gift of 2,000 shares to his son.
Example C Following information is related to Mr. K. (All amounts are in rupees)

Purchase Consideration received FMV at the time Holding


Capital asset
price on disposal of sale period
Shares of private company 50,000 40,000 60,000 6 months
House 1 1,000,000 1,500,000 1,500,000 1.5 years
House 2 1,500,000 2,000,000 2,000,000 3 years

Assuming he has no other taxable income, compute tax payable by Mr. K. for tax year 2016.
Solution:
Mr. K
Computation of taxable income and tax liability: Rs.
Shares of private company:
Consideration on disposal (higher of FMV or actual amount) 60,000
Purchase price (50,000)
10,000
House 1:
Consideration on disposal (higher of FMV or actual amount) 1,500,000
Purchase price (1,000,000)
500,000
House 2:
(Holding period is more than 2 years, hence nothing is taxable in case of house 2 ______-_____
Income taxable under NTR 510,000
Less: chargeable to tax under SBI 500,000
10,000
Tax liability (Income is below taxable limit), hence tax liability is zero -
Tax liability under SBI (500,000 x 5%) 25,000
Total tax liability 25,000

186 Conceptual Approach to Taxes


Capital Gains Chapter-12

Explanation of section 37 and 38

Is asset is a capital asset?

No: Yes:
Although gain shall not taxable under If chargeable to tax
capital gains but may be taxable as
business income or income from
other sources.

No: Yes:
The same may be exempt from tax If it is an asset mentioned under
under 2nd Schedule section 38(5)

Yes: No:
No loss will be recognized only gain will be Gain and loss both will be recognized
chargeable to tax by taking 25% exemption by taking 25% exemption on capital
on capital gain where applicable. gain where applicable.

3. Gain on sale of securities: [U/s (37A), Rule 13A 13N]


Capital gain on disposal of securities (other than exempt from tax) shall be treated under NTR as SBI from 01
July 2010. Tax shall be charged on capital gain on disposal of capital assets acquired for a period which is less than
24 months at following rates.
The gain arising on the disposal of a security by a person shall be computed in accordance with the following
formula:
Gain = (Consideration received by the person on disposal of the security) (Cost of acquisition of the security)
Gain from capital assets under this section shall not apply on gain on disposal of securities by a banking company or
an insurance company.
S. No. Period Tax Year Rate of tax
(1) (2) (3) (4)
1. Where holding period of a security is less than 12 months. 2016 15%
Where holding period of a security is equal or more than 12 months
2. 2016 12.5%
but less than 24 months.
Where holding period of a security is equal or more than 24 months 2016 7.5 %
3.
but less than four years.
3. Where holding period of a security is equal or more than four years. 2016 0%

Securities held for a period upto a maximum of one hundred eighty two days (182) and for a period upto a
maximum of three sixty five days (365) shall be taken as held for six months and one year respectively.
Capital gain arising on the disposal of any security shall be computed on the basis of First in First out
(FIFO) inventory accounting method. However, FIFO method shall not apply in respect of sale of shares
purchased on the same trading day. In that case gain or loss shall be computed by applying the average
method.
TAXATION OF GAIN ON DEBT SECURITIES FOR COMPANIES (Part I of first Schedule Proviso to Division
VII)
Capital gain arising from disposal of securities shall be treated as a separate block of income. For rate
purposes this income is split into two categories, namely, debt securities and all other securities.
Tax on gain on disposal of debt securities shall be 32% for companies and for small companies 25% for the tax
year 2016.

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Capital Gains Chapter-12

COST OF ACQUISITION [Rule 13K(d)]


Cost of acquisition of any security means the market price of the security which the investor pays or would
have paid to purchase such security. Besides this general rule, the following principles shall apply while the cost
of securities acquired:
Sr. Particulars Cost of acquisition
1. Purchase of shares The market price of the security paid by the investor.
2. Right shares Discounted price at which the right shares are issued.
3. Acquisition through Market price of the security at which the deceased person and or would have
bequest or inheritance paid to purchase such security.
4. Bonus shares Market price of bonus shares immediately following the bonus shares which the
investor would have paid to purchases such shares.
5. Initial public offering (IPO) Actual price paid to the issuer.

Special provision relating to capital gain tax [U/S 100B read with Eight Schedule]
Capital gains on disposal of listed securities and tax thereon, subject to section 37A, shall be computed, determined,
collected and deposited in accordance with the rules laid down in the Eighth Schedule.
The above provisions shall not apply on the following:-
(a) mutual fund, a modaraba;
(b) Banking company, a non-banking finance company and an insurance company subject to tax under the Fourth
Schedule;
(c) a company, in respect to debt securities only; and
(d) Any other person or class of persons notified by the Board.

EIGHT SCHEDULE
RULES FOR THE COMPUTATION OF CAPITAL GAINS ON LISTED SECURITIES
1. Manner and basis of computation of capital gains and tax thereon
(1) Capital gains on disposal of listed securities, subject to tax under section 37A, and to which section 100B
apply, shall be computed and determined under this Schedule and tax thereon shall be collected and
deposited on behalf of taxpayers by NCCPL in the manner prescribed.
(2) For the purpose of sub-rule (1), NCCPL shall develop and automated system.
(3) Central Depository Company of Pakistan Limited shall furnish information as required by CCPL for discharging
obligations under this Schedule.
(4) NCCPL shall issue and annual certificate to the taxpayer on the prescribed form in respect of capital gains
subject to tax under this Schedule for a financial year:
(5) Provided that on the request of a taxpayer of if required by the commissioner, NCCPL shall issue a certificate
for a shorter period within a financial year.
(6) Every taxpayer shall file the certificated referred to in sub-rule (4) along with the return of income and such
certificate shall be conclusive evidence in respect of the income under this Schedule.
(6) NCCPL shall furnish to the Board within the Board within thirty days of the end of each quarter, a statement of
capital gains and tax computed thereon in that quarter in the prescribed manner and format.
(7) Capital gains computed under this Schedule shall be chargeable to tax at the rate applicable in Division VII of
part 1 of the First Schedule.
(8) The provisions of section 4B shall apply to the taxpayers under this schedule and taxed at the rates specified
in Division IIA of Part 1 of the First Schedule.
2. Sources of Investment
(1) Where a person has made any investment in the listed securities, enquires as to the nature and source of the
amount invested shall not be made for any investment made prior to the introduction of the Schedule, provided
that-
(a) a statement of investment s is filed with the Commissioner along with the return of income and wealth
statement for tax year 2012 within the due date as provided in section 118 of this Ordinance and in the
manners prescribed; and
(b) that the amount remains invested for a period of forty- five days upto 30th of June 2012, in the manner
as may be prescribed.

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(2) Where a person has made any investment in the shares of a public company traded at a registered stock
exchange in Pakistan from the date of coining into force of this Schedule till June 30, 2014, enquiries as to the
nature and sources of amount invested shall not be made provided that
(a) the amount remains invested for a period of one hundred and twenty days in the manner as may be
prescribed;
(b) tax on capital gains, if any, has duly been discharged in the manner laid down in this Schedule; and
(c) a statement of investments is filed with the Commissioner along with the return of income and wealth
statement for the relevant tax year within the due date as provided in section 118 of this Ordinance and
in the manner prescribed.
(3) For the purpose of this rule, amount of investment shall be calculated in the prescribed manner, excluding
market value of net open sale position in futures and derivatives, if such sale is in a security that constitutes
the said investment.
3. Certain provisions of this Ordinance not to apply
The respective provisions for collection and recovery of tax, advance tax and deduction of tax at source laid down in
the Parts IV and V of Chapter X shall not apply on the income from capital gains subject to tax under this Schedule
and these provisions shall apply in the manner as laid down in the rules made under this Ordinance, except where
the recovery of tax is referred by NCCPL to the Board in terms of rule 6(3).
4. Payment of tax collected by NCCPL to the Board
The amount collected by NCCPL on behalf of the Board as computed in the manner laid down under this Schedule
shall be deposited in a separate bank account with National Bank of Pakistan and the said amount shall be paid to
the Board along with interest accrued thereon on yearly basis by July 31st next following the financial year in which
the amount was collected.
5. Persons to whom this Schedule shall not apply
If a person intends not to opt for determination and payment of tax as laid down in this Schedule, he shall file an
irrevocable option to NCCPL after obtaining prior approval of the Commissioner in the manner prescribed. In such
case the provisions of rule 2 shall not apply.
6. Responsibility and obligation of NCCPL
(1) Pakistan Revenue Automation Limited (PRAL), a company incorporated under the of Companies Ordinance,
1984 or any other company or firm approved by the Board and any authority appointed under section 209 of
this Ordinance, not below the level of an Additional Commissioner Inland Revenue, shall conduct regular
system and procedural audits of NCCPL on quarterly basis to verify the implementation of this Schedule and
rules made under this Ordinance.
(2) NCCPL shall implement the recommendations, if any, of the audit report under sub-rule (1), as approved by
the Commissioner, and make adjustments for short or excessive deductions. However, no penal action shall
be taken against NCCPL on account of any error, omission or mistake that has occurred from application of
the system as audited under sub-rule (1).
(3) NCCPL shall be empowered to refer a particular case for recovery of tax to the Board in case NCCPL is
unable to recover the amount of tax.
7. Transitional Provisions
In respect of tax year 2012, for the period commencing from coming into force of this Schedule till June 30, 2012, the
certificate issued by NCCPL under rule 1(4) shall be the basis of capital gains and tax thereon for that period.
Example: Mr. Adnan sold some shares in tax year 2016. Detail of gain or loss on sale is given below:
Gain / (loss)
Rs.
(a) Shares of Alpha Chemicals (Pvt.) Ltd. 100,000
(Holding period is 15 months)
(b) Shares of Beta Industries Ltd. (Unlisted public Company) (60,000)
(Holding period is 6 months)
(c) Shares of Omega Limited (Listed Company) 10,000
(Holding period 9 months)
(d) Shares of Delta Limited (Listed Company) 20,000
(Holding period 18 months)
Required: Compute taxable income and tax liability for tax year 2016.

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Capital Gains Chapter-12

Solution:
Mr. Adnan
Computation of taxable income and tax liability: Rs.
Capital gain:
Gain on shares of Alpha Chemicals (Pvt.) Ltd.
(Holding period is more than 1 year) (100,000 x 75%) 75,000
Loss on shares of Beta Industries Ltd. (Unlisted Public Company)
(In case of loss, holding period has no effect) (60,000)
Taxable income 15,000
Computation of tax liability:
Tax on taxable income (Below taxable limit) Nil
Tax on income under separate block of income:
Tax on gain on shares of Omega Limited (10,000 x 15%) 1,500
Tax on gain on shares of Delta Limited (20,000 x 12.5%) 2,500
Total tax liability 4,000
4. Loss U/S 37:
Capital losses shall be set off against the capital gains only during the same tax year and where such loss is not so
set off then the balance loss shall be carried forward for adjustment against capital gain up to six succeeding tax
years. If capital gain is exempt from tax then loss from such asset shall have no treatment under capital gain. [U/s38
(1) and (2)]
Example: From the following information, compute the amount of capital loss to be carried forward, if any
Taxable capital gain 40,000
Capital loss 80,000
Note: Out of given capital loss Rs. 20,000 relates to capital asset that is exempt from tax.
Solution:
Total capital loss 80,000
Less: capital loss of exempt capital asset 20,000
60,000
Less: Taxable capital gain 40,000
Capital loss to be carried forward 20,000
No loss shall be recognized on disposal of the assets mentioned below: [U/s 38(5)]
(i) A painting, sculpture, drawing or other work of art;
(ii) Jewellery;
(iii) A rare manuscript, folio or book;
(iv) A postage stamp or first day cover;
(v) A coin;
(vi) A Medallion; and
(vii) An antique.
Example: From following information compute taxable income and tax liability of Mr. A.
Rs.
Gain on sale of painting 40,000
Loss on sale of jewellery 20,000
Loss on sale of shares of an industrial undertaking in EPZ 10,000
Solution:
Capital gain chargeable to tax is Rs. 40,000.
Loss on sale of Jewellery is not recognised.
Loss on sale of shares of industrial undertaking in Export Processing Zone (EPZ) shall also not be recognized as gain
on such shares is exempt from tax.

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Capital Gains Chapter-12

5. Loss U/S 37A:


Capital loss u/s 37A shall be set off against the gain from any other security chargeable to tax during the year; It shall
not be carried forward as it is treated as a separate block of income. [U/s 37A(5)]
Capital loss adjustment disallowed (Rule 13F)
Capital loss adjustment as mentioned above shall not be admissible in the following cases, namely
Wash Sale
Where capital loss realized on disposal of a specific security by an investor is preceded or followed in one months
period by purchase of the same security by the same investor, thus maintaining his portfolio.

Cross Trade
Where coordinated reshuffle of securities between two related accounts of the same investor or between two related
brokerage houses is undertaken and securities accumulating unrealized losses are sold to related accounts to
artificially realize capital losses in one account without actually selling the securities to an outsider.
Tax Swap sale
Where the investor having realized loss on a particular security does not repurchase the same security but
chooses another similar security in the same sector, thus, not only minimizing or eliminating altogether liability
on account of tax on capital gain, but also maintaining the portfolio broadly at the same risk return profile.
There shall be no tax if the securities are held for more than one year;
This section shall not apply to a banking company or an insurance company;
The holding period shall reckon from the date of acquisition to the date of disposal;
Gain under this section shall be treated as a separate block of income.

Payment of tax on capital gain [Rule 13H]


Every investor other than individual shall e-file statement of advance tax on capital gain on the capital gain
on the prescribed format within seven (7) days after the end of each quarter with the tax authority.
The liability to pay the due tax on capital gain shall lie on the investor who held the securities during the
period for which tax on capital gain is to be paid.
Example: Compute tax payable by Mr. Sabir for the tax year 2016 from following information:
Rs.
Gain on sale of shares of Omega Limited (Listed Company) 35,400
(Holding period is less than 6 months)
Loss on sale of shares of Delta Limited (Listed Company) (65,000)
(Holding period is equal to 12 months)
Solution:
Mr Sabir
Tax year 2016
Computation of taxable income and tax liability:
Rs.
Gain on sale of shares of Omega Limited 35,400
Less: Loss on sale of shares of Delta Limited 65,000
Unadjusted loss on sale of securities (29,600)
No tax is payable by Mr. Sabir as there is loss under separate block of income.
Note: The unadjusted loss on sale of security shall not be carry forward.

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Example: Compute tax payable by Mr. Jamil for the tax year 2016 from following information:
Rs.
1. Gain on sale of shares of Omega Limited (Listed Company) 20,000
(Holding period is less than 12 months)
2. Gain on sale of shares of Apex Limited (Listed Company) 20,000
(Holding period is equal to 12 months)
3. Gain on sale of shares of Zelda Limited (Listed Company) 20,000
(Holding period is equal to 48 months)
4. Loss on sale of shares of Delta Limited (Listed Company) 20,000
(Holding period is more than 12 months but less than 24 months)
Solution: Taxpayer has the option to adjust the loss on sale of security against gain on sale of any security
chargeable to tax during the year. The gain on sale of shares of Zelda Limited is not chargeable to tax because of its
holding period. However capital loss on sale of Delta Ltd. shall be firstly adjusted against the gain of Apex Ltd and
finally the gain of Omega Ltd. shall be charged tax at 15%.
Explanation of section 37A

Where asset is a capital asset is a


security as defined in section 37A(3).

No: Yes:
It may be chargeable to tax under It is chargeable to tax under separate
section 37 as given above block of income

Non applicability of section 37A: Treatment of losses:


a. Securities held for equal or more than 48 Loss shall be set off only against the
months. and gain of the person from any other
b. Banking and insurance companies etc. securities chargeable to tax under this
section and no loss shall be carried
forward to the subsequent tax year.

192 Conceptual Approach to Taxes


Capital Gains Chapter-12

Pakistan source & Foreign source capital gain

Geographical source of capital


Received by Taxability
gain

Pakistan source capital gain


Taxable [Section 11(5) and (6)]
[Section 101]:
In case of non resident the terms &
conditions of double taxation treaty
Gain arising on the disposal of Resident / Non-resident individual
agreement are also relevant for Pakistan
shares in a resident company
source income.
shall be Pakistan-source income.

a. Resident Individual Taxable [Section 11(6)]


[Section 50]
b. Short term resident An individual shall be exempt in respect of his
foreign-source income which is not brought /
received in Pakistan if he is resident only by
[For all foreign source income] reason of his employment and he is present in
Pakistan for not exceeding 3 years.
Foreign source capital gain:
Capital gain other than above. [Section 51]
c. Returning expatriate If an individual citizen of Pakistan (returning
expatriate) is resident in the current tax year
[Citizen of Pakistan coming back but was non-resident in the 4 preceding tax
in Pakistan] years, his foreign-source income shall be
exempt in current tax year and in the following
[For all foreign source income] tax year.
Non-resident individual Not taxable [Section 11(6)]

6. Capital Gains Exempt from tax:


The following capital gains are exempt from tax under Part-I of 2nd schedule:
1. Any distribution received by a taxpayer from a collective investment scheme registered by the Securities and
Exchange of Commission of Pakistan including NIT or a Mutual Fund out of the capital gains of the said
Schemes. Provided that this exemption shall only e available to only such mutual funds, collective investment
schemes that are debt or money market funds and these do not invest in shares U/c (103)
2. Any gain on transfer of a capital asset, being a membership right held by a member of an existing stock
exchange, for acquisition of shares and trading or clearing rights acquired by such member in new
computerized stock exchange in the course of corporatization of an existing stock exchange. U/c (110B)
3. Exemption on capital gains from units in Special Industrial Zones U/c 113 has been omitted from tax year
2016.
4. Any income from sale of shares of an industrial undertaking set up within the meaning of the Export
Processing Zone Authority Ordinance. U/c (114)
7. Treatment of bonus shares
Under the Companies Ordinance, 1984 a company may issue the following three ways to issue the share:
1. Shares issued for cash
2. Shares issued for other than cash
3. Issue of shares without any consideration (Bonus shares)
The taxation of bonus shares of listed companies are covered under the head income from other sources u/s 39 and
to be taxed @ 5% under section 236M on market price on the first day end price on closure of books. However the
Board has reserved the right to prescribe the taxation on bonus shares from unlisted and Private Ltd. Companies.
8. Disposal
The legislature intentionally used the word of disposal and it had not used the words of gain on sale. The reason to
use the term is that the term disposition is wider connotation than sale. It includes exchange, relinquishment and
extinguishments in addition to sale. This is evident from the explanation of disposal given in u/s 75 of the
Ordinance.

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Sales Ordinary sale involving transfer of assets in lieu of any consideration.


Disposition In relation to a property means disposition made by deed or will and also made by
or under a decree or under orders of court Tribunal or Authority.
Exchange Where transferee does not bring cash but something else in exchange.
Relinquishment of an asset Firm purchases right to manufacture a certain brand and of goods, on dissolution
one partner relinquishes the right to that license for a consideration.
Extinguishments of a right Say three partners of a firm hold right in goodwill. Two partners on dissolution
surrendered their right in favor of third Partner

194 Conceptual Approach to Taxes


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MULTIPLE CHOICE QUESTIONS


Q.1. Gain arising from the disposal of _________ is taxable under the head capital gains.
(a) Depreciable asset
(b) Eligible depreciable asset
(c) Securities
(d) All of the above
Q.2. ____________are capital assets.
(a) Stock in trade
(b) Sculpture
(c) Immovable property
(d) Both b and c
Q.3. A person who derives his income by dealing in shares of private, unlisted and public limited companies are covered
under the head.
(a) Income from business
(b) Income from other sources
(c) Capital gains or
(d) All of the above
Q.4. A loss on the disposal of _______ is not recognized under the Income tax Ordinance, 2001.
(a) Securities not chargeable to tax
(b) Medallion
(c) Both (a) and (b)
(d) None of (a) to (c)
Q.5. Bonus shares are issued by a company to its ______ without receiving any amount from them.
(a) Employees
(b) Customer
(c) Shareholders
(d) All of the above
Q.6. Where a capital asset (other than securities and immoveable property) is disposed off after one year of its acquisition,
then gain for tax purposes is ______ of actual gain.
(a)
(b)
(c)
(d) None of (a) to (c)
Q.7. Income from Modaraba certificates is now taxable under section _________.
(a) 37
(b) 37A
(c) 38(5)
(d) none of (a) to (c)
Q.8. Income from shares of a public company set up in any special Industrial zone is exempt up to-------- years from the
date of commencement of commercial production.
(a) Three
(b) Four
(c) Five
(d) None of the above
Q.9. Gain from sale of shares of Private Limited companies is taxable under section_________.
(a) 37
(b) 37A
(c) Not taxable
(d) None of (a) to (c)

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Capital Gains Chapter-12

Q.10. Bonus shares are the shares issued by a company_____________.


(a) Free of cost
(b) Issued at concessional rate
(c) On credit
(d) None of the above
Q.11. A deduction of loss u/s 37A on disposal of security chargeable to tax may be adjusted against the capital gain of
____________.
(a) Any other security not chargeable to tax
(b) Any other security chargeable to tax
(c) Shares of (Pvt.) Ltd. company
(d) None of the above
Q.12. A company in which at least 50% of the shares are held by a foreign government is ___________.
(a) Private company
(b) Public company
(c) Foreign company
(d) All of the above
Q.13. Any incidental expenditure on disposal of capital assets shall form part of _____________.
(a) Cost of assets
(b) Disposal consideration
(c) Selling cost
(d) None of a to c
Q.14. Capital loss u/s 37 is allowed as deduction for those assets the gain of which is___________.
(a) Chargeable to tax
(b) Exempt from tax
(c) Both of these
(d) None of (a) to (c)
Q.15. At the time of devolution ___________ would be the cost of the asset.
(a) FMV
(b) Historical cost
(c) higher of a and b
Q.16. Medallion received as gift and disposed off later, the capital loss on the same shall________.
(a) be recognized
(b) not be recognized
Q.17. Expenditure that shall form part of the cost of the asset are __________.
(a) Any expenditure to earn such income
(b) All the expenditure excluding expenditure inadmissible u/s 21 of the ITO, 2001.
(c) None of the above
Q.18. Tax on capital gain shall be charged on capital gain arising from debt on securities u/s 37A w. e. f.
(a) 01-07-2014
(b) 01-07-2013
(c) 01-07-2012
Q.19. Capital gain tax shall not be chargeable on disposal of securities which are held for a period of __________.
(a) one year
(b) two years
(c) three years
(d) six months
(e) forty eight months
Q.20. Derivatives is a general term for financial assets that are derived from other_______________.
(a) fixed assets
(b) current assets

196 Conceptual Approach to Taxes


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(c) financial assets


(d) income
Q.21. Any distribution received from NIT or a Mutual Fund of ICP out of the Capital Gains on which tax has already been
paid are___________________.
(a) Permanently exempt
(b) Fully Taxable
(c) Chargeable to tax
Q.22. Which one of the following is not a security _______________.
(a) share of a public company
(b) voucher of PTC
(c) Modaraba Certificates
(d) Lease hold right
Q.23 Gain on disposal of immovable property is chargeable to at _____%, where holding period is up to one year.
(a) 10
(b) 2
(c) 6
(d) 12
Q.24 Where a capital asset under section 37 is sold after one year, ________ of gain on such assets is exempt from tax.
(a) 50%
(b) 25%
(c) 75%
(d) 100%
Q.25 A loss on the sale of jewellery is _______ under the head capital gain.
(a) recognized
(b) not recognized
(c) taxable
(d) none of above
Q.26 Redeemable capital instruments are chargeable to tax under section _____.
(a) 37
(b) 38
(c) 37A
(d) 39
Q.27 In case capital assets are acquired through inheritance, the FMV on the date of ________ is treated as cost of
assets.
(a) disposal
(b) acquisition
(c) destruction
(d) all of above
Q.28 Profit on sale of personal car is taxable under the head _______.
(a) income from salary
(b) income from property
(c) income from business
(d) none of above
Q.29 Where a security has been disposed off within twelve (12) months from the date of its acquisition the rate of tax shall
be higher as compared to the rate applicable after _________months.
(a) 12
(b) 5
(c) 1
(d) none of above

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Q.30 Holding period of security and other capital assets _______ on the taxability of capital gain on their disposal.
(a) have no effect
(b) have effect
(c) none of above
Q.31 Rates for taxability of capital gains under section 37A for AOP and individuals are____.
(a) different
(b) equal
(c) none of above
Q.32 Capital gain is _______ where transfer of assets between spouses under an agreement to live apart, under a gift,
bequest or will, by succession, inheritance or devolution and distribution of assets on dissolution of an AOP or on
liquidation of a company.
(a) taxable
(b) exempt
(c) not recognized
(d) none of above
Q.33 The unadjusted capital loss under section 37 can only be carried forward upto the period of ___ years immediately
after the year of occurrence for adjustment against income from capital gain only.
(a) seven
(b) three
(c) six
(d) ten
Q.34 Loss on securities chargeable to tax can be carried forward to subsequent ___ tax years.
(a) seven
(b) three
(c) six
(d) none of the above
Q.35 When a capital asset is disposed of within one year, _____ of gain is taxable.
(a) 100%
(b) 75%
(c) 25%
(d) 0%
Q.36 Provisions of section 37A are not applicable to _________.
(a) an insurance company
(b) a banking company
(c) both a and b
(d) none of above
Q.37 An option to buy a __________ is a derivative.
(a) treasury bond
(b) shares
(c) debentures
(d) all of above
Q.38 Capital loss under section 37 may not be adjusted against the capital gain under section ______.
(a) 37
(b) 38
(c) 37A
(d) all of above
Q.39 _______ received as gift shall be chargeable to tax.
(a) medallion
(b) old coin
(c) painting
(d) none of above

198 Conceptual Approach to Taxes


Capital Gains Chapter-12

ANSWERS
1 (c) 2 (d) 3 (c) 4 (c) 5 (c)
6 (c) 7 (b) 8 (d) 9 (a) 10 (a)
11 (b) 12 (b) 13 (a) 14 (a) 15 (a)
16 (b) 17 (b) 18 (a) 19 (a) 20 (c)
21 (a) 22 (d) 23 (a) 24 (b) 25 (b)

26 (c) 27 (b) 28 (d) 29 (a) 30 (b)

31 (b) 32 (c) 33 (c) 34 (d) 35 (a)

36 (c) 37 (a) 38 (c) 39 (d)

Conceptual Approach to Taxes 199


Capital Gains Chapter-12

PRACTICE QUESTIONS WITH SOLUTIONS


Q # 1 An individual has disposed off his shares holding in different companies as per following details:
Cost of Acquisition
Company No of Shares Disposal Consideration Rupees Per Shares
Rupees Per Share
ABC Limited 10,000 35 55 (sold within 12 months)
XYZ Limited 5,000 40 30 (sold after 12 months but before 24 months)
MN (Private) Limited 15,000 100 140
HN (Private) Limited 20,000 50 45
PN (Private) Limited 10,000 50 75
Required: Compute the amount of capital gain for the tax year after considering the following information:
1. ABC Limited and XYZ Limited are listed companies.
2. Shares of MN (Private) Limited were disposed after two years of purchases.
3. Shares of PN (Private) Limited were kept by the person for 6 months.
Solution
Capital gain on shares of listed companies (Separate Block of Income):
Rs.
Gain on shares of ABC Limited (10,000 x (55 35)) 200,000
Loss on shares of XYZ Limited (5,000 x (30 40)) (50,000)
Capital gain 150,000
Tax on above capital gain @ 15% (Separate block of Income) 22,500
Capital gain on shares of (Private) limited companies:
Rs.
Gain on shares of MN (Private) Limited (15,000 x (140 100)) x 75% 450,000
Loss on shares of HN (Private) Limited (20,000 x (45 50)) (100,000)
Gain on shares of PN (Private) Limited (10,000 x (75 50)) 250,000
Capital gain 600,000
Q # 2 Mr. Z owns different assets the detail of these assets along with mode and value of acquisition and nature of
transaction is as under:
During the year, Mr. Arshad brother of Mr. Z gifted 5,000 shares of M/s ABC (Pvt.) Limited to Mr. Z. Mr. Arshad purchased
these shares at Rs.100 per share. Mr. Z sold these shares for a sum Rs.625,000 as on 15 June, 2016. The fair market value
at the date when gift received was Rs.135.
Mr. Z has also paid a sum of Rs. 40,000 for purchase of a one Kanal plot in EME Society Lahore. Mr. Z has fortunately
succeeded in balloting and has was provided the opportunity to pay the instalments for the allotment of plot. Mr. Z paid first
instalment of Rs.100,000 on January 2016. However, Mr. Z felt that he would not be able to pay the further instalments,
therefore he sold that plot entitlement to Mr. S for a sum of Rs. 250,000 on June 27, 2016.
Mr. Z has also 10,000 shares of XYZ Limited, a listed company, which were transferred to him through inheritance from
father. The face value of these shares is Rs.10 per share and his father was originally allotted these shares. Mr. Z sold 2,000
shares out of them at Rs.30,000 on January 30, 2016. The price ruling in the market on the date of sale was Rs.20 per
share.
Mr. Z also has a habit of collection of postage stamps. His collection includes 2,000 stamps countries and occasion. He
collected these stamps in many years. The cost of these stamps aggregates to Rs.275,000. However, due to paucity of
space in the home, he is not able to continue this habit therefore he sold these stamps for sum of Rs.500,000 in a stamp
exhibition.
You are required to compute taxable income of Mr. Z for tax year 2016.
Solution
Rs. Rs.
Shares of ABC (Pvt.) Limited:
Consideration received 625,000
Less: Fair market value on date of gift deemed as cost (5,000 x 135) 675,000
(A) (50,000)
Sale of rights in the plot
Consideration received 250,000
Less payments made 140,000
Taxable capital gain (B) 110,000

200 Conceptual Approach to Taxes


Capital Gains Chapter-12

Stamps:
Consideration received 500,000
Less: Cost 275,000
225,000
75% taxable (C) 168,750
Taxable capital gain (A+B+C) 228,750
Capital gain on shares of XYZ Limited (Separate Block of Income):
Consideration received 40,000
Higher of: Actual or fair market value (30,000 or 40,000)
Less: cost (10 x 2,000) 20,000
(Assumed that fair market value on date of transfer is Rs.10 per share)
20,000
Q # 3 Mr. Shahbaz a resident individual earned Rs 650,000 from the sale of assets as shown below:
PURCHASE SALE GAIN / (LOSS)
DATE PRICE (Rs) DATE PRICE (Rs) Rs
Shares of Listed Company 10-12-14 350,000 31-7-15 200,000 (150,000)
Shares of Unlisted Company 15-7-14 500,000 30-11-15 900,000 400,000
Jewellery 15-5-14 750,000 20-12-15 1,400,000 650,000
Sculpture 01-7-13 400,000 31-01-16 300,000 (100,000)
Shares of private company 01-01-14 1,300,000 15-02-16 1,200,000 (100,000)
Shares of Listed Company 31-12-14 250,000 30-6-16 200,000 (50,000)
Required: Discuss the treatment and implications of each of above transaction under the ITO, 2001.
Solution
Capital assets u/s 37A Rs.
Loss on shares of listed companies (150,000 + 50,000) (200,000)
Loss (200,000)
Capital loss u/s 37A can neither be adjusted against gain realized u/s 37 nor can it be carried forward.
Capital assets u/s 37
Gain on shares of unlisted company (400,000 x 75%) 300,000
(Holding period is more than one year)
Gain on jewellery (650,000 x 75%) 487,500
(Holding period is more than one year)
Loss on sculpture (Loss of this capital asset is not recognized) -
Loss on shares of private company (100,000)
Total gain u/s 37 687,500
Q # 4 Explain the following with reference to Income Tax Ordinance, 2001.
(i) Capital assets (ii) Valuation of Capital assets (iii) Capital gains (iv) Adjustment of capital loss against capital gains.
Solution
(i) Capital assets
There are two categories of capital assets: 1. Capital assets other than specified in section 37A, 2. Capital assets
specified in section 37A.
(a) Capital assets other than specified in section 37A.
Capital asset has been defined as property of any kind, connected with business or not, but does not include:
(i) Stock in trade, consumable stores or raw materials held for business
(ii) Depreciable asset or amortizable asset (i.e. fixed assets and intangibles for business use)
(iii) Immovable property
(iv) Movable property held for personal use of the person or any dependent family member excluding
capital assets mentioned in section 38(5)
(b) Capital assets specified in section 37A.
A separate section 37A has been introduced by the Finance Act 2010 to cater the disposal transactions of the
following securities:
(i) Shares of a public company;

Conceptual Approach to Taxes 201


Capital Gains Chapter-12

(ii) Vouchers of PTCL;


(iii) Modaraba certificates
(iv) An instrument of redeemable capital, debt securities as defined in the Companies Ordinance 1984; and
(v) Derivative products
(ii) Valuation of Capital assets: If a person receives a capital asset under Gift, Bequest, Will, Succession, Inheritance,
Devolution, Dissolution of AOP or Liquidation of Company, then fair market value on date of transfer shall be treated
as cost of the capital asset while in other cases value of capital asset shall be equal to its purchase price.
(iii) Capital gain: Capital gain is computed as consideration received less cost of the capital asset + expenses incurred
exclusively for earning capital gains (including incidental expenses for acquiring and disposing the capital asset).
Consideration received is the higher of actual amount received or fair market value. In case, an asset is lost or
destroyed, consideration received shall be scrap value along with any compensation, indemnity or damages received
under an insurance policy, agreement, settlement or judicial decision.
(iv) Adjustment of capital loss against capital gains: Capital loss can be c/f only against future capital gains up to 6
years next following the tax year in which the loss occurred.
Loss on disposal of securities u/s 37A shall be set off only against the gain from any other securities u/s 37A and any
unadjusted loss shall not be carried forward to the subsequent tax year.
Q#5 Briefly explain the income tax implications in respect of each of the following independent situations for the tax year
2016
(a) Mr. Mobeen has also paid a sum of Rs. 60,000 for purchase of dining table set on 15 January 2002 for his personal
use. He sold the said set to Mr Gufran for a sum of Rs. 90,000 on 27 June, 2016.

(b) 15 February 2016 Bilal discarded a machine which he had imported from China for Rs. 1,000,000 on 1 January
2016 to start the business. However, the machine was badly damaged during the shipment, rendering it unfit for
use. The shipping company paid him Rs. 850,000 as damages. The scrap value of the machine on the date it was
discarded was estimated to be Rs. 200,000. The documentation charges incurred in connection with the claim for
damages were Rs. 25,000
(c) On June 15, 2016 Imran sold his personal car for Rs. 1,500,000. The car has been originally purchased for Rs.
1,200,000 on September 13, 2013.
Solution:
(a) Sale of dinning table set

Although there is gain on sale of dinning table of Rs. 30,000. However any movable property for personal use,
except for painting, sculpture, drawing, jewellery, rare manuscript, folio, book, postage stamps, first day cover, coin,
medallion or an antique, is not chargeable to tax.
(b) Disposal of machine

Since Bilal was not entitled to claim depreciation on this machine, the machine falls within the definition of a capital
asset. [S.37(5)(b)] Discarding an asset is also treated as a disposal of the asset. [S.75(3A)] The capital gain is
determined as:
Rs.
Consideration received 15 February 2016
Damages from the shipping company 850,000
Scrap value of the machine 200,000
1,050,000
Cost of the machine on 1 January 2016
Purchase price of the machine 1,000,000
Documentation charges incurred 25,000
(1,025,000)
Capital gain 25,000
Since the disposal was made within one year of acquiring the asset, the full amount of capital gain is taxable. [S.37
(3)]

(c) Sale of personal car


A moveable asset in the personal use of the taxpayer is not a capital asset. Therefore, the gain is not taxable [Ref.
Sec 37(5)(d)]

202 Conceptual Approach to Taxes


Capital Gains Chapter-12

ICMAP PAST PAPERS THEORECTICAL QUESTIONS


Q. NO. 7 (b) WINTER 2005 State the five capital assets for which loss on disposal is not allowed to be recognized /
claimed under Income tax Ordinance, 2001.
Q. NO. 8 (a) WINTER 2004 Explain the provisions of Carry forward of capital losses under the Income tax Ordinance, 2001.

Conceptual Approach to Taxes 203


Capital Gains Chapter-12

CA MOD C PAST PAPERS THEORECTICAL QUESTIONS


Q.NO.3 Autumn 2014 Zaman is working as the Chief Executive Officer in Yasir Limited (YL). Following are the details of
sale and purchase relating to his capital assets during the tax year 2014.
(b) He sold 24,000 shares of HQ (Pvt.) Limited on 30 June 2014 for Rs. 200 per share.
He had acquired these shares as follows:
18,000 shares were purchased at Rs. 55 per share on 25 June 2013.
6,000 shares were allotted as bonus shares on 28 February 2014.
(c) A gain of Rs. 300,000 was realized on the sale of shares of Zeeshan Industries Limited (ZIL), a public listed
company, in June 2014. The shares were acquired on 31 May 2013.
(d) Zaman sold a painting to his brother on 23 March 2014 for Rs. 1,800,000. Zaman had purchased this painting
for his residence, in an auction for Rs. 2,000,000 on 10 July 2011.
(e) He sold his old furniture to Furqan for Rs. 285,000 on 25 June 2014. The furniture was purchased in 2012 for Rs.
250,000.
Required: Compute the amount to be included in the taxable income of Zaman for the tax year 2014 and specify the head
of income under which the income would be classified.

Q.NO. 6(a) Spring 2010 Explain the term Capital Assets as referred to in the Income tax Ordinance, 2001.
Q.NO. 6(a) Spring 2007 Under the Income tax Ordinance, 2001, a deduction for capital loss is allowed when consideration
received on disposal of a capital asset is less than its cost. What are the exceptions to this rule?
Q.NO. 4(b) Spring 2005 Discuss which assets are not considered capital assets for the purpose of determining income
under the head Capital Gains.
Q. NO. 4(b) April 2005 Discuss which assets are not considered capital assets for the purpose of determining income under
the head capital gains.
Q. NO. 2(i) March 2000 state the basis of taxation regarding capital gains.
Q. NO. 4(a) March 1999 Explain the procedure for computation of capital gain.
Q. NO. 4(b) April 1998 Explain the basis of chargeability under the head capital gains.

NOW SOLVE FOLLOWING NUMERICAL QUESTIONS OF MODULE C / AFC PAST PAPER RELATED TO THIS TOPIC

Q. NO. 3(III) & (IV) AUTUMN 2013


Q. NO. 5(A) AUTUMN 2012
Q. NO. 6(B) SPRING 2010
Q. NO. 3(A) AUTUMN 2007

204 Conceptual Approach to Taxes


Income From Other Sources Chapter-13

Chapter

13 INCOME FROM OTHER SOURCES

Topic covered Topic covered


Section (Part - I for CAF-6 and ICMAP (Part - II for CA Mod F and ICMAP
Section Rule
students) students)
Part - I Part - II
39 Income from other sources 89 Authors
Loan, advance, share deposit or gift
111 Un-explained income or assets
as other source of income
Profit on debt received as arrears 228 Valuation of assets
Non application of section 39 228 Donation in kind
Deductions under income from
40
other sources
Deductions not allowable
46 Profit on debt exempt from tax MCQs with solutions
Geographical source of income from
11,50,51 &101 Practice questions with solutions
other sources & their taxability
Exemption under 2nd schedule to ICMAP & CA Mod C past papers theoretical
Income Tax Ordinance, 2001 questions

PART I (For CAF-6 and ICMAP students)


1. Income from other sources: [U/s 39(1)]
Income of every kind received by a person in a tax year, if it is not included in any other head, other than
income exempt from tax, shall be chargeable to tax in that year under the head income from other sources including
the following namely:
(a) Dividend (covered under separate block of income)
(b) Royalty
(c) Profit on debt.
(d) Additional payment on delayed refund under any tax law
(e) Ground rent.
(f) Rent from sub-lease of land or a building.
(g) Income from the lease of any building together with plant or machinery.
(h) Income from provision of amenities, utilities or any other service connected with renting of building.
(i) Any annuity or pension received by a person not being as an employee.
(j) Any prize on prize bond, or winning from a raffle, lottery, prize on winning a quiz, price offered by companies
for promotion of sale or cross-word puzzle.
(k) Any other amount received as consideration for the provision, use or exploitation of property, including from
the grant of a right to explore for, or exploit, natural resources.
(l) The fair market value of any benefit, whether convertible to money or not, received in connection with the
provision, use or exploitation of property; and
(m) Income arising to the shareholder of a company from the issuance of bonus shares.

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Income From Other Sources Chapter-13

(n) Any amount received by the person as consideration for vacating the possession of a building or part thereof.
It shall be taxable as follows: [U/s 39(1) and (2)]
Amount received for vacating the possession
Less: any amount paid on acquiring the possession
Taxable under the head other sources = Additional amount received 10
(o) Any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under
Voluntary Pension System Rules, 2005.
2. Loan, advance, share deposit money or gift to be treated as income from other sources [U/s 39(3) and (4)]
Amount of loan, advance, share deposit money or gift received by a person in a tax year from another person
(excluding receipt from a company or financial institution) otherwise than by a crossed cheque, shall be treated
as income from other sources for the tax year in which it was received.
This section shall not apply on the following cases:
(i) Where amount is received through banking channel from a person who holds a NTN; or
(ii) Advance against sale of goods or supply of services.

Example: Which of the following incomes are covered under the head income from other sources
(a) Dividend received by an individual.
(b) Salary received from employer.
(c) Profit on debt received by banking company.
(d) Rent against plot received as ground rent.
(e) Rent of building received from tenant.
(f) Rent from sub-lease of a property by tenant.
(g) Income from hire of factory (inclusive of plant and machinery).
(h) Amount received against sale of shares of a private limited company.
(i) Income from utilities connected with the rented premises.
(j) Received prize on prize bond.
(k) Amount of any unexplained income, investment or expenditure treated u/s 111.
(l) Any amount of loan received from friend through cash.
(m) Additional payment for delayed refund of income tax
Solution: Income from other sources: (a), (d), (f), (g), (i), (k), (l) and (m) Income from salary: (b) Income from
property: (e) Income from business: (c) Capital gain: (h) Final Tax Regime: (j)
3. Profit on debt of previous year or years received in current year [U/s 39(4A and (4B)]
(a) Where any profit on debt derived from investment in National Saving Deposit Certificates and Defence
Savings Certificate, by a person related to previous year or years in the current year that has resulted to
taxable at a higher rate of tax as compared to the year to which the profit on debt relates,
(b) The person may elect, by notice in writing to the Commissioner Inland Revenue that such profit is to be taxed
at the rate applicable to the year or years to which the profit on debt relates.
(c) An option shall be filed by the person at the date of filing of return for the tax year in the year of receipt or by
such later date as allowed by the Commissioner Inland Revenue.
Example: Mr. Zia received Profit on debt Rs. 600,000 in 2016 including profit on debt of Rs.100,000 related to tax
year 2015.
Required: Calculate the amount of tax under the Income Tax Ordinance, 2001 by assuming that the tax rate in tax
year 2015 was 8% and in tax year 2016 it is 10%.
Solution:
Option A (Total income charged to tax at tax rate of 2016)
2016
Rs.
Income from other sources 600,000
Tax on Rs. 600,000 @ 10% 60,000
Tax liability = Rs. 60,000

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Income From Other Sources Chapter-13

Option B
2015 2016
Rs. Rs.
Income from other sources 500,000 100,000
Tax on income
2016: tax rate is 10% 50,000
2015: tax rate is 8% 8,000
Tax liability (50,000 + 8,000) = Rs. 58,000
Note: As tax liability under option B is less hence, the same is opted by the taxpayer.
Non application of section 39 U/S 39(5):
This section shall not apply to any income received by a person in a tax year that is chargeable to tax under any other
head of income or subject to tax under section 5 as dividends, u/s 6 tax on certain payments to non-residents and
under section 7 tax on shipping and air transport income of a non-resident.
4. Income from other sources [U/s 40]
Where a persons income is chargeable to tax under the head income from other sources, he shall be allowed to
deduct expenditure incurred on deriving such income. These expenditures are as under:
A deduction shall be allowed for any expenditure (except capital expenditure) paid by the person to the
extent to which the expenditure is paid in deriving income from other sources.
Zakat paid under the Zakat and Ushr Ordinance on profit on debt.
Deduction for depreciation of plant, machinery or building in case of lease income from letting out such building
together with plant and machinery.
An initial allowance for any plant or machinery.
5. Deductions not allowable [U/s 40(4), (5) and (6)]
No deduction shall be allowed to a person under this section to the extent that the expenditure is deductible in
computing the income of the person under another head of income.
The inadmissible expenses u/s 21 shall also be used under this head in the same manner as they apply in
determining the deductions allowed in computing the income under the head income from business.
Expenditure is of a capital nature if it has a normal useful life of more than one year
Example: Mr. Imran let out his building together with plant and machinery to Mr. Amir. He provided you the following
information for the calculation of taxable income and tax liability:
a. Rent received Rs. 600,000
b. Repair and maintenance of building Rs. 35,000
c. Insurance (already claimed under the head business income) Rs. 60,000
d. Salary to collect the rent (one month salary to employee to collect the rent paid in cash) Rs. 50,000
He also received Rs. 15,000 as additional payment on delayed refund from income tax department.
Solution:
Mr. Imran (Resident)
Tax year 2016
Computation of taxable income and tax liability:
Income from other sources: Rs.
Rent of building with plant and machinery 600,000
Less: Admissible deductions:
Repair and maintenance of building 35,000
Insurance (see note 1 below) -
Salary to collect rent (see note 2 below) -
35,000
565,000
Additional payment on delayed refund 15,000
Taxable income 580,000
Computation of tax liability:
Tax [Rs. 7,000 + 10% on (Rs.580,000 500,000)] 15,000

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Income From Other Sources Chapter-13

Note 1 The insurance has already been claimed under the head business income so the same now shall not be allowed
under the head income from other sources.
Note 2 Salary to collect rent is inadmissible as salary more than Rs.15,000 per month should be paid through crossed
cheque.
Example: Mr. Hasnat Nadeem, an individual, furnishes the following particulars of his income for the year ended
30.06.2016.
Rs.
(a) Dividends from a company listed on stock exchange (gross amount) 15,000
(b) Interest on fixed deposit account (net amount after tax deduction) 45,000
(c) Taxable salary 135,000
(d) Prize on prize bond (gross amount before tax deduction) 20,000
(e) Income as shareholder from bonus issue (assumed market value) 100,000
Calculate total income of Hasnat Nadeem for the tax year 2016 and tax thereon.

Solution:
Mr. Hasnat Nadeem (Resident)
Tax year 2016
Computation of taxable income and tax liability:
Income from salary: Rs.

Taxable salary 135,000


Taxable income 135,000
Computation of tax liability:
Tax on Rs. 135,000 (taxable income is below taxable limit) nil
Incomes covered under Separate block of income:
Tax on gross dividend Rs.15,000 @ 12.5% 1,875
Tax on gross interest on fixed deposit @ 10% (45,000 x 100 / 90) 5,000
Tax on gross amount of prize on prize bond @ 15% 3,000
Tax on income as bonus issue Rs.100,000 @ 5% 5,000
Total tax liability 13,875
Less: tax deducted at source:
On dividend 1,875
On profit on debt 5,000
On prize bond 3,000
On bonus issue 5,000
13,875
Balance tax nil
6. Pakistan source & Foreign source Income from other sources
Geographical source
of Income from other sources Received by Taxability
[section 101]
Taxable [Section 11(5) and (6)]
Pakistan source income from Resident / non-resident Term and conditions of double taxation treaty
other sources individual agreements shall be considered for non
residents having Pakistan source income.
a.