INCOME TAX THEORY

Subjective Study Manual for the Students of B.COM

Prepared By:

Syed Shahid Abbas Sherazi

Contact Info:
Mobile: 0302-2286057
E-mail: shahidshah9288@yahoo.com

References; Text books of INCOME TAX

MUHAMMAD MUAZUM MUGHAL
MIRZA MUHAMMAD MUNAWAR HUSSAIN

1 Prepared By: Syed Shahid Abbas Sherazi

 Preface
The purpose of this study manual is to enable you to understand the Theoratical concepts of INCOME TAX and its major concepts.
The test of student’s ability to master a range of knowledge and skills required for modern professionals and new techniques.

This study manual is thorough, up to date and having plenty of theory and knowledge for proper understanding of INCOME TAX.
This manual has been written specifically for the students of M.COM, MBA, B.COM (Hons), B.COM (IT) and BBA keeping in view the
course contents as per syllabus of Punjab University and Bahauddin Zakariya University Multan.

We do hope that this manual will serve the purpose and useful to the students of Commerce. Any suggestion for the improvement of
the study manual shall be welcomed with thanks and open arms.

Finally, I owe a great intellectual debt to those who taught me and created in me the zest to seek and transmit knowledge and my
honorable parents.

Special Thanks;
TO MY HONOURABLE PARENTS AND MY RESPECTABLE TEACHERS

Lecturer,

Syed Shahid Abbas Sherazi (M.com, B.com)

2 Prepared By: Syed Shahid Abbas Sherazi

 CONTENTS

Q. 01 What are the legal provisions governing the filing of return of total
income under income tax year?

Q. 02 What are the types of Assessment made by Commissioner of Income tax?

Q. 03 What is the procedure for filling of appeals under income tax law?

Q. 04 What do you mean by set off and carry forward of losses? Also explains
the legal provisions regarding various losses?

Q. 05 What do you mean by Agriculture income? Also explains the types of

agricultural income and legal provisions regarding agriculture income under
income tax law?

Q. 06 What do you mean by capital and revenue expenditures and capital and
revenue receipts? Explain them with examples?

Q. 07 What are the different types of perquisites and allowances enjoyed by the
salaried person?

Q. 08 What do you mean by provident fund and also discuss its types and tax
treatments?

Q. 09 What penalities are imposed by commissioner of inland revenue in which

condition to taxpayer?

Q. 10 What are the conditions laid down under income tax ordinance for
depreciation allowances?

Authorities

Q. 11 Commissioner of inland revenue

Q. 12 Appellate Tribunal Inland Revenue

Q. 13 Federal Board of Revenue

3 Prepared By: Syed Shahid Abbas Sherazi

 INCOMES EXEMPT FROM TAX

4 Prepared By: Syed Shahid Abbas Sherazi

Q. 01 What are the legal provisions governing the filing of return of total income under income tax year?

Return of Income
At the end of every tax year it is necessary for
certain persons to inform the income tax authorities about the total income which they have earned during a
year and also inform about those incomes which are exempt from tax.All the details which are provided by the
certain person in a prescribed form to income tax authorities is known as return of income.

Furnishing the return of Income

When the return is fully completed
and submitted to the income tax authorities it is known as furnishing the return of income.
Who should furnish the return of income:
It is necessary for the following persons to furnish the return of income to
the income tax authorities. Following are the persons who should furnish the return of income;
1. Every person whose total income during a year exceeds the maximum amount
2. Any person who obtained a national tax number
3. Every company
4. Non-Profit making organizations
5. Welfare institutions etc
Who should not furnish the return of income:
Under the income tax ordinance 2001 and under the section (g) they are
not required to furnish the return of income if they belong to any of the following catagory;
1. A widow
2. An orphan whose age below 25 years
3. A non-resident person
4. A disable person
Requirements of a return:
Furnishing the return of income have following requirements which has to be fulfilled;
1. It should be in prescribed form
2. It includes all information, documents and statement that is required by law
3. It must be signed by a person
4. It can be filed electronically on the web or any magnetic media
Return of a salaried person:
If the salary income of the salaried person for the tax year is Rs. 500, 000 or more file
the return of income electronically in the prescribed form. It must be accompanied by the proof of deduction or
payment of tax and wealth statement along with the wealth reconciliation statement.
Furnishing the wealth statement:
Filling a wealth statement and wealth reconciliation staement along with a return of
income is compulsory for the following persons;

5 Prepared By: Syed Shahid Abbas Sherazi

 1. Every individual taxpayer filling a return of income
2. Every member of an AOP
3. Every person to whom commissioner of inland revenue serves a notice for filling a wealth statement.
When to furnish the return of income:
A taxpayer should furnish the return of income according to the following details;
1. The companies whose tax year ends between 1st January and 30th June the return of income must be
furnished upto 31st December of the same year.
2. All other persons should furnish the return of income upto 31st September of next tax year
3. In case a person is discontinued his business and commissioner has issued him a notice to furnish the
return of income, the person should furnish the return of income by the specified date in a notice.
Extension for furnish the return:
The commissioner of income tax has the authority to extend the date for furnishing the
return of income. The application for furnishing the return of income is presented to commissioner of income
tax and if the commissioner satisfied that an extension is necessary then commissioner extends the date but not
exceeding 15 days.
Invalid return:
In following circumstances the furnish of return will be treated as invalid return;
1. A return which is not signed by taxpayer
2. Return not furnished in prescribed form
3. If the return not include a wealth statement if total income exceeds Rs. 500, 000
4. If the taxpayer has not registered national tax number
Method of furnishing the return:
The return of total income should be furnished by register post with
acknowledgement due or delivered by hand to the officer having case. The board has empowered for electronic
filing of returns and other statements.
Notice for furnishing a return of income:
The commissioner of income tax give a notice for furnishing the return of
income to the tax payer for furnish within a specified date normally 30 days.
Revision of return:
If furnish the return of income discovers any omission or wrong statements he may furnish a
revised return. It is necessary that such revised return should be submitted within five year on the date of
original return.
Penalty for failure to furnish the return:
If a person fails to furnish the return of income within the prescribed date
and the extension is not granted by the deputy commissioner of income tax then the commissioner shall impose
a penalty upon such persons. The amount of penalty will be equal to one tenth of one percent of tax payable
minimum of five thousand and maximum of 25 percent of tax payable.

6 Prepared By: Syed Shahid Abbas Sherazi

Q. 02 What are the types of Assessment made by Commissioner of Income tax?

Introduction
Assessment means a complete scrutiny of the
information provided by the taxpayer in his return. The procedure of assessment has been made quite simple
by the finance ordinance 2001 and various possibilities under which assessment is made and the procedure to
be followed.

Definition
"Assessment is the act through which the taxable income, the tax liability or the amount of refund of a taxpayer
is determined"
"Assessment means the whole process which enables the tax department to finalize an assessment is termed as
assessment procedure"
Return of income as an assessment (Sec.120):
When the taxpayer furnishes a return of income for a tax year the taxpayer
return will be accepted without any question. The calculation made by the taxpayer of total income, exemption
and computation of tax there on will be accepted. Furnishing the return of income to the commissioner is
sufficient for the proof that assessment is completed and order is made by the commissioner.
Assessment if return is not furnished (Sec.121):
If the person is not furnished the return of income to commissioner or fails to
produce his accounts for audit then commissioner can himself make a statement on the basis of any
information available about that person. This assessment is made on the absence of the third party so the
commissioner should not act dishonestly. He should follow the rule of justice and make fair judgment.
Procedure of this assessment is as under
1. The commissioner should calculate the taxable income and tax payable on the basis of available
information
2. After making such assessment the commissioner shall issue assessment order to taxpayers mentioning
there in;
(i) Taxable income
(ii) Tax payable
(iii) Amount of tax already paid
Amended assessment (Sec.122):
The amended assessment can also be made if the commissioner of inland revenue defined
that previous assessment is incorrect. The commissioner can only amend the assessment order if in his opinion
incorrect income, incorrect exemption, wrong tax rebate was calculate in the original assessment.
Procedure for amended assessment
1. Revised to furnish the return of income
2. When the original assessment amended then the commissioner can further amend.
7 Prepared By: Syed Shahid Abbas Sherazi
Provisional assessment (Sec.122C and 123):
If a tax payer fails to submit the return of income within a specified period as per notice of
income tax authorities then the commissioner will pass the provisional assessment order and temporary
assessment is made based on any information or material available.
The law allowed the taxpayer to submit the return of income along with the wealth statement and wealth
reconciliation statement within 60 days from the date of such order. If wealth statement is not submitted the
provisional assessment is considered as final assessment.
Assessment after decision of appeal (Sec.124):
If an assessment order of the commissioner is set aside by appellate tribunal,
high court or Supreme Court and the commissioner is also make a new assessment such assessment order is
passed within 60 days.
Assessment of disputed property (Sec.125):
When the ownership of any property is in dispute and the case pending in any civil
court in Pakistan the assessment of such property is postponed by the commissioner and the assessment should
be made within one year of court's decision.
Q. 03 What is the procedure for filling of appeals under income tax law?

Introduction
If a taxpayer and income tax authorities are not
satisfied with an order passed under the income tax ordinance 2001, a procedure to remove the grievances has
been provided in the law. However it should be clearly understood that appeal shall be made under specified
conditions.

Definition
"Whenever a dispute or difference of opinions between taxpayer and income tax authority is brought then a
procedure is used to remove such difference is called appeals"
1st Appeal to Commissioner of inland revenue appeals:
If the taxpayer is not satisfied with the order or decision of
commissioner of Inland Revenue then the appeal can be made to the commissioner of Inland Revenue appeals.
An appeal may be filed by a person against an appeal able order of commissioner of Inland Revenue.
If the tax department is not satisfied with the orders of commissioner of Inland Revenue an appeal cannot be
made.
Fees of Appeal
1. If the appeal against assessment the fee will be One thousand rupees.
2. If appeal against another issue then;
(i) In case of companies one thousand rupees
(ii) In case of others two hundred rupees
Main features
1. The appeal must be filed within 30 days of the receipts of appeal able orders. The commissioner of
Inland Revenue appeals can extend this period.
8 Prepared By: Syed Shahid Abbas Sherazi
 2. Before making an appeal the person must pay the amount of tax that is payable.
3. The commissioner of Inland Revenue appeals fixes a date for hearing the appeals and send intimation
to the taxpayer.
4. The commissioner of Inland Revenue appeals is disposing of an appeal in the case of assessment.

Decision
It is necessary that the commissioner of Inland Revenue appeals make the decision of an appeal within
four months of the date of filling of an appeal. If case is not decided then the commissioner of Inland Revenue
appeals mentions a reason in written and extends the period of sixty days. If the decision of an appeal is made
the commissioner of Inland Revenue appeals should communicate to the taxpayer about the decision.
2nd Appeal to Appellate tribunal:
If the taxpayer and the commissioner of inland revenue are not satisfied with the
decision of commissioner of inland revenue appeals the appeal can be made to appellate tribunal inland
revenue.
Fees of appeal
1. If the appeal is filed by the taxpayer the fees of an appeal is Rs. 2000
2. If the appeal is filed by the commissioner of inland revenue then no fee is payable.
Main features
1. The appeal must be filed within 60 days of the receipts of appeal able orders. The appellate tribunal of
inland revenue can extend this period.
2. The appeal should be in prescribed form and all the necessary documents should be attached.
3. The Appellate tribunal of inland revenue is disposing of an appeal in the case of assessment.
Decision
The decision of an appellate tribunal on the point of fact is final. However if the taxpayer or commissioner
of inland revenue is not satisfied with the decision of appellate tribunal may be referred to high court only in
case of point of law.
3rd Appeal to the High court:
If the taxpayer or the commissioner of inland revenue is not satisfied with the decision
of the appellate tribunal he may file an appeal to the high court . If high court is satisfied that the case is point
of law then he proceed to hear the appeal.
Fees of appeal
1. If the appeal is filed by the taxpayer the fees of an appeal is Rs. 100
2. If appeal is filed by CIR then no fee is payable.
Main features
1. The appeal must be filed within 90 days of an appeal able orders. The high court can extend this
period.
2. The appeal should be in prescribed form and all the necessary documents should be attached.
Decision
9 Prepared By: Syed Shahid Abbas Sherazi
 The case shall be heard by bench of judges consist of minimum two judges of high court and decision is
made.
4th Appeal to the Supreme court:
The income tax ordinance 2001 provided a right to taxpayer and commissioner of
Inland Revenue to file an appeal to Supreme Court. However that article 185 of the constitution of Pakistan
also provided the right to any person to file an appeal to Supreme Court against the judgment of high court.
The decision by the Supreme Court is final.
Q. 04 What do you mean by set off and carry forward of losses? Also explains the legal provisions regarding
various losses?

Introduction
The income may be a profit, gain or loss from any
source of income. Thus income tax ordinance 2001 allowed the taxpayer for the automatically adjustment
against losses. However law has specified a procedure for adjustment of losses sustained by a taxpayer during
a tax year.

Set of Losses
"The adjustment of loss of one head against the income of same head or other head is known as set off losses"
Explanation:
If the tax payer has more than one source of income, it is not necessary that all the source of income
provide him a gain during the tax year but some source may shows a loss during the tax year. The income tax
law allowed the tax payer to adjust the loss of one head against the income of same head during a year.

Exceptions
Followings are the exceptions regarding set off
losses;
Set off losses of companies operating hotels:
A company registered in Pakistan or azad jammu and Kashmir which is
operating hotels at both places, if it sustains a loss from business at one place the loss can be adjusted against
the income of other place.
Set off speculation business loss:
Where a person sustains a loss of any speculation business can be adjusted against
the profit of another speculation business. It means that loss from speculation business cannot be adjusted
against any other head.
Set off capital loss:
Where a tax payer sustains a capital loss it can only be adjusted against the capital gain of the
same year. It means that capital loss can not be adjusted against any other head.
Loss on sale of securities:
Where person sustains a loss on disposal of securities, the loss can be set off against profit on
disposal of other securities.
10 Prepared By: Syed Shahid Abbas Sherazi
Loss sustains by AOP:
If an association of person sustains a loss during a tax year it can be set off against the income
of
Other associations of person, any remaining loss that cannot be adjusted are apportioned among the members
of AOP according to their profit sharing ratio.
Set off the losses of certain companies:
If loss is sustained by a company and the company is merged with another
company the loss of the company being merged can be set off against the profit of amalgamated company.
However if amalgamated company has any accumulated loss it can be set off with amalgamated company.

Carry forward of losses

"The loss which cannot be adjusted fully to the income of same year and to the income of same head the
unadjusted loss is o be adjusted to the income of future year this procedure is known as carry forward of
losses"

Features
The main features of carry forward of losses are as
follows according to the income tax law;
Loss which can not be carry forward:
If the taxpayer sustains any loss from income from property or income from other
sources and such loss cannot be set off against the income of any other head then this loss cannot be carry
forward and it becomes dead loss.
Carry forward of loss from business:
If the loss in business is not fully set off in a current year then it can be carry
forward to the next years and only adjusted against the income of the business not against any other source of
income. But no loss can be carry forward for more then six tax years.
Carry forward of loss of speculation business:
If the taxpayer sustains any loss from the speculation business and if it cannot be
set of fully against the income of the current year then it can be carry forward tothe next years and adjusted
against the income of same head.
Carry forward of capital loss:
If capital loss is not fully set off against the income of current capital gain then
unadjusted loss can be carry forward and can be adjusted against capital gain of the next year. But no loss can
be carry forward to more then six tax year.
Carry forward of losses of AOP:
If the member of an association of persons sustains any loss and it cannot be adjusted
fully gains the income of AOP then it can be carry forward to the next year but only for six years. The members
of AOP can not carry forward of loss by itself.
Carry forward of losses of certain companies:

11 Prepared By: Syed Shahid Abbas Sherazi

 The loss of companies or amalgamated companies can be set off against the
business profit of amalgamated company in the year of amalgamation; the unadjusted loss can be carry
forward up to six years.
Losses of business exempt from tax:
If the income of business exempt from tax sustains any loss during the exemption
period such loss cannot be set off against the taxable income. The finance act 2003 removed such restriction ,
now the business can also enjoy exemption and also carry forward its losses.

Q. 05 What do you mean by Agriculture income? Also explains the types of agricultural income and legal
provisions regarding agriculture income under income tax law?

Introduction
Agricultural income means any income derived as
rent, revenue or from sale of any produce which is grown on a Pakistani land is agricultural income. However
it is necessary to understand that the land must be used for agricultural purposes, which means that some
human labor and efforts are necessary to be employed. If a produce is grown wild or spontaneously on land
without any human effort is not an agricultural income.

Definition
"The agricultural income means an income which is
1. Derived from land
2. Land is situated in pakistan
3. Land is used for agricultural purpose
Explanation:
The above definition can be explained with the help of following details;
Income from land
Any income derived in form of rent, revenue or sale of any produced which is grown on land is an
agricultural income.
Land in Pakistan
Income will be agricultural income only if the land is situated in Pakistan. If the income is derived
land which is situated in foreign country will not be an agricultural income.
Land used for agricultural purposes
Land used for agricultural means that some human labor must be involved in agricultural process.

Types of an agricultural income

Rent:

12 Prepared By: Syed Shahid Abbas Sherazi

 Any rent which is received by landlord for providing land for agricultural purpose is considered as
agricultural income. Rent may be in cash or produce.
Revenue:
Revenue means the income of tenant in cash or produce form is an agricultural income.
Sale of produce:
Amount of cash received by landlord or tenant for sale of produce is also an agricultural income.
Necessary process:
Necessary process means the process which is required to fit a produce in order to sale in the market.
The income of such necessary processby the cultivator or receiver of rent is agricultural income.
Building:
The income from the building will be an agricultural income if;
1. Building is required for agricultural purpose
2. Building is the immediate part of the agricultural income
3. Building is occupied by the cultivator

Examples of agricultural income

1. Income from growing tea
2. Income from growing flowers
3. Income from wheat, tobacco sugarcane etc
4. Income from sale of honey or its products
5. Income from building used for agricultural purpose

Example of Non-agricultural income

1. Income from stone quarries
2. Income from fisheries
3. Income from sugar mill
4. Income from textile mills
5. Income from markets

Examples of Partially agricultural income

1. Income of a person who grow sugercane and then convert it into sugar
2. Income of a person who produce tea leaves and manufacture it into tea
3. Income of a cigerate company who produce tobbacco and used in cigerates.
Q. 06 What do you mean by capital and revenue expenditures and capital and revenue receipts? Explain
them with examples?

Capital and Revenue expenditures

While deciding whether an item of
expenditure is a capital or a revenue expenditure, many points should be kept in mind. It is necessary to
differentiate between capital and revenue expenditure because only revenue expenditures will be deducted
from trading receipts while calculating profits of the business

13 Prepared By: Syed Shahid Abbas Sherazi

 Definition
"If the permanent asset has been increased by incurring expenditure if so then such cases it will be a capital
expenditure. If the expenditure does not result in an increase of a permanent asset the expenditure will be of
revenue nature"
For income tax purpose it is necessary to make a difference between capital and revenue expenditures due to
the following reasons
1. Capital expenditure placed on the asset side of the balance sheet
2. Revenue expenditure placed on the debit side of profit and loss account.
Effects of distinction:
Following are the main effect for making the difference between capital and revenue;
1. Preparation of correct profit and loss account
2. Preparation of correct balance sheet
3. Correct assessment of tax liability

Test for Capital and Revenue Expenditures

Purchase of an Asset:
Any payment which is made to purchase of fixed assets is capital capital expenditure while
payment is made to purchase of a circulating asset is revenue expenditure.
Fixed Asset
If an organization purchase fixed assets such as machinery, land, building etc then the payment
which is made against such assets is considered as capital expenditure
Floating Asset
Floating asset means those assets which are purchased by a company for resale purpose either in
same shape or after manufacturing. Purchase of raw material
Period of benefit:
If any expenditure provides the benefit for a long period of time then it will be treated as capital
expenditure, whereas if the benefit is temporary or short then it is treated as expense.
Examples
1. Amount spent on the sign board for the advertisement purpose is called capital expenditure
2. Amount spent on news paper, radio, television is called revenue expenditure.
Initiation of business:
If any expenditure are made at the initiation of business it will be treated as capital expenditure,
whereas expenditures are made on the routine activity of business is treated as revenue expenditure.
Examples
1. Cost of land, amount spent on construction, legal cost paid for preparing legal documents is called
capital expenditure
2. Salary paid to legal advisor is revenue expenditure.

14 Prepared By: Syed Shahid Abbas Sherazi

Extension of business:
Expenses incurred on the extension of business will be treated as capital expenditure, but
expenditures are made which do not expand the business is treated as revenue expenditure.
Examples
1. Cost of issuing debentures is called capital expenditures
2. Interest paid on debentures is called revenue expenditure.
Earning Capacity:
If any expenditure increases the earning capacity of the business it will be treated as capital
expenditures but if the earning capacity of the business remains the same then it is called revenue expenditure.
Example
1. Purchase of new machinery for a factory is a capital expenditure
2. Repair old machinery used in the factory is a revenue expenditure

Capital and Revenue receipts

It is not easy to differentiate between
capital and revenue receipts because there is no prescribe rules for the differentiation. It is necessary to
differentuiate between capital and revenue receipts because income tax is levied on revenue receipts only not
on capital receipts.

Test for Capital and Revenue Receipts

Sale of an asset:
When an amount is being received due to the sale of an asset, the question is to decide which asset
has been sold fixed or circulating;
Sale of fixed asset
If any amount which is received by an organization due to the sale of fixed assets will be treated
as capital receipts of the business.
Sale of floating asset
Any amount which is received by an organization due to the sale of circulating asset will be
treated as revenue receipts of the business.
Amount received on account of right:
If a person is the owner of any right such as patent, trademark, copy right and
he is receiving any amount from it the question is whether the right is fully surendered or not. If the right is
fully surendered the amount which is receipt is called capital receipt but if the right is given for some period of
time then the amount which is received is called a revenue receipt.
Q. 07 What are the different types of perquisites and allowances enjoyed by the salaried person?

Perquisites and Allowances

15 Prepared By: Syed Shahid Abbas Sherazi
 Perqisites means those facilities or benefits which
are provided by the employer to his employee from his own pocket.
Types of perquisites and Allowances
Accommodation:
Accomodation allowance is one of the benefit which is provided by employer to his employee. The
accomodation allowance can be provided with following manners;

House rent allowance

If the employer does not provide any accommodation facility to employee then accommodation
allowance will be provided and it is fully taxable
Accommodation facility
E,ployer also provided an accommodation facility to his employee, the tax treatment of
accommodation facility is as follows;
1. Amount of accommodation XXXX
2. 45% ofMTS or Basic salary XXXX
Whichever is higher will be taxable from 1 and 2
Conveyance:
Sometimes an employer provides a conveyance facility or conveyance allowance to his employee. The
tax treatment of conveyance is as follows;
Conveyance allowance
If conveyance allowance is provided by employer to employee is fully taxable.
Conveyance facility
If conveyance facility is provided by employer to employee then if provided for official
purpose then exempt, if provided for personal use then 10% cost of vehicle will be taxable, if provided for
partially purpose then 5% of cost of vehiclw will be taxable
Lease conveyance provided:
If an employer provided leased conveyance facility to an employee then only fair market
vaue is used but rates will be the same.
Medical facility:
If an employer provided medical facility to his employee then it will be fully exempt from tax.
Medical allowance:
If an employer provided medical allowance to his employee then medical allowance will be
exempt up to 10 of basic salary.

Entertainment allowance:

If an employer provided entertainment allowance to employee then it is totally taxable.

16 Prepared By: Syed Shahid Abbas Sherazi
Entertainment facility:

If an employer provided entertainment facility to his employee then it will be fully exempt from
tax liabilty of a person

Special allowance:

Employer provided special allowance to employee to meet the expenses which are
incurredduring official duty. This allowance is totally exempt from tax.

Examples

1. Travelling allowance
2. Daily allowance
3. Kit allowance/uniform allowance

Special additional allowance:

Employer of government and private organization provided a special additional

allowance to employee for the purpose of tax we treat of this allowance as

1. If the employee of government organization then fully exempt

2. If the employee of private organization then fully taxable

Utilities allowance:

Employer provided utility allowance to employee to meet the expenses of water, Gas, electricity
for the purpose of tax this allowance if fully taxable. If an employer reimburse these allowance from his own
pocket

after some time then it is also fully taxable.

Loan to employee:

The employer provided another kind of benefit in the form of loan, the employee can get the
loan from employer at concessional rates of benchy mark rate. This rate may fluctuate from year to year.

Q. 08 What do you mean by provident fund and also discuss its types and tax treatments?

Provident fund
Provident fund is maintained by many
organizations for the benefit of their employees. The amount in this fund contribute employee as well as
employer and paid to employee when he retire or discharge from services. In case of death of employee the
amount is paid to his family or heirs. The provident fund is deducted from the salaries of an employee.

Types of provident fund

17 Prepared By: Syed Shahid Abbas Sherazi

 1. Government provident fund
2. Recognized provident fund
3. Unrecognized provident fund

Government provident fund:

A provident fund which is maintained by government or semi-government organization

is known as government provident fund or statutory provident fund. E.g provident fund is maintained by
railway, wapda, army etc.

Tax treatment

1. Employee contribution of the fund is already included in his salary

2. Employer contribution will be exempt from tax
3. Interest on accumulated balance is not taxable
4. Payment which is received by employee after retirement is also exempt from tax

Recognized provident fund:

A provident fund which is maintained by private organizations but it is recognized by the

commissioner of inland revenue CIR is known as recognized provident fund. If the commissioner of inland

revenue refuses to recognize the fund but it fulfills the All conditions then the appeal can be made to the Board.

Tax treatments

1. Employee contribution is already included in the salary.

2. Employer contribution is exempt upto 10 of basic salary of an employee if employer contribution
exceeds then excess amount will be taxable
3. Interest on accumulated balance will be exempt upto 1/3rd of basic salary or 16 of the basic salary if
exceed then excess amount will be taxable

Unrecognized provident fund:

A provident fund which is maintained by private organizations which has not been

recognized by the income tax authorities because of any following reasons;

1. The condition prescribed in the law related to provident fund are not fulfilled
2. No application for recongnization is made by the organization
3. The application may turned down due to some technical grounds by income tax authorities

Tax tratments

18 Prepared By: Syed Shahid Abbas Sherazi

 1. Employee contribution is already included
2. Employer contribution is not taxable
3. Interest on accumulated balance is also not taxable

Note: For provident fund Basic salary means Basic salary items + dearness allowance

Q. 09 What penalities are imposed by commissioner of inland revenue in which condition to taxpayer?

Penality for failure to furnish statement:

Where any person fails to furnish a return of income, wealth statement,

wealth reconciliation statement within due date the commissioner can impose a penality upon a person. The
penality shall be .1% of tax payable for each day of default subject to minimum Rs. 5000 and maximum to 25%
of the tax payable.

Penality for failure to issue receipt:

Any person who fails to issue cash memo, invoice or receipt when required under
the law shall pay a penality of Rs. 5000 or 3% of the amount of tax payable whichever is higher.

Penality for failure to apply for registration:

It is necessary for certain persons to register under section 181 of the

income tax ordinance 2001, if such a person does not apply for registration he/she shall pay a penality of Rs.
5000.

Failure to notify a change of material nature:

The person who fails to notify any changes of material nature in the
particular of above mentioned registeration, the commissioner can also impose a penality of Rs. 5000.

Failure to deposit additional tax:

Any person who fails to deposit the additional tax within due date the penality
shall be paid as per following;

1. For the first time in default 5% of the amount of tax default

2. For the second default 25% of the amount of tax default
3. For the third time an additional 50% of the amount of tax default

Penality for repeated mistakes in return:

When a person repeats wrong calculation in his return, show lesser tax
payable than actual he shall pay penality of Rs. 5000 or 3% of the tax payable whichever is higher.

Penality for failure to maintained record:

19 Prepared By: Syed Shahid Abbas Sherazi

 Under the income tax ordinance every taxpayer is required to maintain record
under the rules of fbr. For failure to maintain the record by the taxpayer he shall pay a penality of Rs. 10000
or 5% of the amount of tax payable whichever is higher.

Penality for failure to produce the documents required for audit:

If a person fails to produce the documents required under the law for audit
the penality shall be impose a following;

1. Fails to record on first notice, the amount of penality shall be Rs. 5000
2. Fails to record second time, the amount of penality shall be Rs. 10, 000
3. Fails to record for the third time, the amount of penality shall be Rs. 50, 000

Penality for failure to furnish information:

If the person fails to furnish any information on notice of commissioner or an

authorized officer, the penality shall be imposed as following;

1. For first default , the amount of penality shall be Rs. 5000

2. For second default the amount of penality shall be Rs. 10, 000

Penality for making false statements:

If a person in his tax affairs makes false statements or furnish false information or

omitts material facts from his statement he shall pay a penality of Rs. 25, 000 or 100% of the amount of
resulting tax shortfall whichever is higher.

Penality for obstracting access to premises:

Any person who denied or obstructs premises, place, account, document of

computerized or stock, access of the commissioner or any other commissioner's authorized officer the penality
shall be Rs. 25, 000 or 100% of tax involved which ever is higher.

Penality for concealment:

If a person concealed or wrong mentioned his income, reduced his income or claimed a
wrong expenditure before any income tax authority or appellate tribunal, penality shall be imposed Rs. 25, 000

Or an amount equal to the tax payable whichever is higher.

Penality for obstruction in performance of duties:

Aqny person who obstruct or denied his performance of his official

duties to any income tax authority, the penality shall be of Rs. 25, 000.

Penality for failure to collect tax:

20 Prepared By: Syed Shahid Abbas Sherazi

 When a person fails to collect or deduct tax as required under the income tax
ordinance or fails to pay the tax collected to the commissioner, he shall pay a penality of Rs. 25, 000 or 10% of
the amount of tax whichever is higher.

Authorities
Commissioner of inland revenue

Introduction:

The commissioner means a person appointed to be a commissioner of inland revenue under setion
208 of the income tax ordinance 2001. It also includes any other authority vested with all or any of the powers
and functions of the commissioner.

Appointment:

The federal board of revenue is the appointing authority for commissioner of inland revenue, the

commissioner is appointed for a specific area known as zone but law allows federal board of revenue to
appoint the commissioner without teritorial restrictions.

Jurisdiction:

1. If appointed for specific area the commissioner of inland revenue shall perform his functions both
executive and judicial.
2. If appointed not for specific area the commissioner of inland revenue perform the function for the
direction of federal board of revenue.

Powers and Functions of CIR

Commissioner of inland revenue enjoys the

following powers and performs the following functions under the law.

Use specific/Normal tax year:

The commissioner of inland revenue allows a person to use special tax year instead of normal.
Tax year or normal tax year instead of a special tax year.

Impose of conditions:

The commissioner of inland revenue imposed a condition while permitting a person to use
special tax year or normal tax year.

Notes for tax:

The commissioner of inland revenue allow an employee to pay a tax on salary receive in arrears in a
tax year in which services were rendered.

21 Prepared By: Syed Shahid Abbas Sherazi

Recovery of tax:

The commissioner of inland revenue recovers the tax from tax payers and those companies which
has gone into liquidation.

Tax on golden handahake:

The CIR allow a person to pay tax on his retirement bpayments and golden handshake
payments as per normal procedure or pay tax on the basis of average rate of tax based on the three perceeding
years.

Assessment order:

The CIR has a power to make an assessment in the light of point of law decided by the High court
or the Appellate tribunal inland revenue. CIR also has the power to issue an assessment order , amended
assessment order and provincial assessment order.

Furnish the return of income:

Commissioner of inland revenue require from a person to furnish the return of income
and also furnish the return of income if business is discontinued nature.

Impose a penality:

The CIR can impose a penality for different default and impose a surcharge if the tax payer fails to
pay tax within due date.

Approve a translator:

The CIR has the authority to approve a translator if the accounts are kept by a taxpayer in a
language other then Urdu or English.

Rectification:

If a person made any mistake in his record then commissioner of inland revenue has the power to
order a person to rectify those mistakes.

Appoint an expert:

The CIR has the authority to appoint an expert for the valuation of the acounts as an auditor if he
thinks the previous access is not correct.

Tax without deductions:

The CIR allow a person to make a payment without tax deducted at source.

22 Prepared By: Syed Shahid Abbas Sherazi

13. Issue an exemption certificate 16. Select a person for audit

14. Expand the time for return 17. Change in accounting method

15. Furnish of wealth statement 18. Adjust the amount of tax paid

Appellate Tribunal Inland Revenue

Introduction:

The federal government is the appointing authority of the appellate tribunal. It is the second court
of appeals. If the taxpayer or the commissioner of inland revenue is not satisfied with the decision of the
commissioner of inland revenue(appeals) then appeal can be made to the appellate tribunalof il\nland revenue.
The detail related to the constitution and functioning the appellate tribunal inland revenue have been provided
in the income tax ordinance 2001.

Members of appellate tribunal inland revenue:

The appellate tribunal inland revenue consists of two types of

mmbers;

1. Judicial members
2. Accountant members

Judicial members:

The federal government may appoint a person as a judicial mm\ember of the appellate tribunal
inland revenue;

1. He has excercised the power of a district judge and is qualified to be a judge of high court.
2. He is an advocate of high court and is qualified to be a judge of high court
3. He is an officer or inland revenue service in BS. 20 or above and is a law graduate

Accountatnt members:

The federal government shall appoint the accountant member of the tribunal also. He must
possess any one of the following qualification

1. The accountant member shall be an officer of inland revenue equivalent in rank to a regional
commissioner of inland revenue.
2. A commissioner inland revenue and a commissioner of inland revenue appeals having atleast 3 years
of experience as a commissioner or collector is also eligible for appointment as accountant member.
3. Is a person who has for a period of not less then ten years practiced professionally as a chartered
accountant.

No. Of members:

23 Prepared By: Syed Shahid Abbas Sherazi

 The federal government may appoint as many judicial and accountant members as it thinks
necessary for the proper working of the appellate tribunal inland revenue. The federal government appoints
one of the judicial member of the tribunal as the chairperson of appellate tribunal inland revenue.

Administration:

A full time registrar is responsible to receive the appeals and look after the working of the offices of
the tribunal. He is subordinate to chairperson of the appellate tribunal inland revenue and works under his
guidance. He fixes the dates of hearing appeals and look after the administrative affairs of the appellate
tribunal inland revenue. His office is situated in the head office of appellate tribunal inland revenue in
islamabad. There are assistant registrar posted in karachi and peshawar branches hain.

Functioning of Appellate tribunal of inland revenue:

The chairperson of the appellate tribunal inland revenue may

constitute benches to perform the functions of tribunals. A bench normally consists of two members. A bench
usually consist of equal number of judicial and accountant members but in some certain cases the number of
members may be increased. The chairperson has empoered to to increase or decrease the number of members
in a bench. Following diagram will clear the whole concept;

Appellate tribunal

Chairperson Registrar

Members Assistant registrar

Judicial Members Accountant Members

Explanation:

A chairperson may alone hear the case if federal government authorize him or may constitute a
bench which may constitute an equal members of judicial and accountant members or may judicial members
are more then accountant members. If members in a bench differ from their opinions then the majority of
opinions is accepted but if the members are equal in their opinions then the case decision is referred to the
chairperson of the tribunal.

Final fact finding authority:

The decision of the appellate tribunal on the point of fact is final but on the point of law the case
may be referred to the high court. Due to this reason it is known as final fact finding authority.
24 Prepared By: Syed Shahid Abbas Sherazi
 Federal Board of Revenue
Introduction:

Board is the highest administrated authority for implementation of the taxation laws. The income
tax ordinance 2001 requires that all income tax authorities and other persons employed in the execution of
income tax law shall be observed and followed the orders, instructions and directions issued by the board.

History:

The old name of the FBR was central board of revenue (CBR). Income tax ordinance uses the word Board
for FBR and CBR. The central board of revenue was created on april 01, 1924 through the central board of
revenue act 1924. On the commencement of FBR act 2007 the central board of revenue has now become
federal board of revenue.

Main features:

1. Highest authority in tax matters

2. All other tax authorities are appointed by board
3. FBR consists of chairman and members appointed by federal government.

Powers and functions of the Board

Determined the jurisdiction

The FBR has power to assign the functions and areas to chief commissioner inland
revenue, commissioner inland revenue and commissioner inland revenue appeals.

Appoint an auditor:

The board has empowered to appoint a firm of chartered accountant or cost and management
to conduct the audit of any person.

Specify method of accounting:

The board may specify the method of accounting for certain businesess or class of
businesess for the purpose of taxation.

Formulate policies:

The federal board of revenue can also formulate all fiscal policies and laws regarding taxation
revenues and also administrate and manage these policies.

Hearing appeals:

If the taxpayer and the commissioner of inland revenue will not staisfied with the tax liabilty of a
person then both can made an appeal to commissioner of inland revenue appeals for making decisions.

Apoint income tax authorities:

The federal board of revenue has the authority to appoint all the income tax
authorities in order of collection of tax from the individuals and business entities.
25 Prepared By: Syed Shahid Abbas Sherazi
Transfer income tax authorities:

The income tax authorities can also be transferred from one place to another place if
there is a requirment of tax authority in any zone from the FBR.

Appoint a firm for survey:

The firms can also been appointed in order to carry out the survey of a specific person
of specific area and these firms can also been appointed by the FBR.

Approval of Charitable institute:

The FBR approve the charitable institute for the purpose of donation. Many
organizations want to donate their incomes in any charitable institutions and then demand for deduction. So
FBR approved such institutes.

Approve a security:

The FBR approve a security for the purpose of taxation as profit on debt. And also issue a
circulars for the guidance to taxpayers about the different issues.

Authorize any agency:

The FBR has a power to authorize any agency of the government to collect and compile any
data in respects of incomes from industrial and commercial undertakings exempt from tax.

Determine procedures:

Determined the procedure for furnishing returns and other documentsincluding an electronic
medium or issuing notices or levy of default surcharge through electronic medium.

Delegation of powers:

The FBR may delegate or transfer any of its power to any officer of inland revenue authority if
it thinks necessary according to the situations.

Make rules:

The rules are made by the FBR to carry out efficient administration and also make rules for the
valuation of unexplained incomes and assets for the pupose of tax.

Decide an application:

The FBR decide an application submitted by a paerson aginst the decision of commissioner inland
revenue for granting or withdrawing the permission regarding use for a specific tax year.

Make rules for deduction:

The FBR make rules for deduction in taxable income for the relief in tax to taxpayer.
26 Prepared By: Syed Shahid Abbas Sherazi
Preparation of forms:

The return id furnished by a taxpayer in a prescribed form and this form is prepared and
published by the Federal board of revenue under income tax ordinance 2001.

Powers of FBR

In quite a few cases same powers have been

vested in the hands of more than one income tax authority. This has been done for the immediate action which
is sometimes necessary in specific situations. The powers may be transferred from one income tax uthority to
other income tax authority keeping in view the case situations.

Q. 10 What are the conditions laid down under income tax ordinance for depreciation allowances?

Introduction
The term depreciation means a decrease in the
value of an asset through wear and tear or obsolescence. In computing the profit of a business or profession,
the income tax law permits the depreciation as deduction subject to certain conditions. These conditions are as
follows;

Conditions for allowability of depreciation

Assets eligible for depreciation:
Income tax depreciation is admissible only in a respect of depreciable assets.
Depreciable assets means that any tangible moveable property, immoveable property (other than unimproved
land) or structural improvement to immoveable property owned by a person provided that;
1. It has a normal useful life more than one year
2. It loses the value due to normal wear and tear or obsolescence
3. It is used partly or wholly in deriving income from business chargeable to tax.
Business use:
Depreciation is only allowed on those depreciable assets which have been exclusively used for the
purpose of business during a tax year.
Methods and rates of depreciation:
Depreciation is allowed on the rates prescribed in part-I of the third schedule of
the income tax ordinance, against the written down value of the assets at the beginning of the year.
Depreciation for whole year:
Under income tax law depreciation for the whole year is allowed even if the asset is
used for a part of a year but depreciation is charged for full year.
Assets used partly for business purpose:
Where a depreciable asset is used during a tax year partly for business and partly for
another use, the depreciation allowance shall be restricted to fair proportionate part of the asset which relates
to the business.
Determination of written down value:

27 Prepared By: Syed Shahid Abbas Sherazi

 The written down value of a depreciable asset shall be determined as under;
1. In case the asset is acquired during the tax year
Written down value = Cost of asset – initial allowance
2. In any other case
Written down value = Cost of asset – Total depreciation allowed to asset in previous years.
Written down value in case asset is used for partly purpose:
Where a depreciable asset is used during a tax year
partly for business and partly for another purpose, the written down value of the asset shall be computed on
the basis that the asset has been solely used to derive income from business.
Depreciation allowance should not exceed original amount:
The total depreciation allowed during the period of
ownership of a depreciable asset shall not exceed the original cost of the asset.
Disposal of an asset used for business:
1. Where in any tax year, a person disposes of a depreciable asset, no depreciation shall be provided in
respect of that year.
2. If the sale proceeds exceed the written down value, the excess shall be considered as the income
chargeable to tax under the head of income.
3. If sale proceeds are less then the written down value, the deficit shall be considered as an expenditure
deductable from the head income from business.
Depreciation allowance in case of immoveable property:
The cost of immoveable property or a structural improvement
to immoveable property shall not include the cost of land. It means that depreciation allowance is restricted up
to the cost of immoveable property excluding cost of land.
Depreciation allowance to lessor:
Where any asset owned by a lessor like, a leasing company an investment bank,
a modaraba, a scheduled bank and a developement finance institutions is leased to another person,
depreciation allowance is allowed to such person because asset is being used in their leasing business.
Depreciation allowance against leased asset:
Depreciation allowance on leased asset shall be allowed against income
from lease rental only. Any unabsorbed depreciation shall be adjusted in next periods.

Kinds of depreciation allowance

Initial allowance for depreciation:
In order to avail initial allowance for depreciation the following conditions should
be satisfied;
1. Assetshould be a depreciable asset
2. Initial allowance is allowed on the first year in which asset is purchased
3. Initial allowance is allowed only 50% of the original cost

28 Prepared By: Syed Shahid Abbas Sherazi

First year allowance:
1. The allowanceis admissible on plant , machinery etc installed by an industrial undertaking
2. The industrail undertakings should be owned and managed by a company and the asset
must put to use after july 1st 2008
3. The FYA will be provided at the rate of 90% of the cost, however the asset shall not be
entitled for initial allowance
Accelerated depreciation:
1. The accelerated depreciation allowance rate in lieu of initial allowance is 90% of the cost of the asset
2. This accelerated rate is admissible on plant, machinery and equipment installed for generation of
alternative energy
3. Asset installed by industrial undertakings and put to use after 1st july 2009

INCOMES EXEMPT FROM TAX

Gratuity or commutation of pension fund:

Gratuity means the lumpsum amount which is paid by emploer to its

employee at the time of retirement. If the amount of gratuity received by the employee on his retirement the
exemption is provided according to the following conditions;

1. If the amount of gratuity received by the government employee then the whole amount is exempt from
tax
2. If the amount of gratuity received by the private employee but approved by the commissioner of inland
revenue than whole amount is exempt from tax
3. If the amount of gratuity received by the private employee but approved by the federal board of revenue
then the amount upto Rs. 200, 000 is exempt from tax.
4. If the amount of gratuityreceived by the private employee but not approved by the CIR or FBR then Rs.
75, 000 and 50% amount of gratuity which ever is less is exempt from tax.
5. In the following cases amount of gratuity will be fully taxable
(i) Gratuity received outside pakistan
(ii) Gratuity received by non-resident employee
(iii) Gratuity received by an employee who already received gratuity from same or any other
employer.

Pension fund:

Pension means the amount which is paid by the employer to its employee after retirement. If the
amount of pension received by then the exemption is provided according to the following rules;

1. Pension received by former employee of pakistan armed forces, federal government is exempt from tax
2. Pension received by a citizen of pakistan from united nation or its agencies is also exempt from tax.
3. If the retired person works for the same employer and received pension then the eemption is not
allowed.
4. If an employee received more than one pensions then only the amount of higher pension will be exempt.
5. If the pension is provided to the families of Shaheeds Bis also exempt.
29 Prepared By: Syed Shahid Abbas Sherazi
Agriculture income:

Any income which is received by a person from an agriculture will be exempt from tax but it
must fulfill the following conditions;

1. Income derived from land

2. Land is situated in pakistan
3. Land is used for agricultural purpose

Income of Educationl institute:

Income received by university or any other educational institution is exempt from tax
but these institutions fulfill the following conditions;

1. The institute should be established for educational purpose

2. The purpose of these educational institute is not to earn profit, the sole object is education.
3. The surplus of these educational institution should be used for educational purpose
4. The educational institute are recognized by the board of education, university or higher education
commission (HEC)

Special allowance:

Employer provided special allowance to employee to meet the expenses which are incurred
during official duty. This allowance is totally exempt from tax.

Examples

1. Travelling allowance
2. Daily allowance
3. Kit allowance/uniform allowance

Capital gain:

Capital gain received by the person from the sale of following share is fully exempt from tax if the
holding period of these securities is more than twelve months;

1. Public company
2. Listed company
3. Modarba company
4. Pakistan telecom corporation voucher
5. National investment trust

Gain on sale of private company shares

1. Gain on sale of private company shares if dispose of within twelve months then no eemption is provided
2. Gain on sale of private company shares if disposed off after twelve months the 25% of capital gain is
exempt from tax

Income from poly technical institute/ vocational institute:

30 Prepared By: Syed Shahid Abbas Sherazi

 In finance act 2004 a new exemption is provided for
the promotion of education in a countary;

1. Any profit earned by a person from ploy technical institute or vocational institutes will be exempt for
the period of 5 years.
2. These institutions set up between 01/07/2004 to 30/06/2008
3. These institutions should be recognized by a board of technical education

Income of non-trading institutes:

Income received by non-profit organizations, welfare society or trust in respect of

subscription donation is not taxable provided that;

1. The trust is approved by the government

2. The trust is approved by the board

Income of religious and charitable institute:

Income derived by the religious and charitable institutes which are

established for religious and charitable purpose is exempt from tax. It is necessary that the private religious
institute is ensure that such income is spent for benefit the general public.

Income of modaraba:

Income of modaraba registered under the modaraba company and modaraba ordinance 1980 is
not taxable under the following conditions;

1. Income should not be from trading activities

2. At least 90% of profit of the year should be distributed among the certificate holders under law
3. Bonus shares distributed to the certificate holders will not be taken into account for the purpoe of
distribution of 90% profit

Income of certain institutions:

Income derived by the following institutions is not taxable;

1. Income from WAPDA (Water and power development authority)

2. State bank of pakistan
3. Income of private sector power project
4. Income of humdard laboratories pakistan
5. Chamber of commerce ( other than income of business or property)
6. Sports board etc

Scholarships:

Scholarships which are granted are fully exempt from tax if provided by the government but if
provided by any other person then it is taxable.

Medical charges or hospital charges:

31 Prepared By: Syed Shahid Abbas Sherazi

 If employer provided medical alloweance or medical facility to its employee
then tax traetment of these is as under;

Medical allowance

If employer provided medical allowance to its employee then exempt upto 10% os basic salary

Medical facility

Medical facility is fully exempt from tax

Note:

If medical facility and medical allowance both are given then medical allowance is fully taxable and
medical facility will be fully exempt.

Allowances for honour, Awards and Gift:

1. Any honour award or medal awarded by the president of pakistan will be exempt from tax
2. Any monetary award awarded by the president of pakistan is also exempt from tax
3. Any gift received from mother, father, sister ect will be exempt from tax

Special additional allowance:

Employer of government and private organization provided a special additional

allowance to employee for the purpose of tax we treat of this allowance as

1. If the employee of government organization then fully exempt

2. If the employee of private organization then fully taxable

Profit on debt:

The following income is exempt from tax under the following conditions;

1. Profit on debt received by a non-resident for a loan given to be utilized on a project in pakistan
2. Profit on debt paid to an agency of a foreign government, a foreign nation or any other non-resident
person approved by the government. This exemption is available upto 30/06/2008.
3. Any profit on debt derived by non-resident person in respect of islamic modes of finance including
mudaraba and musharika.
4. Profit on debt derived by hub power company limited after 1st july 1991 on his bank deposit

Support payment to live apart:

If any payment which is made to spouse for support purposes then this income
will be exempt from tax under the income tax ordinance 2001

Income from export of computer softwares:

Income from export of computer software or IT services or IT enable

services is exempt up to the period of 30th june 2016.

Explanation
32 Prepared By: Syed Shahid Abbas Sherazi
 1. IT services includes software development, software maintenance, web design etc
2. IT enable services includes inbound and outbound call centers, remote monitoring, graphic
designs etc.

33 Prepared By: Syed Shahid Abbas Sherazi