Short notes on INCOME TAX COMMON RULES for the tax year 2018

Topic covered Topic covered

SR. Section Rule SR. Section

(For Module C &
ICMAP Students)

1. Liability in case of co- 6. Currency

66 71
owners conversion
2. 13 & Apportionment of 7. Cessation of
67 72
231 deductions source of income
3. 8.
Rules to prevent
68 Fair market value 73 double derivation &
double taxation

4. 9.
69 Receipt of income 74 Tax year

5.
70 Recouped expenditure
 (For Module C & ICMAP Students)

1. Liability in case of co-owners [Section 66]

SR. PARTICULARS EXPLANATION

1. SHARE OF CO- In case of co-ownership in property & the share of each

OWNERS IS partner is determinable then share received by each partner
DEFINED from property shall be included in his total income but this
principle will not apply to BI.

2. SHARE OF CO- If the share of co-owners is not defined even then the income
OWNERS IS shall be taxed on share of each co-owner in the capital
NOT DEFINED invested in the firm.

3. SIGNING Signing amount from the tenant is taxable under the head PI.
AMOUNT 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.
4. IMPORTANT It is important to mention here that if the share of each co-
NOTE owner shall not be determinable then the same shall be
taxable in the ratio of capital invested in property.
Example 1, 2 & 3
2. Apportionment of deductions (u/s 67)

SR. PARTICULARS EXPLANATION

WHAT ARE THE If an expenditure relates to:

1. EXPENSES
WHICH ARE (a) derivation of incomes chargeable to tax under more than
APPORTIONED
one HOI; or

(b) derivation of incomes chargeable to tax under NTR &

FTR or SBI; or

(c) derivation of income chargeable to tax & some other

purpose,
2. BASIS OF Shall be apportioned on any reasonable basis taking
APPORTIONME account of the relevant nature & size of the activities to
NT which it relates. The board may make rules u/s 237 for the
purposes of apportioning deductions.

Example - 4
Apportionment of expenditures [Rule 13]

Sr. Particulars Explanation

1. EXPENDITURES Any expenditure that is incurred for a particular class or classes of
ALLOCABLE TO income shall be allocated to that class or classes.
CLASSES OF
INCOME
2. FORMULA FOR 1. Any CE excluding financial expenses relatable or attributable
ALLOCATION OF to non-business advances or loans & the amount as stated
COMMON above relatable to business including FTR & exempt income,
EXPENDITURE shall be allocated to each class of income according to the
following formula, namely:-
Amount of CE x Gross receipts for the class of income
Gross receipts from all classes of income
2. Where brokerage, CIR & other income is to be taken into
account on turnover of such transactions, such income shall
be compared with G/P from business for apportionment of
aforesaid CE.
3. VERIFICATION OF The basis used must be certified by the CA’s or CMA that shall be
BASIS OF accepted unless significant variations are found & where books of
APPORTIONMENT accounts are not required to be audited, the reasonable basis
BY CA OR CMA based would be accepted by the CIR, unless variation is found.
Significant variations would be beyond the limits of ±10% under
any head of account.
 DEFINITION OFmeans expenditure that is not clearly allocable to any particular class
4. COMMON or classes of income, such as general administrative & other such
EXPENDITURE allocable expenditures.
Where a taxpayer exports any goods manufactured in Pakistan, the
COMPUTATION taxpayer's profits attributable to export sales of such goods shall be
OF EXPORT computed in the following manner namely:
PROFITS (a) where a taxpayer maintains separate accounts of the
5. ATTRIBUTABLE business of exports of goods manufactured in Pakistan, the profits
TO EXPORT of the export business shall be amount as may be determined by
SALES [U/R the CIR on the basis of such accounts; or
231] (b) in other cases, profits of such business shall be amount
which bears to the total profits of the business of the taxpayer from
the sale of goods, the same proportion as the export sales of goods
manufactured in Pakistan bear to the total sales of goods.
In this rule:
(a) the expression "export sales" means the F.O.B. price of the
goods exported; and
(b) the expression "total sales" means,-
i. the aggregate of exports sales as determined under clause (a);
ii. the ex-factory price of goods sold in Pakistan, where the goods
exported out of Pakistan were manufactured by the exporter; or
iii. the ex-godown price of goods sold in Pakistan, in other cases.
 VARIOUS OTHER COMMON RULES

1. FAIR MARKET VALUE (SECTION 68)

EXPLANATION
(a) FMV of any property, rent, asset, service, benefit or perquisite at a
particular time shall be the price which such property, rent, asset, service,
benefit or perquisite would ordinarily fetch on sale or supply in the open
market at that time.
(b) FMV shall be determined without regard to any restriction on transfer or to
the fact that it is not convertible to cash.
(c) FMV shall be determined by the CIR where it is not ordinarily
ascertainable.
Example - 5
 VARIOUS OTHER COMMON RULES

2. RECEIPT OF INCOME (SECTION 69)

EXPLANATION
A person shall be treated as having received an amount, benefit, or
perquisite if it is
(a) actually received by him;
(b) applied on his behalf at his instruction or under any law; or
(c) made available to him.
Example - 6
 VARIOUS OTHER COMMON RULES

3. RECOUPED EXPENDITURE (SECTION 70)

EXPLANATION
Where a person has been allowed a deduction for any expenditure or
loss incurred in a tax year & subsequently he receives in cash or in kind
any amount in respect of such expenditure or loss then the amount so
received shall be included in the income chargeable under that head for
the tax year in which it is received.
Example - 7
4. CURRENCY CONVERSION (SECTION 71)

EXPLANATION

Every amount taken into account under this ordinance shall be in

Rupees & if it is not in Pak rupees then this amount shall be converted
to the Rupee at the SBP rate applying between the foreign currency &
the Rupee on the date the amount is taken into account for the
ordinance.
Example - 8
5. CESSATION OF SOURCE OF INCOME (SECTION 72)

EXPLANATION
Where any income is derived by a person from any business, activity,
investment or other source that has ceased either before the
commencement of the year or during the year, then any income derived
before the cessation of source of such income shall be chargeable to tax
on the basis that source had not ceased at the time the income was
derived.
6. RULES TO PREVENT DOUBLE DERIVATION & DOUBLE TAXATION
(SECTION 73)

EXPLANATION

Where any amount is chargeable to tax on the basis that it is

receivable then such an amount shall not be chargeable again on the
basis that it is received & vice versa.
Similarly where any expenditure is deductible on the basis that it is
payable then such an expenditure shall not be deductible again on the
basis that it is paid & vice versa.
7. TAX YEAR (SECTION 74)

Tax year is of three types, Normal tax year, Special tax year &
Transitional tax year.
NORMAL 1. A period of 12 months from 1 July to 30 June denoted by the
TAX YEAR calendar year in which the NTY ends. For the year ending 30 June
2016 the tax year shall be 2016.
SPECIAL 2. Any income year ending other than 30th June is STY & denoted by the
TAX YEAR calendar year relevant to the NTY in which the year-end falls.
The Board has authority to prescribe any special tax year in respect of
any particular class of taxpayers.
If the tax year is not specified by the Board and a taxpayer wants to have
any STY then he is required to make an application to the Board
specifying the reason for the purpose.
In respect of certain classes of income, following special income years
are specified by the Board. The list of such specified special income year
is as under.
Special Tax Notification No.
Sr. Classes of Taxpayer
year (SRO) & Date
1. Companies manufacturing 1 Oct to 30th
st 134(I)/68, 31-7-1968
sugar September
2. All persons exporting rice st
1 September to 367(I) /74, 14-01-1974
31st August
3. All persons carrying 1st September to 1153 (I) /79, 10-12-
business of rice husking 31st August 1979
4. All persons carrying on 1st April to 31st 505 (I) /80, 15-05-1980
business of manufacturing March
& dealing in shawls
5. All insurance companies 1st January to 31st 878 (I) /95, 30-08-1995
December
TRANSITIONA 3. If a NTY or STY changes then the period from the day next following the last
L TAX YEAR full tax year to the date of commencement of new tax year shall be treated
as TTY.
CHANGE IN If a person wants to change the tax year then he shall apply to the CIR. The
THE TAX
YEAR CIR shall grant permission subject to condition, if any, only if the person has
shown a compelling need for the change;

If the application is rejected, the CIR shall provide an opportunity of being

heard to the person & shall record in the order the reasons for such
rejection. In this case the person may file a review application to the Board
& the decision of the Board shall be final.

Example – 9 & 10
 SPECIAL POINTS
SR. HEADINGS EXPLANATION

1. Difference between specific expenditure & common

expenditure
Apportionment of common deductions with special
2.
emphasis on ratio where sales & commission business
are at the same time
3. Tax year various aspects.