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CHAPTER:-1 PART-IINCOME TAX LAW

QUESTION NO:-01

WRITE A SHORT ESSAY ON THE EVOLUTION OF INCOME TAX LAW IN THE SUBCONTINENT.ORELABORATE THE HISTROICAL BACKGROUND OF IN COME TAX LAW IN PAKISTAN.

ANSWER:-INTRODUCTION:-Income tax is a federal tax and it is the third important source of the income of Government of Pakistan.Income tax plays an important role in the national economy of a country. It is a direct tax and it is burden falls on the same person on whom it is levied. It is not business expenses but it is the personal liability of the proprietor.

1. EVOLUTION / HISTORY OF INCOME TAX :-Income tax was introduced in the sub-continent in 1860 on the pattern of British law. In Britain it was introduced on 1798. Between 1860 and 1880 it was amended thirteen times and abolished two times. The Act of 1886 remained practically unaltered for a period of thirty years. In 1916 income tax at slab rates was introduced. Previously all incomes were charged at flat rates. In 1918 distinction was made between taxable and total amount.Up tell 1921 the highest authority in the taxation was known as board of in land revenue. It was renamed as Central Board of Revenue (CBR) by passing of CBR act 1921. With a view to centralizing the administration and improve the incidence of taxation an all India committee was appointed in 1921 and on its recommendations the income tax Act 1922 was enacted. In 1939 drastic changes in the system of administration and in the incidence of taxation were made. The appellate tribunal was also established by the Income Tax Amended Act 1939, which started functions from January 25, 1941. In 1944 pay as you earn scheme was introduced. In 1945 distinction was made for the first time between earned and unearned income and relief was given in respect of earned income.SINCE INDEPENDENCE:-1947:-Income tax Act-1922 was promulgated as amended up to date.1958:-A Taxation enquiry committee was constituted which was consisted of Govt: officials, and representatives of trade & commerce. On the recommendations of the committee the act was amended.1959:-Super tax was abolished except for registered firms and companies.1960:- Financial year was changed from 1st April 31 to July 1, ---- June 30, next.1961:-CBR also formulated an other committee to review the law in consultation with tax enquiry committee.1971:-Interim report of the committees was published and most of the recommendations were incorporated in the law.1979:-The income tax ordinance was promulgated on June 28, 1979, became effective from July 1, 1979; it repeated the income tax Act 1922.1985:-National tax reforms commission was formed consisted of top Govt: officials, representatives of senate and National Assembly and renowned Industrialists.2001:-As a result of the tax reform commission the income tax ordinance 2001 was promulgated on Sept: 13, 2001, repealed the Income Tax Ordinance 1979 and became effective from July 1, 2002.

2002:-A lot of changes have already been made through Income Tax rules 2001 as well as subsequent finance Acts.

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The new law contains 13 chapters 240 sections and 7 schedules. From the date of its promulgation different notifications and circulars have been issued by the CBR up to June, 2006 and afterward by the FBR to facilitate the tax officials and tax payers. These will continue to apply until repealed or rescinded.

QUESTION NO:-02

DESCRIBE THE IMPORTANT ROLE OF TAXATION IN THE NATIONAL ECONOMY.ORTHE ROLE OF INCOME TAX IN THE DEVELOPMENT OF A COUNTRY CANNOT BE IGNORED DISCUSS.

ANSWERS:-To meet the budgetary requirements of the country and fulfill the needs of people the Government tries best to collect revenue from various sources. The most important of these sources is taxation.Some revenues are derived from state enterprises including communication, high ways air ways and railways etc and some from nationalized industries. Besides these sources income tax is one of the main sources of the Government finance.Income tax is federal tax and it is the third important source of revenue of the government of Pakistan. The other two important sources are excise and customs.Tax is a compulsory contribution of the citizens towards the National economy. Every stat is always in need of some funds for the general administration of the country. For this purpose every stat imposes taxes to achieve its goal so to say no state can meet its expenses if taxes are not levied upon the citizen. The importance of tax can be judged from the fact the when one is born has to pay taxes when one lives has to pay taxes and ALLAH forbid when one dies taxes are after him. So the payment of tax is compulsory. Every person upon whom tax is levied must pay it.So it can be said that income tax plays an important role in the economy. If government does not levy taxes on incomes then it cannot be able to balance its budget and to improve its infra structures.The principle that Government follows in imposing different kind of tax should be so that every person can pay it and the Government get maximum revenues .As far as possible tax should be imposed according to the ability of the tax payers to pay. The rich should pay more and the poor should pay less i.e the progress system of taxation should be followed. Further it should be collected in a manner that tax payers should not find any difficulty to pay it in time. The Government should impose taxes in such a way that its cost of collection is not too large. If the cost of collection is more then it is possible that the government may not obtain maximum revenues.So the Government should try to levy taxes in the manner that it can be paid easily and also the Government can collect them and can given proper attention to utilize the revenues in its various fields of endeavor.In nut-shell it is an admitted fact that if the system of taxation is followed in its true sense it will not merely prosper the economy but the people as well.

QUESTION NO.03EXOLAIN THE OBJECTIVES OF TAXATIONS:

ANSWER:-In our country like all other countries of the world the government receives different types of direct and indirect taxes in order to finance its day to day

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expenses, defense requirement and other development projects. The taxes include customs, excise, income tax, and sales tax etc.OBJECTIVES:-The main objective of taxation is to provide a perpetual and regular source of revenue to the Government, the details of the objectives are as under:-

1. AVIOD CONCENTRATION OF WEALTH :To avoid excessive concentration of wealth and economic power in a few hands.

2. CIRCULATION OF WEALTH :De-Concentration of wealth result in circulation of wealth in the economy and such the widely based lower or middle classes are fostered.

3. CORRECT ECONOMIC IMBALANCE :Through healthy taxation policy economic imbalance among various regions with in the country can be easily corrected.

4. IMPROVE RURAL ECONOMY :To reverse the long continued decline of the rural economy.

5. BALANCING MODERNIZATION AND REPLACEMENT :To increase Pakistan capacity to build or acquire for it self he machinery and equipments essential to modern industry and agriculture.

6. EN-COUERAGE MODERNIZATION AND REPLACEMENT :To generate domestic saving and develop exports on a scale that will enable us progressively to dispense with foreign assistance.

7. ERADICATE INFLATION :Inflationary pressure can be controlled by mopping up extra purchasing power through proper taxation.

8. MOBILIZE INVESTMENT :Through appropriate investment Rebate the target pattern of investment and development can be achieved.

9. DISPERSAL OF INDUSTRIES :By virtue of tax holiday in less developed area a network of industries can be extended to the deprived sectors of the country.

10. DIVERSIFICATION OF INDUSTRIES :Certain industrial undertakings are not attaining due attention of the investors due to one reason or other through excessive tax relief to selected industries this problem can be redressed.

11. SUPPORT DOMESTIC PRODUCTION :En-courage domestic production by extending exorbitant relief to domestic producers.

12. JOB OPPORTINITIES :Through an indirect way job opportunity is created with in the country as these taxes funding are utilized in various fields of endeavors.

13. FLOURISH SAVINGS :-By restraining consumption savings can be promoted to a greater extent.

14. BALANCE OF PAYMENTS / TRADE :By promoting exports through flexible tax rebates balance of trade or payments can be rendered favorable.

DEFINITIONS PART-I

QUESTION NO.04

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DEFINE THE FOLLOWING TERMS PROVIDED UNDER THE INCOME TAX ORDINANCE 2001.ANSWER:-

Like every other subject income tax law also contains a few terms which are exclusively meant for the subject. Having being assigned specific meanings in the ordinance. Important definitions and terms are as follows.

1. AGRICULTURAL INCOME :The Agricultural income means income:a. Derived from landb. Land is situated in Pakistan andc. Land is used for agricultural purpose.

TYPES OF AGRICULTURAL INCOME:i. Rent or revenue derived from agricultural landii. Income derived from such land by the performance of a process

ordinary employed by cultivator or receiver of rent in kind to render the product fit for the market.

iii. Income derived from such land by agricultural.iv. Income derived from such land by the sale of produce by a cultivator

or receiver of rent in kind.v. Income derived from any building required for agricultural purpose.

2. ASSESSMENT :Assessment is the process under which taxable income, tax liability or refund of the taxpayer is determined under the income tax ordinance, 2001. Assessment is the responsibility of the Commissioner of Income Tax.However, if complete return is field by the taxpayer, such complete return may be considered as assessment order. Assessment also includes re-assessment and amended assessment.

3. BUSINESS :Business means and includes the following:-

a) Tradeb) Commercec) Manufactured) Professione) Vocation orf) Adventure or concern in the nature of trade commerce,

manufacture, profession or vocation.However, the term business does not include employment.EXPLANATION:-I) TRADE:-

Purchase and sale of goods with a motive of earning profit, undertaken by a person is called trade.COMMERCE:-All those activities which facilitate the trade represent commerce. For example, insurance, transportation, warehousing, marketing, banking etc.

Ii) MANUFACTURE:-Any process in which an article is either converted in to another article or product or is so changed or reshaped that it becomes capable of being put to use differently or distinctly.

Iii) PROFESSION:Profession means an ability of a person to do some particular work purely by the application of intellectual skill or through manual skill controlled by intellectual skill.For example: Professor, Doctor, Lawyer etc.

Iv) VOCATION:-Vocation means an ability of a person to do some particular work, generally, by the application of manual skill. For example Carpenter, Singer, Dancer etc.

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4. CAPITAL ASSET :-Capital Asset means property of any kind held by a person, whether or not connected with a business, but does not include:i) Any stock-in-trade (not being stocks and shares) consumable stores or

raw materials held for the purpose of business.ii) Any depreciable asset (asset on which depreciation is allowed u/s 22).

For example: Plant, machinery, building etc.iii) Any intangible asset on which amortization is allowed u/s 24. For

example: Patent, Copy right, Trade mark etc.iv) Any immovable property. For example land, building etc.v) Any movable property held for personal use by the person or a

member of the person’s family dependent on the person. For example: Car held by the person’s family etc.

Note: Following movable property is included in the definition of capital asset:a) A painting, sculpture, drawing or any other work of art.b) Jewelryc) A rare manuscript, folio or bookd) A postage stamp or first day covere) A coin or medallion; orf) An antiqueFurther examples of capital assets;i) Modaraba certificatesii) Participation Term Certificates (PTCs)iii) Term Finance Certificates (TFCs)iv) Musharika Certificatesv) Shares of companiesvi) Pakistan Telecommunication Corporation (PTC) vouchers issued by the

Government of Pakistan.vii) Leasehold rights.viii) Partner’s share in an AOP.

5. COMPANY :Company means a company as defined in section 80.According to section 80, Company means:1. A company as defined in the Companies Ordinance, 1984.2. A body corporate formed by or under any law in force in Pakistan.3. A Modaraba;4. A body incorporate by or under the law of a country outside Pakistan

relating to incorporation of companies;5. A trust a co-operative society or a finance society or any other society

established under any law for the time being in force.6. A foreign association, whether incorporated or not, which the FBR has

declared to be a company for the purposes of the Income Tax Ordinance, 2001.

7. A Provincial Government8. A local authority in Pakistan9. A small Company.

6. DIVIDEND :Dividend is that part of divisible profits of a company which is distributed among its members. For the purpose of the Income Tax Ordinance, 2001, dividend includes the following transactions.a. Any distribution of accumulated profits by a company to its shareholders.b. Any distribution of profit to Modaraba certificate holders.c. Any distribution of profits to the shareholders or Modaraba certificate

holders by way of debenture or any other deposit certificate.d. Any distribution to shareholders or Modaraba certificate holders on the

liquidation (if the recipient is entitled to participate in the surplus assets in the event of the liquidation of a company).

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e. Any distribution to the shareholders or Modaraba certificate holders on the reduction of capital to the extent of the accumulated profit of the company ( if the recipient is entitled to participate in the surplus assets in the event of the liquidation of a company

f. Any payment made by a private company to its shareholders if the following conditions are fulfilled.i) The payment is made by way of:

a) Loanb) Advancec) Payment on behalf of a shareholder ord) Payment for the individual benefits of a shareholder

ii) The payment is made to the extent to which the company possesses accumulated profits.

7. INCOME: a) Any amount chargeable to tax under the Income Tax Ordinance 2001.b) Any amount subject to collection or deduction of tax at source u/s

148,150,152 (1),153,154,156,156A,233,233A, & 234(5)c) Any amount treated as income under any provision of the income tax

Ordinance 2001.d) Any loss of income.

EXPLANATION:Any amount subject to deduction or collection of tax at source. Under the above mentioned sections is considered as income in the hands of recipient. So the person paying such amount is required to collect tax on such payment.Remember loss is a negative income such negative income is adjusted against other incomes during the tax year while computing the total income of a person.

8. TOTAL INCOME: “Total Income” means total income as defined in section 10.According to section 10:The total income of a person for tax year shall be the sum of the person’s income under each of the heads of income for the year.There are following heads of income:i) Salaryii) Income from Propertyiii) Income for Businessiv) Capital Gains; andv) Income from other Sources.

9. TOTAL WORLD INCOME: Total income and total world income are two relative terms in relation to resident and non resident. Income of a person under a head of income for a tax year shall be the total of amounts derived by a person in that year that are chargeable to tax under the head as reduced by the total admissible deductions.

In case of non resident the income shall be computed by talking in to account only amounts that are Pakistan source income. Therefore in his case the income is termed as total income. Where in case of resident person income shall be computed by talking into account amounts that are Pakistan source and amounts that are foreign source. Therefore in his case the income will be treated as Total world Income.

10. TAXABLE INCOME: “Taxable Income” means taxable income as defined in section 9.According to section 9.The taxable income of a person for a tax year shall be;The total income of a person for the year.LESS; DEDUCTIBLE ALLOWANCES:i) Zakat paid under Zakat & Ushr Ordinance, 1980.

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ii) Contribution to Workers Participation Fundiii) Workers welfare fund paid under Workers

Welfare Fund Ordinance, 1971= Taxable Income

However, the taxable income may not be in negative.11. PERSON.

Person means a person as define in section 80. According to section 80, the following shall be treated as persons;i) AN INDIVIDUAL:

A CompanyAn AOPThe Federal GovernmentA foreign GovernmentA political sub-division of a foreign GovernmentA public international organization.

12. PRINCIPAL OFFICER: “Principal Officer” in respect of a company or an association of persons includes;i) A director a manager, secretary, agent, accountant or any similar

officer and ii) Any person connected with the management or administration of the

company or an AOP upon whom the Commissioner has served a notice of treating him as the Principal Officer.

EXPLANATION:The term “Principal Officer” has been defined in respect of a company or an AOP, this term has been defined to facilitate the process of the Ordinance because in company or an AOP, there may be a number of shareholders or members. If any competent authority want to contact with particular company or an AOP, it is not possible to contact with each shareholder or member.Keeping in view such complexity, the Income Tax Ordinance, 2001 has specifically mentioned some persons to be considered as principal officers.In other words, to understand it, we must call in mind the concept of a company or an AOP.For example; a director is a principal officer of a company. Commissioner may serve the notice upon any person treating him as a principal officer and after the notice of CIT such person is called principal Officer.

13. TAX “Tax” means any tax imposed charged levied or paid under the income tax ordinance 2001. It may be in the form of;

a) Income Taxb) Additional Taxc) Penaltyd) Fee ande) Any other charge under the income tax ordinance, 2001.

EXPLANATION:Term “Tax” has comprehensive meaning, so any amount which is chargeable livable under any provision of the Income tax Ordinance, 2001 by tax department from tax payer represents tax.

14. TAXPAYER (ASSESSEE): The nomenclature of assesses has been changed as taxpayer in the income tax ordinance 2001.“Taxpayer” means any person who derives an amount chargeable to tax under the income Tax Ordinance 2001. However the following people are also included in the definition of taxpayer.

a. Any representative of a person who derives an amount chargeable to tax under the income tax ordinance, 200i

b. Any person who is required to deduct or collect tax at source.

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c. Any person who is required to furnish a return of income under the income tax

Ordinance, 2001.d. Any person who is required to pay tax under the Income Tax

Ordinance, 2001.15. TAX YEAR:

“Tax Year” means the tax year define in section 74 (1) in relation to a person, includes a special tax year or a transitional tax year that the person in permitted to use u/s 74.According to section 74, there are three types of tax year.

a) Normal tax year.b) Special tax year.c) Transitional tax year.16. NORMAL TAX YEAR:

Normal tax year is a period of 12 months ending on 30th day of June & is denoted by the calendar year in which the last date falls.

17. SPECIAL TAXYEAR: A period of twelve months ending on other then 30th day of Jun is called special tax year.EXPLANATION:A tax year which is not ended on 30th day of June is called special tax year. In other words, it is different from normal tax year which starts on 1st July & ends on 30th June.The FBR has power to specify any special tax year for any taxpayer, class of taxpayers or for any source of income.Any tax year specified by the FBR other than normal tax year is called special tax year.

18. TRANSITIONAL TAX YEAR: Where the FBR permits a person to change his tax year from normal tax year to special tax year or from special tax year to normal tax year as a result of an application of the taxpayer. The period between the end of the last tax year (tax before change) and the date on which the changed tax year start, such period is called “transitional tax year.

19.SEPARATE & DISTINCT TAX YEAR :A tax year can be a period of less then twelve months. For e.g in section 117 (2) a tax payer has to file a return on discontinuance of business for the period coming on the first day of the tax year to the date of discontinuance of business, where if comprises , say, of forty days. This will be treated as a separate and distinct tax year.

20. REGISTERED FIRM A firm is registered when it fulfils the conditions mentioned in the income tax ordinance 2001, and on its application to income tax Commissioner, an order

granting registration is passed by him under the said ordinance. A firm registered under the partnership act 1932 will/ not be treated a registered firm for the purpose of income tax.A registered firm pays no income tax, but only super tax if it assessed income exceeds the prescribed limit. The partners are assessed in their individual hands.

21. TAX EVASION:- Tax evasion means application of illegal manners, and measure by the Tax payers to pay the taxes they legally owe. The internal revenue service (IRS) estimates that taxpayers voluntarily pay only 80 percent of the taxes they legally owe. The greater an individuals tax rate, the greater the incentive to defraud the Government, because high tax rates effect behavior by increasing evasion. For example people may fail to report income to the Government thus reducing their tax bill and the Government’s tax revenue.

22. TAX AVOIDENCES: Tax avoidance occurs when people change their behavior to reduce the amount of taxes they legally owe. When individual relocate their business to

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a state with lower taxes or take advantages of loopholes in tax laws, they are practicing tax avoidance. There is nothing illegal in tax avoidance.Simply tax avoidance is the application of legal measures by the tax payers to reduce the burden of tax is known as tax avoidance.

23. TAX NET :-The “Tax net” refers to the types of payment/ income that are taxed which included personal gains capital gain business income and income from other sources etc.In other words it means that on when tax is applicable on what income it is applicant and where it is applicable “when all these areas of applicability are given rise to tax net or network of tax.

QUESTION NO.05:

HOW RESIDENTIAL STATUS OF THE DIFFERENT TYPES OF ASSESSEES IS DETERMINED? HOW IT EFFECTS TAX LIABILITY.ORIS REDINATIAL STATUS AND NATIONALITY THE SAME? DISCUSS.

ANSWAR:-RESIDENT & NON RESIDENT PERSON:The term resident & non resident is the core of taxability under the Income Tax Ordinance 2001, because tax is charged under this ordinance on the basis of residence and non residence status of a person. It has no concern with nationally of a person.NOTES:-a) Residential status is a term purely designed for income Tax purposes.b) Nationality/ citizen ship/ domicile of an individual are immaterial.c) Continuous stay of 183 days is not necessary.d) It has no concern that an individual stayed in hotel, rented building or in

his own house.e) Purpose or nature of stay in Pakistan is immaterial. In other words there is

no concern with it that why individual has visited Pakistan.f) Residential status is determined for each year separately. A person being

a resident in one year may be non resident in other year.g) Physical presence of a person is essential element to declare a person as

a resident.h) The number of days a person is in Pakistan shall be determined according

to Rule-14.

I) A part of day a person is in Pakistan shall be taken as full day.II) A public holiday a day of sick leave or any day in which an

individual is in Pakistan shall be counted to determine the residential status.

However a day in which a person is in transit between two different places outside Pakistan is not considered.

i) The visit in Pakistan is immaterial for an individual who is an employee of the Federal Government.

i) RESIDENT INDIVIDUAL An individual is treated as resident if he fulfills any of the following conditions:a) Person is in Pakistan for a period of 183 days or more during a tax year orb) Person is employee or official of the Government of Pakistan posted

abroad in the tax year.ii) RESIDENT COMPANY

A company shall be resident for a tax year if any of the following conditions is fulfilled:

a) Company has been incorporated under any law in force in Pakistan;

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b) The control and management of a company’s affairs is situated wholly in Pakistan at any time in the year or

c) Company is a Provincial Government or a local authority in Pakistan.

iii) RESIDENT ASSOCIATION OF PERSONS (AOP) An AOP shall be a resident AOP for a tax year if the control and management of the association are situated wholly or partly in Pakistan.

EFFECT ON TAX LIABILITY:1. INCIDENCE OF TAXATION :

The income of a resident person is calculated by taking into account both the Pakistan-source income and the foreign source income.The income of non resident person is computed by taking into account only those amounts which are Pakistan-source income.

2. RATES OF TAX: There is a difference in rates of tax for residents and non-residents. This difference will be discussed in later chapters.In nut shell we conclude that resident assess faces double taxation as compare to non resident assess.

QUESTION NO.6

LIST DOWN THE VARIOUS EXEMPTIONS PROVIDED UNDER THE SECOND SCHEDULE OF THE INCOME TAX ORDINANCE 2001?

ANSWAR:-Sections 41 to 51 of the income tax ordinance 2001 provided a list of the items which either has been exempted fully from tax or some concession in the tax has been provided on them.A complete list of such exempted income has provided in second schedule of the income tax ordinance, 2001.IMPORTANT ITEMS OF THESE EXEMPTIONS ARE BEING EXPLAINED HERE:

1. AGRICULTURAL INCOME: Agricultural income is completely exempt from tax. Although many changes have been brought regarding the agricultural income since past few years, yet presently the agricultural income received by a person is fully exempt from tax.A major change has been brought from tax year 2003. From this year onwards the persons whose total income includes income from agriculture on which tax is payable to the province and such income from agriculture on which tax is payable to the province and such income from agriculture exceeds Rs.80, 000/-

different rates of tax are applied. However, the agricultural income in these cases also still remains exempted.

2. OFFICIALS OF THE FOREIGN GOVERNMENT: If an employee of a foreign government (including a consular or other officer or a non-diplomatic representative) receives any amount of salary, it will be exempt from tax, provided that:-I) The employee is a citizen of the foreign country.II) Same type of services is being performed by employees of

Government of Pakistan in foreign countries.III) Tax exemption is granted by that foreign government to our

employees performing similar duties in that country.3. ALLOWANCES ATTACHED TO HONOURS, AWADES ETC:

(i) Any allowance attached to any honors, award or medal awarded by the President of Pakistan is exempt from tax.

(ii) Any monetary award granted to a person by the President of Pakistan shall also be non-taxable.

4. SCHOLARSHIPS:

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Any scholarship given to a person to meet the cost of the person’s education is exempt from tax; however the scholarship should not be paid directly or indirectly by the associate.

5. INCOME IN LIEU OF AGREEMENT TO LIVE APART: Any income received by a spouse under an agreement to live apart is also exempt from tax.

6. INCOME OF GOVERNMENTS: (i) The income of Federal Government is fully exempt from tax.(ii) The income of a Provincial Government or local authority will also be

exempt from tax provided that the income is not derived from a business carried on outside its jurisdictional area.

(iii) Any payment received by the Federal Government, or Provincial Government or a local authority shall not be liable to any collection or deduction of advance tax.

7. INCOME OF TRUST, WELFARE INSTITUTIONS OR NON PROFIT ORGANIZATION: Income derived by the above mentioned institutions from donations, subscriptions, house property and investment in the securities of Federal Government is not taxable provided that either :

a. The trust is approved by the Federal Government orb. The trust is approved by the FBR.

8. INCOME FROM MICRO FINANCE BANKS: By virtue of finance Act, 2007, the income of Micro Finance Banks has been exempted as under:(i) The exemption will start from 01/07/2007.(ii) The exemption will be available for a period of 5 years.(iii) The bank shall not issue any dividend to their share holders and(iv) Any profit or gain will be utilized for Micro Finance Operations only.

9. INCOME OF FOREIGN EMPLOYEES OF AGHA KHAN DEVELOPMENT NETWORK: Salary received by a person working as an expert, consultant, advisor or senior management staff in Agha Khan Development Network is not taxable provided that he is not a citizen of Pakistan.

10. ALLOWANCE GIVEN BY THE GOVERNMENT OUT OF PAKISTAN: Any allowance or facility which is paid outside Pakistan by the Government to a citizen of Pakistan for rendering service outside Pakistan have been completely exempted from tax.

11. PENSIONS: Position regarding pension is summarized below.(i) Pension received by a former employee of Pakistan Armed Forces.

Federal Government or Provincial Government is not taxable.(ii) The Pension received from the United Nations or its specialized

agencies by a citizen of Pakistan is exempt provided that salary of such person was also not taxable under Pakistan income tax law.

(iii) The pension received by any citizen of Pakistan from his former employer is exempt. However; this exemption will not be available if a retired person works for the same employer or associate of this employer in any capacity for any remuneration.

(iv) Any pension granted under the rules to the families and dependent of “Shaheeds” belonging to Pakistan Armed Forces, is completely exempt.

(v) In case a person receives more than one pension only the amount of higher pension will be exempt.

(vi) By virtue of finance Act 2008 pension received by former President of Pakistan and his widow will not be taxable.

12. ENCASHMENT OF LEAVE PREPARATORY TO RETIREMENT:

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Any sum representing encashment of leave preparatory to retirement (LPR) received by an employee of Armed Forces of Pakistan, Federal Government or Provincial Government is exempt.

13. ACCUMULATED BALANCE OF PROVIDENT FUND: Any accumulated amount received by a employee participating in a provident fund is exempt from tax provided that it is a ‘’recognized’’ provident fund.

14. AMOUNT RECEIVED FROM WORKERS PARTICIPATION FUND. The amount received by a person out of workers participation fund established under the Companies Profits (Workers Participation) Act, 1968, will not be taxable.

15. AMOUNT OF GRATUITY OR COMMUTATION OF PENSION :If an amount is received as gratuity or commutation of pension by an employee on his retirement or by his heir on the death of employee, the exemption is provided according to the following rules:

a. If the amount is received from government, local authority, a statutory body or a corporation, whole amount is exempt from tax.

b. If the amount is received from a gratuity fund approved by the Commissioner of Income Tax, again the whole amount is non taxable.

c. If the amount is received from an organization which gives the facility of gratuity to all of its employees, an amount up to Rs.200, 000 is exempt from tax.

d. In case the amount is being received from an organization where (a),(b) and (c) above do not apply,50% of the amount received or Rs.75,000 whichever is less will be exempt.

16. AMOUNT RECEIVED FROM BENEVOLENT FUND: Any amount received by an employee or members of his family from a benevolent fund scheme under the provisions of central Benevolent Fund and group insurance ACT, 1969, is non-taxable.

17. FACILITY OF ACCOMMODATION: The facility of rent-free accommodation provided to the following persons is not taxable:-(i) President of Pakistan(ii) Provincial Governors(iii) Chiefs of staff of Pakistan Army, Navy and Air Force(iv) Corps Commanders(v) Federal Government Ministers(vi) Judges of Supreme Court and High Courts

18. FACILITY OF CONVEYANCE AND ENTERTAINMENT ALLOWANCE: (i) Chiefs of staff of Pakistan Army, Navy and Air Force(ii) Corps Commanders(iii) Federal Government Ministers(iv) Provincial Governments

19. MEDICAL/ HOSPITAL CHARGES :The following facilities will be exempt from tax provided these are in accordance with the terms of employment.

a. Free provision of medical treatment b. Hospitalization expenses of the employee borne by the employer.c. Reimbursement received by the employ on account of medical

treatment or hospital charges or both paid by the employer.20. SPECIAL ALLOWANCE:

Special allowance granted to meet expenses which are incurred in the performance of official duties, such allowance will be exempt from tax, even if the expenses actual incurred or less than the allowance. Examples of such allowance are travelling allowance, Daily Allowance (TA & DA) and uniform allowance etc.

21. SPECIAL ADDITIONAL ALLOWANCE:

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For the Government employees up to BPS-16 the allowance is paid as 25% of minimum of pay scale. Where as for employees of higher rank the rate is 20%. This allowance is completely exempt from tax.

22. DIVIDEND RECEIVED BY ICP Any dividend received by investment corporation of Pakistan from any other company which has paid or will pay tax in respect of the profits out of which such dividends are paid.

23. INCOME OF TAXTBOOK BOARDS:Income earned by the textbook boards of all the provinces is wholly exempt from tax.

24. INCOME OF EDUCATIONAL INSTITUTIONS: Income received by a university or any other educational institution which is established only for educational purposes and for the purposes of profit is exempt from tax.

25. INCOME OF EDUCATIONAL AND COMPUTER INSTITUTIONS :Income received by the university or other educational institutions is exempt from tax provided the sole object of the institution is educational and there is no profit motive. Further more a computer training institution will be exempt for the period of five years subject to the following conditions:

a. Institution is recognized by the Board /University/University Grants Commission (UGC).

b. It is setup between 1st July 1997 and 30 June 2005.26. INCOME FROM TECHNICAL INSTITUTES:

Income of Vocational institute, Technical institute or Poly technical institute will be exempt for the period of five years provided recognized by the Board / University and established between 1/07/ 2004 and 30/06/2008.

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084

CHAPTER 03 PART-IQUESTION NO.07

WHAT DOES THE WORLD “SALARY” SIGNIFY? DESCRIBE THE SCOPE AND FEATURES OF SALARY INCOME.ORDESCRIBE THE LEGAL PROVISIONS / OR PRINCIPLES GOVERNING THE TAXABILITY OF INCOME UNDER THE HEAD SALARY.

ANSWERS:-For the purpose of change of income tax and calculation of tax payable the income is classified under five heads in section 11 of the income tax ordinance 2001.Classification of income under five specified heads does not mean that a person will have to pay five different taxes. A classification is only necessary because the procedure adopted for computation of income under each head is different.SALARY (S-12):Salary is the first head or source of income mentioned in section 11 of the income tax ordinance, 2001.SCOPE OF SALARY INCOME:

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The word salary has been used in a broader sense in the income tax ordinance as compared to its use in our daily conversation. Under section 12 the following groups of receipts are included in terms salary.(i) Salary and wages(ii) Annuity pension and gratuity(iii) Fees commission and allowances(iv) Perquisites and(v) Profits in lieu of or in addition to salary or wages(vi) Overtime(vii) Bonus(viii) Leave salary(ix) Work conditions supplement(x) Payment in lieu of leave.PROVISION / CONDITIONS FOR THE TAXABILITY OF INCOME UNDER SALARY HEAD.

1. RELATION SHIP OF EMPLOYER AND EMPLOYEE :-Chargeability of income under the” head salary” requires the relations ship between payer and payee to be that of employer and employee or master and servant. If the relation ship of employer and employee does not exist between payer and payee, amount received by the payee cant not be treated as salary with in the ambit of section-12.

2. SOURCE OF RECEIPTS :-The amount must be received from present, past or prospective employer.

3. PAKISTAN SOURCE INCOME :-Salary is paid by Government local authority, public body association or private employer in Pakistan, salary received from foreign Government is not taxed under this head.

4. ACCRUAL OF INCOME :-Salary is due to employee during or after the service, it means that pension paid by past employer after service is included in salary.

5. NATURE OF RECEIPTS :-Receipts by the employer from the employer weather of capital nature or revenue nature is included in salary.

6. SALARY FROM MORE THAN ONE SOURCE: If and individual receives salary from more than one employer during the same income year, salary from each source is taxable under the “Head Salary”.

7. NO EXPENSES AGAINST SALARY INCOME: No deduction is allowable for any expenditure incurred by an employee in deriving amounts chargeable to tax under the “Head Salary”.

8. FOREGOING OF SALARY: If an employee foregoes his salary, it does not mean that salary so foregone is not taxable. Such voluntary waiver or forgoing by an employee of salary due to him is merely an application of income and chargeable to tax.

9. REDUCED SALARY: If a Government employee agree to accept a reduced salary, the reduce salary should be treated as income chargeable under this head. This exemption is only available to Govt: employees.

10. TAX FREE SALARY: If a tax free salary is paid by the employer, the employee (except foreigner) has to include in his income not only the salary but also the amount of tax paid by the employer.

11. VOLUNTARY PAYMENTS: Salary allowances etc may be given as a gift or charity to an employee, yet it would be taxable .the ordinance does not make any distinction in gratuitous payment and contractual payment.

12. TAX YEAR OF A SALARIED PERSON :

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If a salaried person has no other source of income except salary his tax year actually is financial year.

13. SALARY BY MEMBER OF A.O.P Any salary drawn by a member of A.O.P is appropriation of profits and chargeable to tax as income from business being share of income of a member in the total income of AOP.

14. BASIS OF CHARGE: Basis of charge in respect of Salary Income is provided in section 12(1) which says “Any taxable salary received by an employee in a tax year, shall be charged to tax in that year under the head salary” the word “received” clearly conveys that basis of charge is actual receipt not “due”

15. LEAVE SALARY :This is taxable where received or right to receive rests with the employee. Leave encashment on retirement (L.P.R) falls in this category. The only exemption provided is under clause (19) part-I of second schedule.

16. FEE & COMMISSION :Fee & Commission are taxable as salary irrespective of the fact that they are paid is addition to or in lieu of salary.

17. BONUS: It is taxable in the year of receipt. Contracted bonus is regarded as a salary while gratuitous bonus is regarded as perquisite.

18. REMUNERATION FOR EXTRA DUTIES :Where an employee agrees to do some thing outside the duties of his office, for which he is given extra payment, that payment is taxable as salary.

19. SALARY RECEIVED IN ARREARS :Where a person receives salary in arrears and he becomes chargeable on higher rate for that year due to inclusion of arrears of salary, relief can be claimed in terms of section 12 (7).

QUESTION NO.08:-

WHAT ARE THE VARIOUS PERQUISITES AND BEFENITS? HOW ARE THEY TREATED IN THE LAW OF INCOME TAX?

ANSWER:-VALUATION OF PERQUISITES, ALLOWANCE AND BENEFITS FACILITIES PROVIDED BY EMPLOYER.The facilities provided by the employer to employees will be taxable in the following manner:-

1. ACCOMMODATION a) HOUSE RENT ALLOWANCE

If any employer provides any accommodation allowance or house rent allowance, the whole amount so received will be taxable.

b) ACCOMMODATION FACILITY If the employer provides a furnished or unfurnished accommodation, the following amount will be added in the total income of the employee as value of this perquisite.i. The amount that would have been paid by the employer in case

such accommodation was not provided or ii. 45% of the minimum of time scale of the basic salary which ever of

(1) or (2) is higher.c) ACCOMMODATION FACILITY IN THE AREAS WHERE HOUSE RENT ALLOWANCE IS

ADMISSIBLE @ 30%

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In areas other than big cities the house allowance admissible to government employees is 30% of minimum of time scale of the basic salary.In such areas value of accommodation will be calculated as under:i. The amount that would have been paid by the employer in case

such accommodation was not provided: orii. 30 % of minimum of time scale of the basic salary;Whichever of (i) or (ii) is higher.

2. CONVEYANCE Sometimes, an employer provides the employee either a conveyance for his use or conveyance allowance is provided. How to determine the value of this facility/ allowance for the purpose of calculating taxable income? The important situations and their treatment are being discussed here.a) CONVEYANCE ALLOWANCE

If the employer provides conveyance allowance to his employee, the whole allowance will be fully taxable.

b) CONVEYANCE PROVIDES BY EMPLOYER FOR PERSONAL USE OF EMPLOYEE If the employer has provided a conveyance to employee for purely personal use,10% of the cost which employer paid for acquiring the motor vehicle will be included in the taxable income of employee, every year.

c) CONVEYANCE PROVIDED BY EMPLOYER PARTLY FOR PERSONAL AND PARTY FOR OFFICIAL USEWhen a motor vehicle is provided by the employee both for official and personal purposes, 5% of the cost paid by the employer for acquiring the motor vehicle will be included in the income of the employee.

d) EMPLOYER ACQUIRES THE CONVEYANCE ON LEASE In case the motor vehicle is acquired by the employer on tease, the fair market value at the commencement of the lease will be ascertained. In case of (b) above 10% of fair market value and in case of (C) above 5% of such value will be added in the total income.

3. MEDICAL CHARGES, HOSPITAL CHARGES OR MEDICAL ALLOWANCE. In case an employee:-(i) Receives free medical treatment or hospitalization or both by the

employer or receives re-imbursement of the medical expenses under the terms of employment whole such benefit will be exempt from tax. It is necessary however the National tax number of the hospital or clinic is provided and the employer also certifies and attests the medical or hospital bill.

(ii) In case where the above mentioned facilities are not provided for in the term of employment any medical allowance given by the employer will be exempt up to 10% of basic salary of employee.

4. ENTERTAINMENT The following is the summary of tax rules regarding entertainment:-(i) Actual entertainment expenditures incurred by employee for

entertainment on behalf of the organization and then reimbursed to him by employer are also not taxable.

(ii) If any employee is provided free tea, coffee etc at the office premises during the course of his work, nothing will be added in the total income of the employee for tax purposes.

(iii) Free or subsidized food provided to an employee of hotel or restaurant during duty hours.

(iv) In all the remaining cases, the entire amount of entertainment allowance received by the employee will be added in his total income for tax purposes.

5. SPECIAL ADDITIONAL ALLOWANCE:-

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Government of Pakistan has allowed special additional allowance to its civilian employees with effect from 1st July 1999. For the employees up to BPS-16 the allowance is paid as 25% of minimum of pay scale, where as for employees of higher rank the rate is 20%.

6. SPECIAL ALLOWANCE Special allowance received by employee, granted to meet expenses which are incurred in the performance of official duties are completely exempt from tax.

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084

CHAPTER NO.05 PART-I

INCOME FROM PROPERTY

QUESTION No.09:-

WHAT DO YOU MEAN BY PROPERTY AND ITS ANNUAL VALUE? DESCRIBE THE LEGAL PROVISIONS FOR THE TAXABILITY OF INCOME UNDER THE HEAD INCOME FROM PROPERTY.

ANSWER:-The rent received or receivable by a person for a tax year is the second source of income and is chargeable under the head income from property other than the rent which is exempt from tax.HOUSE PROPERTY (S-15):PROPERTY:

Means constructed building or land.BUILDING:

Means block of bricks or stone work covered by roof.LAND:

Means vacant plot used for erecting temporary huts or for storing materials.

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RENT:Rent means any amount received or receivable by the owner of land or

building as consideration for the use or occupation of or the right to use or occupy the land or building and includes any forfeited amount paid under a contract for the sales of land or a building. The amount of rent shall not be less then the fair market rent.

LEGAL PROVISIONS:-1. CHARGEAIBLITY TO TAX:

The amount received or receivable by the owner of land or a building for its use or the right to use its occupation is the rent chargeable to tax and includes also any forfeited deposit paid under a contract for the sales of land or building. But in no case the rent realized should be less than the fair market rent.

2. USAGE OF PROPERTY: If a building or any portion there of is used for any business or profession the income from such building or portion shall be brought to charge under the head income from business.

3. BURDEN OF TAX: The owner is required to pay tax and the tenant is not required to do so.

4. ADJUSTMENT OF LOSS: If there is any loss from the property after adjustment of allowable deduction this can be set off against any other income of the assesses and can not be carried forward.

5. JOINT OWNER SHIP: If the property is jointly owned by two or more persons. Their respective share shall be included in their total income.

6. SITUATION IN PAKISTAN NOT NECESSARY :Where the property is situated out side Pakistan even then the income derived shall be charged under this head.

7. PERSONAL STATUS :Where the house property is owned by an individual or a limited company the income derived shall be brought to charge under this head.

8. TAXATION OF PAGREE (i) NON ADJUSTABLE AMOUNT:

Where an assesses received from a tenant any amount. Which is not adjustable against the rent payable by such person such amount shall be deemed to be the income of the assesses and chargeable to tax under this head. In the income year in which such amount is received and the nine income years next following in equal proportions.

(ii) LIABILITY IN CASE OF REFUND :Where such an amount is refunded by the owner to the tenant on termination of the tenancy before the expiry of ten years, no portion of the amount shall be allotted to the tax year in which it is refunded or to any subsequent years.

9. LETTING OF BUILDING TOGETHER WITH PLANT :Any rent received by any person in respect of the lease of building together with plant and machinery such rent shall not be chargeable under this head.

10. TAXATION TREATMENT :Income from property is treated as separate block of income and brought to charge @ the following rates.

Individuals and associations of personsS.NO. GROSS AMOUNT OF RENT RATE OF TAX

1 Up to 1,50,000 Nil2 Rs.1,50,001 to Rs.4,00,000 5% of the amount exceeding

Rs.1,50,0003 Rs.4,00,001 to Rs.10,00,000 Rs.12,500 + 7.5% of the

amount exceeding Rs.4,00,0004 More than Rs.10,00,000 Rs.57,500 + 10% of the amount

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exceeding Rs.10,00,000These are the fixed tax on property income irrespective of any other income earned by the person. No deduction is allowed out of the fair market rent.

11. BASIS OF TAXABILITY: The deductions allowed formerly have been withdrawn and the property income is chargeable at gross receipt basis.

12. RECOVERY OF UNPAID RENT :Where any unpaid rent is wholly are partly recovered, the amount so recovered shall be chargeable to tax in the tax year in which it is received.

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084

CHAPTER NO:- 06 PART-II

QUESTION NO.10

WHAT IS MENT BU BUSSINES IN THE LAW OF INCOME TAX? DESCRIBE THE VARIOUS INCOMES CHARGEABLE UNDER THE HEAD INCOME FROM BUSINESS / PROFESSION.

ANSWER:-Income from business is third source of income chargeable to tax. The

term “business” has specific meanings under the “income tax ordinance, 2001”.BUSINESS:“Business” includes any:(i) Trade;(ii) Commerce;(iii) Manufacture;(iv) Profession;(v) Vocation; or(vi) Adventure or concern in the nature of trade, commerce manufacture,

profession or vocation.However, the term business does not include employment.INCOME CHARGEABLE UNDER THE HEAD “INCOME FROM BUSINESS”The following incomes are chargeable to tax under the head “Income from Business’’

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1. Profits and gains of any business carried on by a person at any time during the tax year.

2. Profits and gains of any business treated to have been carried on during a tax year.

3. Income derived by any trade professional or similar association from:(i) The sale of goods; or(ii) Provision of services to its members.

4. Income from the hire or lease of tangible movable property. For example: rent of furniture etc.

5. Fair market value of any benefit or perquisite derived from the past, present or future business relationship. It may or may not be convertible in to money.

6. Management fee derived by a management company ( including a modaraba management company)

7. Any profit on debit derived by a person where the person’s business is to derive such income.

8. Where a lesser being a scheduled bank or an investment bank or a development finance institution or Modaraba or a leasing company has leased out any asset whether owned by it or not, to lessee, any amount paid or payable by lessee shall be treated as “Income from Business” of the lesser.

9. Any amount received by a banking company or a non-banking finance company, where such amount represents distribution by a mutual fund out of its income from profit on debt shall be chargeable to tax under the head income from business.

QUESTION NO. 11

WHAT ARE ADMISSIBLE DEDUCTIONS AGINST INCOME FROM BUSINESS?

ANSWER:-1. EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS:

Any expenditure incurred by the person during the tax year wholly and exclusively for the purpose of business, whose taxable income is being determined shall be allowed as deduction against income of such business. Where any expenditure is partly incurred for the business. Where any expenditure is partly incurred for the business, only fair proportion of such expense shall be allowed as deduction.

2. EXPENDITURES INCURRED ON ACQUISITION OF DEPRECIABLE OR INTANGIBLE ASSETS:A person is allowed a deduction for depreciation or amortization in respect of any expenditure incurred on acquisition of depreciable or intangible assets or pre-commencement expenditures.

3. EXPENDITURES INCURRED BY AMALGAMATED COMPANY: Following amalgamation expenditures are allowed as deduction to amalgamated company:a) Legal expendituresb) Financial advisory services andc) Other administrative costs relating to planning and implementation of

amalgamation.4. PRE-COMMENCEMENT EXPENDITURES:

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“Pre-commencement expenditure” means expenditures incurred before the commencement of a business wholly and exclusively to derive income chargeable to tax, which includes the followings:(i) Cost of feasibility study(ii) Construction of prototypes.(iii) Cost of trial production activities.A person is allowed a deduction against income from business for amortization of pre-commencement expenditures u/s 25 of the income tax ordinance, 2001. But this deduction is subject to the following conditions:(i) Pre-commencement expenditures shall be amortized on a straight

line basis.(ii) Amortization is allowed @ 20%, given under the part-III of the third

schedule.(iii) Total amortization of pre-commencement expenditure should not

exceed the actual expenditure.(iv) No amortization shall be allowed where total amount of pre-

commencement expenditure has been allowed as deduction under any other provision of law.

5. SCIENTIFIC RESEARCH EXPENDITURE :“Scientific Research” means any activity undertaken in Pakistan in the field of natural or applied science for the development of human knowledge.Under the income tax ordinance, 2001 a person is allowed a deduction for scientific research expenditure against “Income from Business” chargeable to tax. But such deduction is subject to the following conditions.(i) The expenditure is incurred in Pakistan.(ii) The expenditure is incurred wholly & exclusively on scientific

research for the purpose for deriving income from business chargeable to tax.

(iii) The contribution is made to an approved scientific research institution.

(iv) The institution is approved by the FBR.

6. EMPLOYEES TRAINING AND FACILITIES. A person shall be allowed as deduction for any expenditure (other than capital expenditure) incurred in a tax year in respect of:(i) Any educational institution or hospital in Pakistan established for

the benefit of the person’s employees and their dependents.(ii) Any institute in Pakistan for the training of industrial workers

recognized, aided, or run by the federal Government or local authority; or

(iii) The training of any person, being a citizen of Pakistan, income connection with a scheme approved by the FBR.

7. PROFIT ON DEBT,FINANCIAL COST AND LEASE PAYMENTS :Following expenditures are allowed as deduction against “Income from Business”(u/s 28):(i) PROFIT ON DEBT:

Any expenditure incurred in respect of profit on debit, if the debt has been used by the person for the purpose of business.

(ii) LEASE RENTAL PAID: Any lease rental paid by lessee to the following person shall be allowed as deduction:

(a) A scheduled bank(b) A financial institution(c) A Modaraba(d) A leasing company or(e) A special purpose vehicle on behalf of originator.

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(iii) PAYMENT OF MODARABA OR PARTICIPATION TERM CERTIFICATE HOLDER:Any payment made by business to Modaraba or participation term certificate holders against their funds used by the business.

(iv) PAYMENT BY HOUSE BUILDING FINANCE CORPORATION (HBFC): Any payment made by HBFC as share of profit to State Bank of Pakistan on its investment in property made under a scheme of partnership in profit & loss where the investment is provided by the State Bank of Pakistan (SBP) under the HBFC.

(v) PAYMENT BY A BANK: Any payment made by scheduled bank to its account holders like P&L sharing account or against their funds used by the business.

(vi) PAYMENT BY NATIONAL DEVELOPMENT LEASING CORPORATION LIMITED (NDLC):Any amount paid by NDLC to the SBP as the share of SBP in the profit earned by such corporation on its leasing operations financed out of a credit line provided by SBP on profit & loss sharing basis.

(vii) PAYMENT BY SMALL BUSINESS FINANCE CORPORATION (SBFC); Any part of profit derived from investment in a small business on profit & loss sharing basis, paid by SBFC to SBP.

(viii) PAYMENT UNDER A SCHEME OF A MUSHARIKA: Any amount incurred by a person in the tax year to a banking company under a scheme of Musharika representing the bank’s share in the profit of Musharika.

QUESTION No.12WHAT ARE THE INADMISSABLE EXPINDITURES IN RESPECT OF INCOME

FROM BUSINESS?ANSWER:-

DEDUCTIONS NOT ALLOWED U/S 21 AGAINST INCOME FROM BUSINESS.The following expenses or payment are not allowed as deduction

while computing the taxable income under the head “income from Business”.

1. CESS, RATE OR TAX: Any cess, rates & tax which is levied on the profit or gains of the business is not allowed as deduction. For example: Income Tax etc.

2. TAX DEDUCTED AT SOURCE: Any amount of tax deducted at source by any authority from an amount received by a person is not allowed as deduction.

3. PAYMENT WITHOT DEDUCTION OF TAX AT SOURCE: A person who makes payment (u/s 149 to 158 and 233) to any resident or nonresident person is required to deduct tax at source, if he is unable to deduct tax at source from such payments.

4. FAILURE IN DEPOSITING TAX AT SOURCE: Where the tax at source is deducted but not deposited in Government account, due to failure in such deposit, the payment against which such tax at source was deducted become inadmissible.

5. ENTERTAINMENT EXPENDITURES :Any entertainment expenditure in excess of limits prescribed by the FBR or in violation of conditions by the FBR is not allowed as deduction.

6. CONTRIBUTION TO UNRECOGNIZED OR UNAPPROVED FUNDS :Any contribution made by the person to unrecognized provident fund unapproved pension fund, un-approved superannuation fund or un-approved gratuity fund is not allowed as deduction.

7. NO ARRANGEMENT OF DEDUCTION OF TAX AT SOURCE: Any contribution made by the person to any provident fund or other fund established for the benefit of the employees of the person, if the person

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has not made effective arrangement for deduction of tax at source at the time of payments out of such fund.

8. PERSONAL EXPENDITURE :Any personal expenditure incurred by the person is not allowed as deduction against “Income from Business”.

9. FINE OR PENALTY PAID OR PAYABLE FOR VIOLATION OF LAW :Any fine or penalty paid or payable by the person for violation of any law rule or regulation is not allowed as deduction against income from business.

10. APPROPRIATION OF PROFIT :Any appropriation of profit such as dividend transfer to any reserve or capitalization in any way is not allowed as deduction.

11. REMUNERATION PAID BY AN AOP ITS MEMBERS :Any remuneration paid by an association of persons to its members or partners like profit on debt, brokerage, commission, salary etc.

12. EXPENDITURE IN AGGREGATE EXCEEDS FIFTY THOUSANDS RUPEES: Any expenditure under a single account head exceeding Rs.50, 000 in aggregate shall be inadmissible if the payment is not made by a crossed cheque or by a crossed bank draft or crossed pay order or any other crossed banking instrument.

13. PAYMENT OF SALARY EXCEEDING Rs.10,000 PER MONTH: Any salary paid or payable exceeding Rs.10, 000 per month other than a crossed cheque or direct transfer of funds to the employee’s bank account is not allowed as deduction.

14. CAPITAL EXPENDITURE :Any capital expenditure incurred by the person for business is not allowed as deduction. For example, purchase of asset etc.

15. LIMITATION ON THE ALLOWABILITY OF PERQUISITES :Any expenditure incurred by an employer in providing perquisites to an employee in excess of 50% of the salary of the employee for the tax year.

QUESTION NO.13

WHAT IS DEPRECIATION? DISCRIBE THE CONDITIONS FOR ALLOWABILITY OF DEPRECIATION ALLOWANCE UNDER THE INCOME TAX ORDINANCE 2001.

ANSWER:-“A decrease in the value of an asset through normal wear and tear, or obsolescence”In other words, depreciation is “the process of allocating the cost of a depreciable asset over its estimated useful life by applying the rate specified in Part-1 of the Third schedule of the Income Tax Ordinance, 2001. However, this deduction is subject to the following conditions:

1. ASSETS ON WHICH DEPRECIATION IS ALLOWED: Depreciation is allowed only in respect of depreciable asset. “Depreciable asset” means any:(i) Tangible movable property(ii) Immovable property ( other than unimproved land)(iii) 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.UNIMPROVED LAND

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An open plot of land represents unimproved land. If any road or railway track or airport runway etc. is constructed on land, such land is called improved land. So only land is not included in the definition of depreciable asset.STRUCTURAL IMPROVEMENT TO IMMOVABLE PROPERTY:Structural improvement to immovable property means construction or installation of any building road, driveway, car park railway line, pipeline, bridge, tunnel, air port runway, canal, dock, wharf, retaining wall, fence, power lines, water or sewerage pipes, drainage, landscaping or dam on immovable property like land.TANGIBLE MOVABLE PROPERTY:It includes machinery, furniture, motor vehicles and ships, technical or professional books, computer hardware, aircrafts etc.IMMOVABLE PROPERTY:It includes buildings like admin office, factory, workshop, cinema, hotel, hospital, school and flats or residential quarters for labour.

2. PURPOSE OF ASSET: Depreciable asset must be used in the business of a person whose taxable income is being determined.

3. AMOUNT OF DEPRECIATION: a. WHERE ASSET IS EXCLUSIVELY USED FOR BUSINESS :It must be computed by applying the rates specified in part-1of the Third Schedule of the Income Tax Ordinance,2001, against the written down value of the asset at the beginning of the tax year.b. WHERE ASSET PARTLY USED FOR BUSINESS :Amount of depreciation allowed as deduction shall be restricted to the fair proportional part of the amount that would be allowed if the assets were wholly used to derive income from business chargeable to tax.

4. DEPRECIATION SHALL BE CHARGED AGAINST WRITTEN DOWN VALUE (WDV): Depreciation shall be charged against written down value of a depreciable asset.

5. AGGREGATE OF DEPRECIATION ALLOWANCE SHOULD NOT EXCEED ACTUAL COST OF THE ASSET:The total deductions allowed to a person during the period of ownership of a depreciable asset as depreciation (u/s 22) and allowance (u/s 23) should not exceed the actual cost of asset.

6. DISPOSITION OF ASSET DURING THE TAX YEAR :No depreciation deduction shall be allowed to a person against income from business chargeable to tax for the tax year in which asset is disposed.

7. ASSET WITH USEFUL LIFE UP TO ONE YEAR: No depreciation allowance shall be allowed for asset whose normal useful life does not exceed one year although their replacement or renewal cost is allowed as revenue expenditure.

8. DEPRECIATION ALLOWANCE IN CASE OF IMMOVABLE PROPERTY: The cost of immovable property or structural improvement to immovable property shall not include the cost of land.In other words if depreciable asset consist of building the value of land not considered.

9. DEPRECIATION ALLOWANCE TO LESSOR :Where any asset owned by lesser is leased to another person. Depreciation allowance is allowed to such persons because asset is being used in their leasing business.

10. LIMITATION ON DEPRECIATION ALLOWANCE AGAINST LEASED ASSET:

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Deprecation allowance on leased asset shall be allowed against income from lease rental only. Any unabsorbed depreciation shall be adjusted in next periods.

QUESTION NO.14WHAT ARE THE VARIOUS KINDS OF DEPRECIATION ALLOWANCES

GRANTED UNDER THE INCOME TAX ORDINANCE 2001?

ANSWER:-The various kinds of Depreciation allowance are as under:-

a. INITIALb. NORMAL

INITIAL ALLOWANCE FOR DEPRECIATION:In order to avail initial allowance for depreciation, one should satisfy the following conditions:1. ASSETS ELIGIBLE FOR INTIAL ALLOWANCE :

Initial allowance for depreciation is admissible only in respect of depreciable assets.

2. YEAR OF ALLOWABILITY: Initial allowance for depreciation will be allowed on depreciable assets in the year asset is used for the purpose of business in Pakistan for the first time or the tax year in which commercial production is commenced whichever is later.

3. RATES OF INITIAL ALLOWANCE: Initial allowance for depreciation is allowed @ 50% of the cost of the asset. In case of leasing company, bank etc the deduction on account of initial allowance for depreciation shall be allowed against income from lease rentals only.

4. ASSET MUST BE OWNED BY THE PERSON: Initial allowance for depreciation is allowed in respect of depreciable asset, if the same is owned by the person.

It must be noted that initial allowance for depreciation is not provided in the following cases:

a. A road transport vehicle not plying for hire.b. A machinery or plant which has previously been used in Pakistan.c. Any machinery or plant on which deduction has been allowed under

another section of the income tax ordinance, 2001.d. Any furniture including fittings.

NORMAL DEPRECIATION:Normal depreciation is to be calculated at the prescribed rates for various types of assets on the written down value of a depreciable asset.RATES FOR COMPUTATION OF DEPRECIATION ALLOWANCE:CLASS OF ASSET DESCRIPTION RATE PER CENT OF THE WRITTEN DOWN VALUE

a. Building (All Types) 10%b. Furniture (including fittings)and machinery and plant (not otherwise

specified) motor vehicles (All Types), ships technical or professional books.15%

c. Computer hardware including printer, monitor and allied items, Machinery and equipment used in manufacture of IT products aircrafts and aero engines. 30%

d. In case of mineral of oil concerns the income of which is liable to be computed in accordance with the rules in Part-I of the fifth schedule.i. Below ground installations.ii. Offshore platforms and production. 100%

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAH

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Contact No. 0333-9255084

CHAPTER:- 08 PART-II

CAPITAL GAINS

QUESTION NO.15

WHAT IS MENT BY CAPITAL GAIN? WHAT IS THE PROCDURE OF ITS CHARGEABILITY?

ANSWER:-According to section 11, of the Income Tax Ordinance, 2001, there are

five heads of income like:a. Salaryb. Income from propertyc. Income from businessd. Capital gainse. Income from other sourcesSo, capital gain represent fourth source of income of a person, which is chargeable to tax under the head capital gains.According to section 37(1), profit and gains arising from the disposal of capital assets is taxable under the head capital gains.WHAT IS CAPITAL ASSET?“Capital Asset” means property of any kind held by a person, whether or not connected with a business, but does not include:

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1. Any stock-in-trade (not being stock and shares), consumable store or raw materials held for the purpose of business.

2. Any depreciable asset (asset on which depreciation is allowed u/s 22). For example: Plant, machinery, building etc.

3. Any intangible asset on which amortization is allowed u/s 24. For example: Patent, Copyright, trade mark etc.

4. Any immovable property. For example: land, building etc.5. Any movable property held for personal use by the person or any member

of the person’s family dependent on the person. For example: Car held by the person’s family etc.

Note:- Following movable property is included in the definition of capital assets:1. Jewelry2. An antique3. Modaraba Certificates4. Participation Term Certificates (PTCs)5. Term Finance Certificates (TFCs)6. Musharika Certificates7. Shares of Companies8. Pakistan Telecommunication Corporation (PTC) vouchers issued by the

Government of Pakistan.9. Leasehold rights10.Partner’s share in an AOP.

The gain arising on the disposal (sale) of capital asset by a person shall be computed as follows:

Capital gain = A-BWhereA is the consideration received by the person on disposal of the asset.B is the cost of the asset.Capital gain = Amount received from disposal of capital asset – Cost of

capital.

HOW COST OF CAPITAL ASSET IS DETERMINED:If the asset is transferred or acquired under the following ways, the fair market value (FMR) shall be treated as cost:

a. Under a gift, bequest or willb. By succession, inheritance or devolutionc. A distribution of assets on dissolution of an AOP.d. A distribution of assets on liquidation of company

COST WHERE SUCH ASSET IS DISPOSED OFF:Fair market value (FMR) of the assetAdd: Expenses on disposal of such assetTotal cost of the asset

COST OF CAPITAL ASSET, WHERE ASSET IS PURCHASED AND THEN DISPOSED OFF:Purchase price of the assetExpenses on purchaseExpenses on disposal= Total cost of the asset

HOW MUCH GAIN ON DISPOSAL OF CAPITAL ASSET IS TAXABLE?1. WHERE ASSET IS DISPOSED OFF AFTER ONE YEAR:

Taxable capital gain = gain arising on sale of asset X ¾Explanation:75% of capital gain is taxable and remaining (1/4) 25% is exempt from tax.

2. WHERE ASSET IS DISPOSED OFF WITHIN ONE YEAR: It means asset is disposed off before completion of one year. In other words such asset is held by the person less than 12 months. So all the profit and gain arising from the disposal of capital asset is taxed within the tax year in which asset is disposed off.EXEMPTED CAPITAL GAINS:

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The second schedule of the Income Tax Ordinance, 2001 allows exemption to certain capital gains from tax. Following capital gains are exempt from tax.According to clause 103 of the second schedule.Any distribution received from NIT or a Mutual Fund of ICP out of the capital gains on which tax has already been paid.Period of exemption:Permanently exemptAccording to clause 110 of the second schedule:Capital gains from sale of:a. Modaraba Certificatesb. Redeemable capital like

i. Participation Term Certificate (PTCs)ii. Term Finance Certificates (TFCs)iii. Musharika Certificatesiv. Any other security not based on interest (excluding shares)

3. Pakistan Telecommunication Vouchers issued by the Government of Pakistan.4. Shares of public company

Period of exemption:Exempt up to June 30, 2007 (up to tax year 2007)According to capital gain arising from the scale of shares of a public company, if shares have been sold by a foreign intuitional investor approved by the Federal Government.Period of exemption:Permanently exempt

ACCORDING TO CLAUSE 113 THE SECOND SCHEDULE:COMPANY REGISTERED IN SPECIAL INDUSTRIAL ZONE (SIZ):Any capital gain arising from the sale of shares of public company set up in any special industrial zone is exempt from tax.Period of exemption:It is exempted up to five years from the date of commencement of commercial production.According to clause 114 of the second schedule:Industrial Undertaking set up in export Processing Zone (EPZ):Any capital gain arising from the sale of shares of an industrial undertaking set up in export processing Zone.Period of exemption: permanently exempt.

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084

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CHAPTER:-09 PART-II

INCOME FROM OTHER SOURCES

QUESTION NO:-16

WHAT IS MENT BY INCOME FROM OTHER SOURCES? HOW IT IS COMPUTED?

ANSWER:-“Income from other sources” is a fifth source of income. It represent an income derived by a person, which is chargeable to tax under the income Tax Ordinance,2001 but is not included in any other head of income.DIVIDEND1. Royalty (which is not taxable u/s 6 or 18)2. Profit on debt (it excludes the profit on debt where person’s business is to

give debt (lone) and to earn profit on such debt)3. Ground rent4. Rent from the sublease of land or building:5. Income from the lease of any building together with plant or machinery.6. Income from provision of amenities, utilities or any other service

connected with renting of building.7. Any annuity or pension.8. Any income from:

a. Prize bondsb. Winning from a rafflec. Lotteryd. Prize on winning a quize. Prize offered by companies for promotion of sale

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9. Any consideration received as provision use or exploitation of property including consideration which is received from the grant of a right to explore for or exploit natural resources.

10.The fair market value of any benefit (whether convertible into money or not) received in connection with the provision, use or exploitation of property.

11.Any amount received by a person as consideration for vacating the possession of a building or part there of, reduced by any amount paid by the person to acquire possession of such building or part there of.

12.Any amount received by a person from approved income payment plan or approved annuity plan under the voluntary pension system rules, 2005.

13.Any amount of loan, advance and deposit for issuance of shares or gift received from a person other than a banking company or financial institution.

14.Remuneration received by a professional man or employee as an examiner or paper checking fee.

15.Income of a non professional writer for his literary work.16.Professional dues realized after discontinuance of business.17.Sale of irrigation water for agriculture.18.Income received as tips by waiters etc.19.Annuities granted by a life insurance company.20.Insurance commission received by a person who is not an employee of the

insurance company.DEDUCTIONS ALLOWED IN COMPUTING INCOME CHARGEABLE TO TAX UNDER THE HEAD “INCOME FROM OTHER SOURCES”:

1. Any expenditure (other than a capital expenditure) which is incurred wholly and exclusively in deriving “ Income from other Sources”

2. When profit on debt is paid to the person ( if profit is taxable under the head Ushr Ordinance,1980 at the time of payment in respect of such profit on debt, shall be allowed as deduction from total income.

3. Where any building is leased together with plant & machinery, depreciation allowance u/s 22 and initial allowance u/s 23 (if it is eligible depreciable asset) should be allowed as deduction against “income from other Source”INADMISSIBLE DEDUCTIONS U/S 40:

1. Any expenditure which is deductible in computing the income of the person under another head of income (like income from business etc) shall not be allowed as deduction under the head “income from other sources”.

2. Inadmissible deduction u/s 21 shall also apply in computing “income from other sources”

3. Any expenditure of capital nature. “Capital nature expenditure” means an expenditure which has normal useful life more than one year.

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084

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CHAPTER NO:-10 PART-II

REGISTRATION OF FIRM

QUESTION NO:- 17

WHAT ARE THE PRIVILEGES GRANTED TO A REGISTERED FIRM OVER AN UN-REGISTERED FIRM? ORWHAT ARE THE ADVANTAGES OF GETTING A FIRM REGISTERED UNDER THE INCOMETAX ORDINANCE 2001? ORDIFFERENTIATE BETWEEN REGISTERED AND UNREGISTERED FIRM.

ANSWAR:-A firm may be registered or an un registered “ if the conditions laid down under the income tax ordinance are fulfilled and an application is made to the C.I.T then after satisfying himself that the firm is not a bogus one, will register the firm and so it will be called a registered firm.THE FOLLOWING BENEFITS ARE ENJOYED BY A REGISTERED FIRM:

1. SUPER TAX: After payment of super tax the profits of a registered firm are divided among the partners who pay income tax on their respective shares after the deduction of admissible allowance. As sale rates are applicable in Pakistan. The partners of registered firm will get the benefit of lower assessment.

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2. SET OFF LOSSES:- The partners of registered firm can set off their private loss against the shares of income of the registered firm. But the un-registered firm partners cannot do so.

3. CARRY FORWARD OF LOSSES: A partner of registered firm can carry forward his share of firm loss and unabsorbed depreciation of the firm but in the case of un- registered firm partners cannot do so.

4. TAX CONCESSION: Income of registered firm is taxed at concessional rates. There is a vast between the maximum limits of rates of taxation between a registered and un-registered firm. The un-registered firm rates are being the lowest as compared to that of a registered firm.

5. COMPUTATION OF DEVISABLE PROFITS: Super tax payable by registered firm is deducted from its total income in computing divisible profit to be allocated among the partners. On the other hand income tax payable by an un-registered firm on its total income cannot be deducted in computing devisable profit.

QUESTION NO:-18

DESCRIBE THE PROCEDURE FOR REGISTRATION OF FIRM.UNDER WHAT CIRCUMSTANCES REGISTRATION OF FIRM CAN BE REFUSED?

ANSWER:-If the following conditions are fulfilled commissioner of income tax

generally grants registration.

APPLICATION:Submission of application is the basic requirement for the registration of firm.The application for registration of firm should be made on the prescribed from and it should be signed by the partners under the rules.INSTRUMENT OF PARTNERSHIP:The firm must be constituted by an instrument of partnership. Instrument must be executed in writing and it should be written before the end of the tax year relevant to the year for which assessment is to be made.PROFIT SHARING SPECIFICATION:The individual share of each partner must be specified in the instrument of partnership. Because it is prerequisite for the grant of registration.FIRM REAL OR BOGUS:The C.I.T must be satisfied that the firm is genuine, constituted in accordance with the instrument of partnership and is fulfilling all the provision contained in the instrument.REGISTRATION UNDER THE PARTNERSHIP ACT1932:The firm should have been registered under the partnership Act 1932 or an application for registration under the said Act has been made.GRANT OF REGISTRATION:1. The commissioner income tax grants registration if he is satisfied that:2. The application in the prescribed form is complete in all respects.3. The firm is genuine.4. The said firm was in existence during the relevant income year.5. The partnership business was actually carried on during the relevant

income year.6. The instrument must specify the individual share of the partners.

GROUNDS FOR REFUSAL OF REGISTRATION:The following are some of the grounds on which the registration of a firm may be refused by the commissioner of income tax.

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1. When the firm is said to have been constituted verbally.2. There was no deed of partnership executed in the relevant accounting

year.3. One of the partners has not contributed the correct share of has not

contributed the correct share of his capital specified in the original deed of partnership.

4. Original deed of partnership executed by the partners did not specify the individual shares of the partners.

5. Original deed specifies the individual share of the partners but the division of profit has not been made in accordance with the deed.

6. Application for registration of firm has not been signed by the partners personally.

7. Partnership deed does not disclose the real partners and their shares.

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084

CHAPTER:-11 PART-II

ASSESMENT PROCEDURE

QUESTION NO:-19

WHAT DO YOU MEAN BY ASSESSMENT? WHAT ARE THE VARIOUS TYPES OF ASSESSMENT?

ANSWAR:-Assessment means a complete scrutiny of the information provided by the tax payer and his return. To determine the taxability or otherwise of the income.TYPES OF ASSESSMENTS

1. REGULAR ASSESSMENTS: Return of income is filed by the taxpayer to the commissioner of income tax (CIT) or any other concerned authority. Such return is scrutinized by CIT. After scrutiny of CIT, the return of income may fall under the following categories.

a. The complete returnb. The incomplete return

a. ON THE BASIS OF COMPLETE RETURN: Where the return of income filed by the taxpayer is complete in all respect and the commissioner is satisfied that taxable income and the tax liability or refund shown in the return fulfills the requirements of the income tax ordinance, 2001. It shall be treated as assessment order issued by CIT on the date of filing of return. Any amount declared by the taxpayer as taxable income, tax liability or refund is taken as assessed taxable income, tax liability refund without any modification.

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b. ON THE BASIS OF INCOMPLETE RETURN: Where the return of income filed by the taxpayer by the taxpayer is incomplete and has some deficiencies regarding the requirement of the income tax ordinance 2001. The commissioner shall a notice to the taxpayer identifying the deficiencies found in the return and due date of removing the deficiencies.Where the taxpayer has fully complied with requirements of notice, the return of income already filed by the taxpayer is treated as complete return at the date of filing of the return. In other words, it shall be treated as assessment order issued by the CIT on the date filing of return.Where a taxpayer fails to comply with the requirements of notice, the return furnished by the taxpayer is treated as an invalid return as if it had not been furnished with the concerned tax authority.

2. BEST JUDGMENT ASSESSMENT [121] It is also known as exparte assessment. Where a person fails to furnish a return of income u/s 114,143 & 144 or wealth statement or any other necessary document for assessment of income tax liability, which is required by the law. The commissioner may make an assessment of the taxable income of the person and the tax due on such income on the basis of any available information or material. As the second partly is not involved in such assessment, so the commissioner shall make honestly an assessment on the basis of his best judgment.The CIT may issue the assessment order to the taxpayer stating:a. The taxable income;b. The amount of tax due;c. The amount of tax paid, if any; andd. The time, place and manner of appealing the assessment order.

3. AMENDMENDED ASSESSMENTS [122] Where appropriate modification in the original assessment order passed by the CIT is made due to any reason, such modification is termed as amended assessment order.WHY ASSESSMENT IS AMENDED?Assessment is amended where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that:a. Any income chargeable to tax has escaped assessment.b. Total income has been under assessed, or assessed at low rate or has

been the subject of excessive relief or refund; orc. Any amount under a head of income has been miss-classified.TIME PERIOD FOR AMENDED ASSESSMENT:An assessment order may be amended within five years after the original assessment made by the commissioner and the commissioner may further amend, as many times as may be necessary within a time period which is later of the following:a. Five years of the date of original assessment.b. One year of the date on which the CIT has issued or treated to have been

issued the amended assessment order.The amended assessment order shall contain the following information:a. The amended taxable income of the taxpayer;b. The amended amount of tax, due:c. The amount of tax paid, if any; andd. The time place and manner of appealing the amended assessment.

4. PROVISIONAL ASSESSMENT [123] Where a concealed asset of any person is impounded by any department or agency of the Federal Government or Provincial Government, the CIT may issue an assessment order in respect of taxable income & tax liability of the

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person. Such assessment is called provisional assessment and it is subject to the following conditions:a. A provisional assessment order is issued at any time before issuing any

assessment order u/s 121 or amended assessment order u/s 22.b. The commissioner shall finalize a provisional assessment order or a

provisional amended assessment order as soon as practicable.Note:-(Concealed asset mean any property or asset which, in the opinion of the commissioner, was acquired from any income subject to tax under the Income Tax Ordinance, 2001.)

5. ASSESSMENT AFTER DECISION OF AN APPEAL [124] Where decision of any appellate authority provides any finding or direction regarding an assessment, the Commissioner shall issue the assessment order within two year from the end of the financial year in which the order is received by the CIT. where decision of any appellate authority set asides the assessment order passed by the CIT and the commissioner is directed to make a new assessment order, the commissioner shall make the new order within one year from the end of financial year in which the order is received by the CIT.Where assessment is made by the CIT after a decision by any civil court in Pakistan the commissioner shall make the new order within one year from the end of financial year in which the order is received by the CIT.Where an assessment order has been set aside or modified, the proceedings may commence from the stage at which such order was passed if reissue is not necessary in the ordinance.Where direct relief is provided by the appellate authority, the CIT is bound to issue orders for providing such relief within two months of the recite of decision.

ASSESSMENT OF DISPUTED PROPERTY: Where the ownership of any property is in dispute in any Civil court in Pakistan and the income from such property is chargeable to tax, an assessment order or amended assessment order in respect of such income may be issued at any time within one year, after the end of the financial year in which the decision of the court is made.

6. SELF – ASSESSMENT SCHEME A scheme where it is assumed that the taxpayer voluntarily abide by the income tax rules and fulfill the requirements of the income tax law and the taxable income & tax liability disclosed by the taxpayer in the return is considered correct and fair. Only small portion (approximately 5%) of the total returns field by the taxpayers in the tax year is checked in detail and the remaining return are accepted by the income tax department without any further verification.OBJECTIVES OF SELF – ASSESSMENT SCHEME:a. TO RELIEVE FROM THE COMPLEXITY OF TAX SYSTEM:

Major purpose of introduction of self-assessment scheme is to relieve the taxpayers from the tax system complexity.

b. TO ENHANCE THE MUTUAL CONFIDENCE :To enhance the mutual confidence between the taxpayer & tax department after showing trust on the taxpayer.

c. TIME SAVING: Time saving for tax department from the complicated assessment procedure is the major objective of the self assessment scheme.

d. TO INCREASE THE NUMBER OF TAXPAYERS: Some people want to enter in the tax circle but avoid due to the complex procedure of assessment, when trust is shown by the tax department on the taxpayers, there is a possibility of new enter in the tax circle.

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e. TO REDUCE THE LITIGATION: When assessment is made by the tax department, there is a possibility of through checking of the records of the taxpayers & there is a greater possibility of litigation in respect of tax disputes.

7. EMERGENCY ASSESSMENT :Under this scheme the deputy commissioner of tax will assess the person who intends to leave Pakistan during the current financial year without intention of returning to Pakistan. Tax is payable by him in respect of the income of the current financial year up to the date of his departure at the rate prescribed for the year of assessment.

8. ADDITIONAL ASSESSMENT :This is also called supplementary assessment. When an assessment for a particular year is finalized it can be reopened In any case if the deputy commissioner of income tax believes that taxpayer has knowingly concealed the particulars of income and has deliberately furnished inaccurate information then he may start proceedings the additional assessment.

QUESTION NO:-20

WHAT IS SELF ASSESSMENT SCHEME?

ANSWER:-1. WHAT IS SELF – ASSESSMENT SCHEME?

A scheme where it is assumed that the taxpayer voluntarily abide by the income tax rules and fulfill the requirements of the income tax law and the taxable income & tax liability disclosed by the taxpayer in the return is considered correct and fair. Only small portion (approximately 5%) of the

total return filed by the taxpayers in the tax year is checked in detail and the remaining returns are accepted by the Income Tax Department without any further verification.OBJECTIVES OF THE COMPLEXITY OF TAX SYSTEM:a. TO RELIEVE OF THE COMPLEXITY OF TAX SYSTEM :

Major purpose of introduction of self- assessment scheme is to relieve the taxpayers of the tax system complexity.

b. TO ENHANCE THE MUTUAL CONFIDENCE :To enhance the mutual confidence between the taxpayer & tax department after showing trust on the taxpayer.

c. TIME SAVING :Time saving for tax department from the complicated assessment procedure is the major objective of the self assessment scheme.

d. TO INCREASE THE NUMBER OF TAXPAYERS :Some people want to enter in the tax circle but avoid due to the complex procedure of assessment, when trust is shown by the tax department on the taxpayers, there is a possibility of new enter in the tax circle.

e. TO REDUCE THE LITIGATION :When assessment is made by the tax department, there is a possibility of through checking of the records of the taxpayers & there is a greater possibility of litigation in respect of tax disputes.

REQUIREMENTS FOR RETURN:A return of income shall be taken to be complete if it fulfills the following conditions/ requirements:

1. PRESCRIBED FORM :A return shall be filed in the form prescribed under the income tax ordinance 2001.

2. ATTACHEMENT OF REQUIRED DOCUMENTS :All the required annexure, statements of document shall be attached with prescribed form.

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3. DISCLOSURE OF RELEVANT INFORMATION :The return of income shall fully state all relevant particulars or information as specified in the form.

4. VERIFICATION OF RETURN :The return shall be verified by the person filling the return or person’s authorized representative.

5. DECLARATION OF THE RECORDS :The return shall contain a declaration of the records kept by the taxpayer.

6. SIGNATURE OF THE PERSON :The return shall be signed by the person or a person authorized representative.

7. FURNISHED IN A PRESCRIBED MANNER :The return of income shall be furnished in the prescribed manner (it means registered post or courier service or on line recording to the method specified by the FBR.

8. APPLICATION FOR NTN :A person having no National Tax Number (NTN) shall submit an application for NTN along with return.

9. EVIDENCE OF PAYMENT :Evidence of different payments made by the person (like charitable donations, investment in shares etc. for which tax credit is claimed, Zakat paid under Zakat & Ushr Ordinance,1980, Tax deducted at source, Advance payment of tax etc) should be attached with the return.

QUESTION NO:-21

WHAT IS MENT BY REFUND? DESCRIBE THE PROCEDURE OF GETTING REFUND?

ANSWER:-1. WHAT IS MENT BY REFUND?

A process of returning any excess amount to the taxpayer which is charged by the tax department or paid by the taxpayer to the tax department is called refund.

2. APPLICATION FOR REFUND. The taxpayers shall file an application to the tax department for refund of tax.

3. REQUIREMENT OF AN APPLICATION FOR REFUND: An application for refund shall fulfill the following requirements:a. PRESCRIBED FORM:

An application for refund shall be furnished in the prescribed form.

b. VERIFICATION OF AN APPLICATION: An application for refund shall verify in the prescribed manner.

c. TIME OF APPLICATION: An application for refund shall be made within two year of the later of:i. The date on which the Commissioner has issued the assessment

order to the taxpayer for the tax year to which the refund application relates;

ii. The date on which the tax was paid.4. TIME PERIOD FOR DECISION REGARDING REFUND:

The commissioner shall within 40 days of the receipt of a refund application serve on the person applying for the refund an order in writing whether;i. Refund is allowable; orii. Refund is not allowable

5. OPPORTUNITY OF BEING HEARD:

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Before deciding an application for refund, the commissioner shall provide an opportunity of being heard to the person applying for refund.

6. ALLOWABILITY OF REFUND BY THE COMMISSIONER: The Commissioner may apply the refund in the following manners:i. APPLICATION OF REFUND AGAINST ANY OTHER TAX:

The Commissioner may apply the refund in reduction of any other tax due from the tax payer.

ii. APPLICATION OF REFUND AGAINST OUTSTANDING LIABILITY: The Commissioner may apply the balance of refund in reduction of any outstanding liability of the taxpayer to pay other taxes.

iii. PAYMENT TO TAXPAYER: The Commissioner may refund the balance in the form of cheque etc to the taxpayer.

7. OPPORTUNITY OF APPEAL: A person aggrieved by:a. An order passed by the commissioner; orb. The failure of the commissioner to pass an order within the

specified time may an appeal to the commissioner (Appeals).8. TIME PERIOD FOR PAYMENT OF REFUND.

The commissioner shall refund the amount within 3 months, when the refund becomes due.ADDITIONAL PAYMENT FOR DELAYED REFUNDS:

1. TIME PERIOD FOR PAYMENT OF REFUND: A refund shall be paid to the tax payer within three months of the date on when it becomes due.

2. WHEN REFUND BECOMES DUE: i. AS ARESULT OF APPEAL ORDER :

When the refund is decided in the appeal to the appellant authority, it shall become due on the date of receipt of refund order by the CIT.

ii. AS A RESULT OF A REVISION ORDER: On the date, the order is made by the Commissioner.

iii. IN ANY OTHER CASE: On the date the refund order is made.

3. ADDITIONAL AMOUNT FOR DELAYED PAYMENT :Where a refund due to a taxpayer is not paid within three months of the date on which it become due, the Commissioner shall pay to the taxpayer a further a further amount by way of compensation.

4. RATE OF ADDITIONAL PAYMENT: Additional payment for delayed refund is allowed @ 6% P.A, starting from the end of three months up to the date of payment of refund.

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084

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CHAPTER NO:-12 PART-III

SET – OFF & CARRY FORWARD OF LOSSES

QUESTION NO:-22

WHAT IS MENT BY SET OFF AND CARRY FORWARD OF LOSSES? DESCRIBE THE CODAL PROCEDURE OF SET OFF AND CARRY FORWARD OF VARIOUS LOSSES?

ANSWER:-SET – OFF & CARRY FORWARD OF LOSSES:The adjustment of losses from one head against the income, profit or gains of any other head of income during the same tax year is called sett- off of losses.CARRY FORWARD OF LOSSES:-Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year, this process of transferring un adjustable losses to the next year is known as carry forward of losses.PROCEDURE OF SET-OFF OF LOSSES:Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year , this process of transferring un-adjustable losses to the next year is known as carry forward of losses.PROCEDURE OF SET- OFF OF LOSSES:Losses under different heads of income may be set-off under the following procedure.SALARY:Salary may not be in negative. So there is no possibility of loss under the head ‘Salary’SET-OFF OF LOSSES UNDER THE HEAD INCOME FROM NON_SPECULATION BUSINESS:

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Where a person sustains losses under the head “Income from Non speculation Business” such losses may be set-off only against income from any other head of income.SET-OFF OF LOSSES UNDER THE HEAD ‘INCOME FROM PROPERTY’:Where a person sustains losses under the head “Income from Property” such losses may be set-off against income from any other head of income.SET – OFF OF LOSSES UNDER THE HEAD INCOME FROM OTHER SOURCES:Where a person sustains losses under “ Income from Other Sources” such losses may be set-off only against income from any other head of income.SET –OFF OF LOSSES UNDER THE HEAD “INCOME FROM SPECULATION BUSINESS”:Where a person sustains losses under the head “Income from speculation Business” such losses may be set-off only against income from any other speculation business. If there is no other income during the current tax year under the head speculation business, speculation losses shall be carry forward to the next year, and can be adjusted against speculation Income only.SET- OFF OF LOSSES UNDER THE HEAD “CAPITAL GAINS”Where a person sustains losses under the “Capital Gains” such loss may be set-off only against any other Income from the head capital gains. If there is no other income under this head, during the tax year, losses from such head shall be carry forward to the next year, and be adjusted against Capital gain only.BRIEFLY SPEAKING:We may categories the losses under different heads of income in the following manner

1. CATEGORY “A” i. Loss from propertyii. Loss from non-speculation businessiii. Loss from other sources

2. CATEGORY “B” Loss from capital assets

3. CATEGORY “C” Loss from capital assetsi. Loss from any head under category “A” may be set off against all

categories like “A”,”B”& “C”.ii. Loss from category “B” may be set-off only against any other income

from category “B”.iii. Loss from category “C” may be set off only against any other income

from category “C”.Notes:-i. Where a person incurs losses under more than one head of income,

including “Income from Business” the business loss shall be set off at last.

ii. If an income from a source is exempt from tax, the loss from such source may not be set off or carried forward.

CARRY FORWARD OF LOSSES:Where the losses are not fully adjusted against the income of same tax year or transfer of losses to the next tax year, such process of transferring losses to the next tax year is known as carry forwarded of losses. However a taxpayer may carry forwarded losses only under the following heads:

a. Loss under non-speculation businessb. Loss under speculation businessc. Capital losses

PROCEDURE FOR CARRY FORWARD OF LOSSES:1. CARRY FORWARD OF LOSSES UNDER NON_SPECULATION BUSINESS:

Any un-adjustable loss under the head non-speculation business may be carried forward up to 6 years immediately succeeding the tax year in which loss was incurred.

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Notes:-i. Where more than one tax year’s losses are being carried forward, the

loss of the earliest tax year shall be set-off first.ii. Any amount of unabsorbed depreciation shall be allowed as deduction

against the income of following tax years. There is no limit of six tax year for carry forward of unabsorbed depreciation. Where losses & un-absorbed depreciation occur together, the losses shall be adjusted first and depreciation shall be adjusted last.

2. CARRY FORWARD OF SPECULATION LOSSES :Any un-adjustable loss under the head speculation business may be carried forward up to 6 years immediately succeeding the tax year in which loss was incurred for set-off against the profit & gains from the speculation business only. Where more than one tax years losses are being carried forward, the loss of the earliest tax year shall be set-off first.

3. CARRY FORWARDED OF CAPITAL LOSSES :Any un adjustable capital loss may be carried forward up to 6 years immediately succeeding the tax year in which loss was incurred for set-off against the profit & gains from those capital assets only in the next years.Where more than one tax year’s losses are being carried forward, the loss of the earliest tax year shall be set-off first.SET-OFF & CARRY FORWARD OF LOSSES OF ASSOCIATION OF PERSONS (AOP):To set-off & carry forward of losses of an AOP, we may divide the AOP into following categories:i. Professional firmii. Any other AOP

4. PROFESSIONAL FIRM: The professional firm may not set-off & carry forward of it own losses. It means the un-adjustable losses of a professional firm are apportioned among its members according to their profit & loss sharing ratios. Only the members may set off and carry forward their respective shares of loss against their individual incomes.

i. An AOP other then professional firm may set-off & carry forward its losses against its incomes. in other words the losses of such AOP are not apportioned among its members like professional firm and members are not allowed to set-off & carry forward of such losses against their incomes.

SET-OFF & CARRY FORWARD OF BUSINESS LOSSES OF AMALGAMATING COMPANY:1. AMALGAMATING COMPANY:

The amalgamated company may set-off & carry forward of non-speculation business losses of the amalgamating company up to six years immediately succeeding the tax year in which loss was incurred.

2. AMALGAMATING COMPANY :The amalgamated company may set-off & carry forward of non-speculation business losses of the amalgamating company.SET-OFF & CARRY FORWARD OF LOSSES OF BANKING COMPANY:A banking company may also set-off & carry forward its losses up to a period of 10 years if the following conditions are fulfilled:

i. The banking company is wholly owned by the Federal Government as on 01-06-2002.

ii. It has been approved by the State Bank of Pakistan (SBP) for banking business.

iii. Loss occurred during the period of 01-07-1995 to 30-06-2001.SET-OFF & CARRY FORWARD OF LOSSES OF SUBSIDIARY COMPANY:Subsidiary company may deal with its losses under the following manners:

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a. It may set-off & carry forward of its losses against its own income as a separate entity & may set-off & carry forward up to 6 tax years immediately succeeding the tax year in which loss was incurred.

b. It may transfer its losses to its holding company. The holding company may set-off losses transfer from subsidiary are not fully adjusted in current tax year, it may carry forward to next two years immediately succeeding the tax year in which loss was transferred. Loss may only be transferred. If the following conditions are satisfied.i. The holding company is a public company listed on stock exchange.ii. The holding company posses at least 75% of the share capital of

subsidiary company.iii. The subsidiary company has transferred the loss of current year.

Pervious year’s loss may not be transferred.Where the share of holding company in the share capital of the subsidiary company is reduced from 75% during the period of 5 years. The loss of subsidiary company already set-off & carried forward by the holding company shall become taxable & is included in the taxable income of holding company in the tax year in which share capital is reduced from 75%.if the holding company may not absorb the losses of subsidiary company against its income during three years, the unabsorbed portion of losses shall be revert back to the subsidiary company for being set-off & carry forward u/s 57.LOSSES OF BUSINESS EXEMPT FROM TAX:There are two types of business exempted from tax.

1. BUSINESS PERMANENTLY EXEMPT FROM TAX: Losses of such business may not be set-off or carried forward under the income tax ordinance, 2001, if any income from a source is exempt from tax; the loss from such source may not be set-off or carried forward.

2. BUSINESS EXEMPT FOR A SPECIFIC PERIOD (TAX HOLIDAY) A loss incurred during the exemption period may be carried forward & set-off after the expiry of exemption period. Such losses may be carried forward up to a period of six years.

CHAPTER NO: 13 PART-IIIINCOME TAX AUTHORITIES

QUESTION NO: 23

WHAT ARE THE VARIOUS INCOME TAX AUTHORITIES? DESCRIBE THE MAIN FUNCTIONS AND POWERS FEDERAL BOARD OF REVENU (FBR)

ANSWAR:

INTRODUTION:For the proper administration of taxation the Government needs

qualified persons who should ensure that tax collecting machinery should work in an efficient manner and proper amount of revenue is received. On the other hand, there is a need that this work should be performed in a justifiable manner. Undue grievances should not be caused to the taxpayer and if any taxpayer feels aggrieved, justice should be provided to him. Keeping in view these goals, sections 207,208 of income tax ordinance, 2001, provide us the details of officials and bodies appointed to run the income tax machinery of the country.INCOM TAX AUTHORIES:The following income tax authorities have been specified by income tax ordinance, 2001:

1. Board 2. Regional Commissioners of income tax

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3. Commissioners of income tax 4. Commissioners of income tax (Appeals)5. Taxation officer, which includes:

i. Additional Commissioner of income tax,ii. Deputy Commissioner of income tax,iii. Assistant Commissioner of income tax,iv. Income tax Officer, v. Special Officer, orvi. Any other officer appointed by the Board.

FEDERAL BAORD OF REVENUE:The federal Board of Revenue is the highest executive authority of income tax in Pakistan. It is a statutory body appointed by the Central Government for the purpose of tax collection in the country, by the virtue of Federal Board of revenue Act, 2007. It is attached by the Ministry of Finance, Government of Pakistan. Apart from income tax, collection of sales tax is also the responsibility of federal Board of Revenue. The Board consisted of seven (07) members who are ex officio joint secretaries to the Government of Pakistan, the federal Government appoints a full-time chairperson of the Board. For the purpose of proper administration of the income tax law. The Board is vested the powers to make and issue orders, instructions and directions to the officers of the income tax department. However, the Board is prohibited to interfere in the working of the income tax appellate authorities while they were performing their appellate functions.

WHO APPOINTS THE FBR?FBR is a statutory body appointed by the federal Government by the authority of the Federal Board of revenue Act, 2007.BASIC FUNCTION OF THE FBR:Tax collection is the basic function of the FBR:HEAD OF THE FBR : Chairperson of the FBR is the main authority in the FBR who is appointed by the federal Government MEMBERS OF THE FBR:FBR consists of save (07) members who are ex-officio joint secretaries to the Government of Pakistan.POWERS & FUNCTIONS OF THE FEDERAL BOARD OF REVENUE (FBR)The FBR has following powers & performs the following functions in the presence of its powers: 1. CERTIFICATION OF RESERCH INSTITUTION:

The FBR is authorized to certify an instruction as conducting scientific in Pakistan.2. APPROVAL OF EMPLOYEE TRAINING SCHEME:

The FBR is empowered to approve a Pakistani employee training scheme against which a business is allowed a deduction.

3. APPROVAL OF LEASING COMPANIES & MODARABA:The FBR has authority to approve such leasing companies & Modaraba where lease rental payment made to such companies is allowed as deduction to person against income from business:

4. METHOD OF ACCOUNTING:The FBR 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.

5. APPROVAL OF CHARITBLE INSTITUTIONS:He FBR is empowered to approve the charitable institutions for the income tax ordinance, 2001 specially, for donation purposes.

6. POWER TO COLLECT INFORMATION REGARDING EXEMPTED INCOME :7. DECISION OF APPLICATION U/S 74

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The FBR is authorized to decide an application submitted by a person against the decision of the CIT for granting or withdrawing the permission regarding use of a special or normal tax year.

8. AUTHORITY OF CIRCULARS: The FBR may issue circulars to achieve consistency in the administration of ordinance and to provide guidance to taxpayers and officers of the FBR.

9. APOWERMENT OF GERNAL ADMINISTION :The FBR shall exercise the general administration of the income tax, commissioners of

10. APPOINTMENT OF INCOME TAX AUTHORITIES :The FBR may appoint as many regional commissioners of income tax, commissioners of income tax, commissioners of income tax (Appeals), Taxation officers and other executive or ministerial officers and staff as may be necessary.

11. CRITERIA FOR AUDIT SELECTION :The FBR may lay down criteria for an audit of person’s income tax affairs, by the commissioner,

12. APPOINTMENT OF THE AUDITOR :The FBR may appoint a firm of Chartered-Accountants, to conduct an audit of the income tax affairs of any person.

13. DETERMINATION OF THE SCOPE OF AUDIT: The scope of any audit conducted by the firm of Chartered Accountants shall be determined by the FBR on a case to basis.

14. DETERMINATION OF JURISDICTION: Where a question arises as to whether a Commissioner has jurisdiction over a person, the question shall be decided by the RCIT or CIRT concerned and, if they are not in agreement, it is determined by the FBR.

15. AUTHORITY OF APPROVAL :The FBR may, by a general or special order, authorize RCIT or the CIT to gerent approval on ordinance may be in such form as determined by the FBR.

16. DETERMINATION: Forms notices, returns, statements, tables and other documents required under this ordinance may be in such form as determined by the FBR.

17. REGISTRATION OF INCOME TAX PRACTIONERS :The FBR may make rules u/s 237 for the registration of income tax parishioners.

18. POWER TO MAKE RULES :The FBR may, by notification in the official Gazette, make rules for carrying out the purposes of the income tax ordinance, 2001.

19. DELEGATION OF POWERS :The FBR may assign to any taxation Officer or nay other authority all or any of its powers & functions for the purposes of administrative convenience.

20. SUPERVISION OF SUBORDINATE AUTHORITIES :The FBR supervises the functions, duties and jurisdiction of its authorities

QUESTION NO.24

DESCRIBE THE MAIN FUNCTIONS OF REGIONAL COMMISSIONER OF INCOME TAX (RCIT)?

ANSWER:-DEFINITION:-

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“Regional Commissioner” means a person appointed to be a regional Commissioner of Income Tax (RCIT) u/s 208 of the Income Tax Ordinance, 2001. It also includes a Director General of Income Tax & Sales Tax.WHO APPOINTS THE RCIT?RCIT is appointed by the FBR.BASIC FUNCTION OF THE RCIT:The RCIT has to supervise the functioning of his subordinate tax authorities. He shall make such arrangements to ensure that the provisions of the income Tax Ordinance, 2001 and directions given by the FBR are being complied withJURISDICTION OF THE RCIT:The jurisdiction of the RCIT is decided by the FBR:AUTHORITIES SUBORDINATE RCIT:The following authorities are sub-ordinate to the FBR.

i. Commissioner of income tax (CIT)ii. Additional Commissioner of Income Taxiii. Deputy Commissioner of Income Taxiv. Income Tax Officerv. Special Officervi. Any other officer appointed by the FBR.POWERS & FUNCTION OF THE RCIT:The RCIT may exercise the following powers & Functions:1. TRANSFER OF JURISDICTION :

The RCIT may transfer the jurisdiction in respect of cases or persons from one Commissioner subordinate to another.

2. DECISION OF JURISDICTION :If any dispute arises regarding the jurisdiction of two Commissioner within same region. It is decided by the RCIT of that region.

3. REVISION OF ORDERS :The RCIT may revise any order passed by any sub-ordinate authority of the RCIT.

4. APPOINTMENT OF SUB-ORDINATE OFFICERS: The RCIT may appoint any of his subordinate authority with the approval of the FBR.

5. INSPECTION OF SUB-ORDINATE OFFICERS :The RCIT may inspect the subordinate officers.

6. DELEGATION OF POWER: The RCIT with the approval of the FBR may delegate all or any of its powers and functions to any sub-ordinate Income tax authority in respect of any person, classes of persons or areas.

7. SUPERVISION OF TECHNICAL WORK: The RCIT is responsible to supervise the technical work performed in the region.

8. POWER TO WRITE-OFF IRRECOVERABLE DEMANDS: The RCIT has powers to write off irrecoverable demands of tax with the instructions issued by the FBR.

9. SUPERVISION OF TAX COLLECTION PROCEDURE: The RCIT being an administrative authority is responsible to super wise the tax collection procedure under his region.

10. INTERNAL AUDIT OF TAX DEPARTMENT: The RCIT may supervise & regulate the inspection work of the additional Commissioner.

11. REGULATION OF INSPECTION WORK :The RCIT may supervise & regulate the inspection work from the Additional Commissioner.

12. EXAMINATION OF INSPECTION NOTES:

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The RCIT may examine the inspection notes received from the Additional Commissioner of Income Tax and take necessary follow up actions.

13. ACTION AGAINST TAX EVASION: The RCIT may examine the inspect of the complaints of tax evasion under the region.

14. POSTING OF SUBORDINATE AUTHORITIES: The RCIT may post different subordinate authorities in different offices in the region.

15. ANY FUNCTION ASSIGNED BY THE FBR: The RCIT shall perform any function assigned to him by the FBR.

QUESTION NO:-25

COMMISSIONER OF INCOME TAX IS BOTH AN EXCUTIVE AND JUDICIAL AUTHORITY EXPLAIN?

ANSWER:-“Commissioner” means a person appointed as a commissioner of Income Tax (CIT) u/s 208, and includes a taxation officer vested with all or any of the powers, and functions of the commissioner.POWERS & FUNCTIONS OF THE COMMISSIONER OF INCOME TAX:

1. CHANGE IN METHOD OF ACCOUNTING: The Commissioner may allow a change in method of accounting, if the cit is satisfied that the change is necessary to clearly reflect the person’s income chargeable to tax under the head “Income from Business”

2. CHANGE IN STOCK VALUATION METHOD: A stock valuation method once chosen may be changed only the written permission of the commissioner.

3. ALLOWABILITY OF NORMAL TAX YEAR: The commissioner may allow a person to use normal tax year instead of special tax year only if the person has shown a compelling need to use normal tax year.

4. ALLOWABILITY OF SPECIAL TAX YEAR :The Commissioner may allow a person to use special tax year only if the person has shown a compelling need to use special tax year.

5. IMPOSITION OF CONDITIONS REGARDING TAX YEAR :The Commissioner may impose certain conditions while permitting a person to use a special tax year or normal tax year.

6. WITHDRAWAL OF PERMISSION TO USE REGARDING TAX YEAR :The Commissioner may withdraw the permission granted to a person in respect of using the special tax year (special tax year or normal tax year) after providing the opportunity of being heard.

7. TRANSACTIONS BETWEEN ASSOCIATIONS: The Commissioner may in respect of any transaction between associates distribute, apportionate or allocate income deduction or tax credits.

8. ISSUANCE OF NOTICE FOR FILLING OF RETURN: The Commissioner may issue a notice to a person or a person’s representative for filling a return for a period of less than 12 months or to a person who is required to file a return but has failed to do so.

9. ISSUANCE OF NOTICE TO FURNISH WEALTH STATEMENT :The Commissioner may be notice require any person to furnish a wealth statement in the prescribed form and verified in the prescribed manner.

10. RETURN OF DISCONTINUED BUSINESS :The Commissioner may serve a notice on the person who has discontinued the Business or is likely to discontinue the business to furnish the return of income within the specified time & specified period in the notice.

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11. EXTENSION OF TIME :The Commissioner may grant the applicant an extension of time for furnishing the return certificate or statement etc.

12. BEST JUDGMENT ASSESSMENT :If the tax payer has not furnished required return or any other document the Commissioner may based on any available information or material and to the best of his judgment make an assessment of the taxable income of the person and the tax due there on.

13. AMENDED ASSESSMENT ORDER :The Commissioner may amend an original assessment order by making necessary alterations or additions.

14. ADJUSTMENT & REFUND OF TAX :Where a person applies for refund the commissioner after necessary adjustments shall refund the balance to the tax payer within 34 days of receipt of a refund application.

15. POWER TO IMPOUND DOCUMENTS :The Commissioner or any authorized officer may impound any accounts or document relating to taxpayer and retain them for so long as may be necessary for examination or for the purpose of prosecution.

16. POWER TO ENTER & SEARCH FOR AUDIT: The Commissioner may enter in any business premises of the taxpayer within his jurisdiction to perform any task which is deemed fit for the Income Tax Ordinance 2001.

17. POWER TO SELECT A PERSON FOR AUDIT: The Commissioner may select a person for audit of his income tax affairs.

18. IMPOSITION OF PENALTIES :The Commissioner may impose penalties for different defaults discussed under Part-X of Chapter-X of the Income Tax Ordinance 2001.

19. IMPOSITION OF ADDITIONAL TAX .The commissioner may impose additional tax if the tax payer fails to pay the tax by due date.

20. APPOINTMENT OF SUBORDINATES :Any income tax authority may appoint any income tax authority subordinate to it by the approval of the FBR. So Commissioner may appoint any subordinate authority by the approval of the FBR.

21. DELEGATION OF POWERS :The Commissioner may delegate to any Taxation Officer all or any of its powers or functions other than the powers of delegation.

22. APPOINTMENT OF EXPERT :The Commissioner may appoint any expert for the purposes of audit or valuation etc.

23. SUPERVISION OF SUBORDINATE AUTHORITIES :The CIT supervises the functions, duties and jurisdiction of its subordinate authorities.

24. RECTIFICATION OF MISTAKES :The Commissioner may amend his own order to rectify any mistake apparent from the record on his own activity or any mistake brought to its notice by a taxpayer or any income tax authority.

QUESTION NO:-26

DESCRIBE THE CONSTITUTION AND POWERS AND FUNCTIONS OF INCOME TAX APPLLATE TRIBUNAL (ITAT).

ANSWER:-1. ATATUS OF THE ITAT:

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Income Tax Appellate Tribunal is the highest appellate authority under the Income Tax Ordinance 2001.

2. WHO APPOINTS THE ITAT: The Income Tax Appellate Tribunal (ITAT) is appointed by the Federal Government.

3. WHO MAY APPEAL TO THE ITAT: If a taxpayer or Commissioner of Income Tax (CIT) is not satisfied with the decision of the Commissioner’s (Appeals). The un-satisfied party may appeal to the appellate tribunal.

4. BASIC FUNCTION OF THE TRIBUNAL: The basic function of the tribunal is to hear the appeal against the decisions of Commissioner (Appeals)

5. HEAD OF THE APPELLATE TRIBUNAL: Head of the appellate tribunal is called Chairperson. Chairperson is appointed by the Federal Government, generally, out of the judicial members of the tribunal.

6. MEMBERS OF THE ITAT: There are two types of the Income Tax Appellate Tribunal (ITAT) members.i. Judicial membersii. Accountant members

7. WHO APPOINTS THE MEMBERS ?The Federal Government appoints the members of the ITAT considering their qualifications.

8. QUALIFICATION OF MEMBERS :i. JUDICIAL MEMBERS :

A person may be appointed as a judicial member of the appellate tribunal if the person:a. Has exercised the powers of a district judge and qualified to be a

judge of a high court; orb. Is or has been an advocate of a high court and is qualified to be a

judge of a high court.ii. ACCOUNTANT MEMBERS :

A person may be appointed as an accountant member if the person is an officer of the Income Tax Group equivalent in rank to the regional Commissioner of Income Tax.

9. NUMBER OF THE ITAT MEMBERS :The Federal Government may appoint as many members of the appellate tribunal as are considered necessary.POWER & FUNCTIONS OF THE APPELLATE TRIBUNAL:The Income Tax Appellate Tribunal is the head of the appellate system under the Income Tax Ordinance 2001. It is independent from the FBR. In other words the FBR may not interfere in the appellate functions of the ITAT.

1. PERFORMANCE OF THE FUNCTIONS OF ITAT :The powers and functions of ITAT are exercised and discharged by the Benches.

2. ESTABLISHMENT OF BENCHES :The Benches of the ITAT are constituted by the chairman out of the judicial and accountant members of the ITAT.

3. PLACEMENT OF BENCHES :The ITAT shall decide that where the Benches of the ITAT shall hold their sittings.

4. POWER TO REGULATE ITS OWN PROCEDURE :According to section 130 (12) the appellate Tribunal has the power to regulate its own procedure.

5. DECISION OF THE APPEALS :The appellate Tribunal performs its functions in deciding the appeals against decisions of the Commissioners (Appeals) through establishment of Benches.

6. DECISION ABOUTNUMBER OF THE MEMBERS OF THE BENCHES :Where the members are equally divided in their opinion the matter is referred to the chairperson of ITAT. Chairperson shall appoint one or more other members of the Tribunal for hearing of disputed point.

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7. POWER OF FINAL DECISION :The decision of the appellate tribunal an a point of fact is final. If the decision involves point of law, it may be referred to high court.NUMBER OF THE MEMBERS OF A BENCH:A bench, generally, consists of at least two members. Normally a bench consists of equal number of judicial as well as accountant members (one Judicial + one accountant) but in certain cases the number of one type of members may exceed the other.(For example, one judicial + two accountants or two judicial + one accountant).

WHO REGULATE THE PROCEDURE OF ITAT?According to section 130 (12) the Appellate Tribunal has the power to regulate its own procedure and the procedure of its Benches in all matters arising out of;i. The discharge of its functionsii. The places at which the Benches shall hold their sittings.PROCEDURE OF THE DECISION OF BENCH:Decision is made by the Bench. If the members of a bench differ in opinion on any point, the majority decision is accepted. Where the members are equally divided in their opinion, the matter is referred to the Chairperson. Chairperson shall appoint one or more other members of the tribunal for hearing of disputed point. The point shall be decided according to the opinion of the majority of the members of the tribunal who have heard the case including those who first hear it.WHY APPELLATE TRIBUNAL IS CALLED FINAL FACT FINDING AUTHORITY?It is called final fact finding authority because the decision of the appellate tribunal on a point of fact is final. If the decision involves point of law, it may be referred to high court.

ORGANIZATIONAL CHART

Appellate Tribunal

Chair Person

Members Register

Assistant Registrar

Judicial Members Accountant Members

ADMINISTRATION:Registrar is the responsible authority in the office of appellate tribunal who works under the guidance of Chairperson and entertains the appeals provisionally, fixes the dates for hearing and looks after the Appellate Tribunal office matters.

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THE END

WRITTEN BY: - PROFESSOR FATH – UR – RAHMANCOMPOSED BY: - SYED FAROOQ SHAHContact No. 0333-9255084