BUSINESS TAXATION

Income tax notes by prof. Anwaar Hussain Shah

Part 1. Income Tax Definition

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 Table of Contents
Business Taxation....................................................................................................... 3
Income tax notes..........................................................................................................3
Prof. Anwaar Hussain Shah........................................................................................ 3
Head Examiner & Lecturer at Punjab College............................................................3
00923006917462.........................................................................................................3
Income tax Definitions................................................................................................ 4
Accumulated Profits {sec. 2(1)}................................................................... 4
 Explanation:......................................................................................................... 4
Appellate Tribunal {Sec. 2(2)}.............................................................................. 4
 Explanation.......................................................................................................... 5
Approved Gratuity Fund {sec. 2(3)}......................................................................5
 Explanation.......................................................................................................... 5
 Features................................................................................................................ 5
I. Contribution............................................................................................................. 5
II. Purpose................................................................................................................... 5
III. Payment.................................................................................................................5
IV. Benefits to employer............................................................................................. 5
Approved Superannuation Fund {Sec. 2(4)}...................................................... 6
 Explanation.......................................................................................................... 6
Banking Company {Sec. 2(7)}................................................................................ 6
 Rate of tax............................................................................................................ 6
Business {Sec. 2(9)}............................................................................................ 7
 Explanation.......................................................................................................... 7
I. Trade........................................................................................................................ 7
II. Commerce...............................................................................................................7
III. Manufacture.......................................................................................................... 7
IV. Profession..............................................................................................................7
V. Vocation................................................................................................................. 7
Capital Asset {Sec. 2(10)}...................................................................... 7
 Note...................................................................................................................... 8
Depreciable Asset {Sec. 2(17)}................................................... 8
Dividend {Sec. 2(19)}.....................................................................9
 Note...................................................................................................................... 9
 Not included in the definition of Dividend........................................................ 10
Employment {Sec. 2(22)}................................................................. 10

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Income {Sec. 2(29)}.......................................................................10
Pakistan Source of Income {Sec. 2(40)}.......................................11
Permanent Establishment {Sec. 2(41)}.........................................12
Principal Officer {Sec. 2(44A)}.............................................13
Profit On Debt {Sec.2(46)}......................................................13
Public Company {Sec. 2(47)}....................................................14
Industrial Undertaking {Sec. 2(29C)}......................................14
 Note.................................................................................................................... 14
Royalties {Sec. 2(54)}..................................................... 15
Speculation Business {Sec. 2(61)}............................................... 15
Tax {Sec. 2(63)}..................................................... 16
1. Income tax............................................................................................................. 16
2. Additional tax........................................................................................................ 16
3. Penalties................................................................................................................ 16
4. Fee......................................................................................................................... 16
5. Other charges.........................................................................................................16
Taxation Officer {Sec. 2(65)}........................................................17
Tax Payer {Sec. 2(66)}............................................................. 17
Tax Year {Sec. 2(68)}..............................................18
i. Normal tax year......................................................................................................18
ii. Special tax year..................................................................................................... 18
iii. Transitional tax year............................................................................................ 18

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 Business Taxation
Income tax notes
Prof. Anwaar Hussain Shah
Head Examiner & Lecturer at Punjab College
00923006917462

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Income tax Definitions

Accumulated Profits {sec. 2(1)}

The accumulated profit mean:
1.Any reserve maintain by a business out of its profits
2.All profits of the company up to date these are distributed
3.These profits kept in whatever shape, whether capitalize or
not, will be treated as accumulated profits until their distribution to
shareholders.

 Explanation:
The amount of profit retained by company is known as
Accumulated profit. Any payment or distribution to share holder out
of accumulated profit is known as dividend. In other words,
distribution under above mentioned sub section can be treated as
dividend to the extent of Accumulated profits of the company.

Appellate Tribunal {Sec. 2(2)}

In case of any dispute between the tax payers and tax department
an appeal can be made to Appellate Tribunal. This is the highest
judicial authority in matter of tax. In simple words Appellate Tribunal
means authority that hears the appeal. But under income tax 2001,
Appellate Tribunal was established under sec. 130. Federal
government is the appointing authority of Appellate tribunal. It is the
second appeal. Finance act 2010, has added the “Appellate Tribunal”
means the Appellate Tribunal Inland Revenue.
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Income tax definitions
 Explanation
Appellate Tribunal is the highest judicial authority in the matters
of tax. It consists of judicial as well as accountant members. The
members are appointed by federal government. The decision of the
tribunal on point of facts is final. However, In case of point of law the
matter may be referred to high court.

Approved Gratuity Fund {sec. 2(3)}

It means such a fund, which has been and continues to be approved

by the commissioner of the Income tax under part of the sixth
schedule.

 Explanation
In this definition Approved mean approved by Income tax
commissioner in accordance with sixth schedule.

 Features
I. Contribution
It is an amount continuously contributed by employer.
II. Purpose
Old age benefit to employees in the purpose for maintenance
of this fund.
III. Payment
An amount paid in lump sum to employee at the time of
retirement or in case of death to the family of desired person.
IV. Benefits to employer

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Income tax definitions

If this fund is approved by “CIT”* then it will be treated as a

business expenditure by the employer and as a result of this
approved profit will reduce and tax will be saved.

Approved Superannuation Fund {Sec. 2(4)}

It means fund approved by income tax commissioner in
accordance with sixth schedule and maintained by organization to
benefit their employees after retirement.

 Explanation
Approved means approved by sixth schedule. Superannuation
fund means fund maintained by government and private organization.
Amount in this fund continuously contributed by employer. If this
fund is approved by CIT then it will treated as business expenditure
and as result of this approval profit will reduce tax.

Banking Company {Sec. 2(7)}

Banking company has the same meaning in banking companies
ordinance 1982 and includes any body corporate formed by or under
any law for the time being in force which transacts the business of
banking in Pakistan

 Rate of tax
Banking company pays tax @38%*

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Income tax definitions
Business {Sec. 2(9)}
Business includes any trade, manufacture, profession, vocation or
adventure or concern in the nature of trade, commerce, manufacture,
profession or vocation but doesn’t include payment.

 Explanation
I. Trade
It means buying goods and selling them to mass profit
II. Commerce
Commerce is a broad term and includes not only buying and
selling but also the services, which are helpful in trade such as
marketing and transportation etc.
III. Manufacture
It means to work upon something by hand or by machine in
order to turn it in to some thing different from what it was
before.
IV. Profession
If any income is earned through manual skill controlled by
intellectual skill is called profession. Such as income of
Professors, Lawyers, Accountants and Surgeons etc.
V. Vocation
It mean ability of a person to do some particular work
generally by the application of manual skills e.g. singer,
dancer, broker and carpenter etc.

Capital Asset {Sec. 2(10)}

Capital asset means property of any kind held by a person
possesses. It is immaterial whether the property is connected with his
business or not.
However the following excluded from definition

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Income tax definitions

a) The medicine available in medical stores for the purpose of sale

are stock in trade and so excluded from the definition of capital
asset.
Share possessed by a dealer of shares for the purpose of sales are
his stock in trade but still they will be treated as his Capital Asset.
b) Any property with respect to which the person is entitles to
depreciation, deduction or amortization deduction.

 Explanation
Any asset which a tax payer uses for the purpose of his
business is entitled to depreciation in case of intangible assets
used for the business purposes entitlement of amortization is
present. Such assets are not included in the definition of
Capital Asset.
e.g. a car being used for business purpose or a trade
mark purchased and being used by a business concern
are not treated to be capital asset.

c) Any immovable property.

d) Any moveable property (including wearing apparel jewellery or
furniture) held for personal use.

 Note
It should be noted that definition states that a person should hold
property. It means that even if the property is held on someone else
behalf e.g. as a trustee, executor, liquidator, receiver, lessee,
administrator and co owner etc. It will be treated as his Capital Asset.

Depreciable Asset {Sec. 2(17)}

Depreciable asset means a depreciable asset as defined in section
22 of income tax ordinance, 2001.

 Definition

In this section, depreciable asset means any tangible moveable

property, immoveable property (other than unimproved land) or
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Income tax definitions
structural improvement to immoveable property owned by a person
that
a) Has a normal life exceeding one year
b) Is like to lose value as a result of normal wear and tear or
adolescence and

c) Is used wholly or partly by the person is carrying income from

business charge able to tax.

Dividend {Sec. 2(19)}

The amount distributed to shareholders or modarba certificate holders
out of the profit is known as dividend.

 Explanation
When a person invest his funds in a company is known as
share holder. If a company earns any profit, it has to pay tax there on.
This tax is not deemed to be paid by the share holder the remaining
profit may either be retained by a company or distributed amongst the
shareholders or modarba certificate holder.

 Note
It is not necessary that the dividend must be distributed in cash it
may b paid in any money worth’s also.

 Dividend Under Income Tax Ordinance, 2001

The following distributions by a company to share holders.
i. Any distribution of accumulated profits by a company to
its share holders.
ii. Any distribution of profit to modarba certificate holders.
iii. Any distribution of profits to the share holders or
M.C.H* by way of debenture or any other deposit
certificate.
iv. Any payment by a Pvt Co. to its share holders, if the
following conditions are fulfilled,
 The payment is made by the way of:
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Income tax definitions

a. Loan
b. Advance
c. Payment on behalf of share holders, or
d. Payment for the individual benefits of
share holders.
 The payment is made to the extent to which
the company possesses accumulated profit.

 Not included in the definition of Dividend

i. Any distribution to such a share holder or debenture
holder who is not entitled to participate in the surplus
assets in the event of liquidation of the company.
ii. Any advance or loan made by a company to its
shareholders or M.C.H in the ordinary course of business,
where the lending of money is a substantial part of the
business of the company.
iii. Any dividend paid by a company that is set off against
the whole or any part of the sum previously paid and
treated as dividend.

Employment {Sec. 2(22)}

Under Income tax Ordinance 2001 employment includes
a) A directorship or any other office involved in
management of a company;
b) A position due to which the holder is entitled to a fixed
or ascertainable remuneration the holding or acting in
any public office.

Income {Sec. 2(29)}

Income includes
a) Any amount chargeable to tax under the income tax
ordinance 2001.
b) Any amount subject to collection or deduction of tax at
the time of import goods.
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Income tax definitions

 Explanation
It is necessary for collector of customs
at the time of import of goods to collect the tax at the
prescribed rates from the importers. The value of the
import has been treated as income in the hands under
this clause.

c) Any payment received by a resident from a prescribed

person for supply of goods or services.
d) Any amount received as export proceeds (money)
e) Amount received on prize and winnings.

 Explanation
The total amount received for sale of goods and
services, amount of foreign exchange received as
export proceeds and amount received on prizes and
winnings has been treated as Income under the law.

f) Any amount collected from a person being the owner of

goods transport vehicle by excise department.
g) Any loss of income
h) Any amount collected or deducted by any person at
source is also included in the definition of Income.

Pakistan Source of Income {Sec. 2(40)}

Income tax ordinance, 2001 has given consideration to the
geographical source of Income while taxing any Income. In this
context, the Pakistan source of income includes while a people a
person earns in Pakistan, irrespective of fact that where it is actually
received.

 Explanation

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Income tax definitions

Such income may be from salary, business or property situated in

Pakistan. Some examples are as follows.
1) Salary received by virtue of employment in Pakistan.
Whenever paid.
2) Income derived from any business carried In Pakistan.
3) Any dividend paid by a Pakistan residence company.
4) Rental income derived from the lease of immoveable
property in Pakistan.
5) Any person or annuity paid by a resident.
6) Any gain arising on the disposal of shares in resident
company.

Permanent Establishment {Sec. 2(41)}

This term has been included in the income tax law by the income
tax ordinance 2001. It means a place of business through which the
business of a person is wholly or partly carried on. It also includes
1) A place of management, branch, factory or workshop,
warehouse, permanent sales exhibition or sale let excluding a liaison
office.
2) Any place of extraction of natural resources (e.g. mine, oil or
gas well etc.)
3) An agricultural, pasture or forestry property.
4) A building site or a project of construction assembly or
installation.
5) Any place from where the supervisory activities connected
with above referred projects under taken.
6) The furnishing of any consultancy or other senses connected
to above projects.
7) An agent shall also be considered as PE* if any of the
following conditions must be filled.
I. The agent has the authority to make contracts on
behalf of the other person and exercise his authority
or
II. The agent has no such authority but he maintains
stock in trade and regularly delivers goods on behalf
of the other person.
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Income tax definitions
8) Any substantial equipment installed or other asset or property
capable of activity giving rise to income.

Principal Officer {Sec. 2(44A)}

Principal officer used with reference to a company or association
of person includes.
1) A director, a manager, a secretary, agent, accountant or
any similar officer.
2) Any person connected with the management or
administration of the company and AOP* upon whom
the commissioner has served a notice of treating him as
the principal officer there of.

 Explanation
Person includes an individual, an AOP and company etc. These
persons are required by Law to submit there return* of total income,
providing other details or documents if needed. In case of a company
or AOP it is very difficult to contact with every shareholders or every
members or owner by the tax department regarding the tax
requirement. For this purpose a few responsible persons connected
with the management are treated as Principal Officer.

Profit On Debt {Sec.2(46)}

Profit on debt means,
1) Any profit yield, interest, discount, premium or other
amount payable on debt. However it doesn't include the
return of capital.
2) Any service fee or other charge incorporated in respect
of a debt. Credit facility will also be treated as profit on
debt, if it has not been utilized.

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Income tax definitions

Public Company {Sec. 2(47)}

Under income tax law a public company means
1) A company in which at least of shares is held by the
federal government.
2) A company whose shares were traded in a registered
stock exchange in Pakistan at any time in the tax year
and which remained listed on that exchange, at the end
of that year, or
3) A unit trust whose units are widely available to the
public and any other public trust.

Industrial Undertaking {Sec. 2(29C)}

An organization fulfilling the following conditions will be known
as industrial undertaking.
i. Organization is set up in Pakistan
ii. It uses electrical energy or any other form if mechanical
energy and employs 10 or more persons or it doesn’t use
electrical or any other form of energy but;
a) Employ 20 or more persons,
b) Is engaged in manufacturing process.
c) Engaged in generation conversion, transmission
or distribution of electrical energy…
d) Engaged in ship building
e) Engaged in the working of any mine, oil well or
any other source of mineral deposits.

 Note
More-ever the FBR* can declare any other
organization which doesn’t fall in the orbit (Limit) of above two types
as “Industrial Undertaking.”

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Income tax definitions
Royalties {Sec. 2(54)}
“Royalty” is consideration for transfer or use of an intangible, for
the purpose of income tax, this term has been defined by taking in to
account, nature of the intangible asset.
Legal provision in this regard as summarized below…
1. Patent, invention, model design, secret process or
formula and trade mark etc.
In respect of above assets the royalties means any
consideration for,
i. The transfer of all or any rights,
ii. The granting of all license,
iii. The importing of any information concerning
the working or use of such assets or
iv. The use of such assets.
2. Copy right, literary, artistic or scientific work etc.
Royalty means the consideration for the transfer of all
or any rights in respect of any copy right, literary, artistic or
scientific work including films or video tapes for use in
connection with television or tapes for use in connection with
board casting.
However it doesn’t include any consideration for the sale
distribution or exhibition of cinematography films.
3. Services
Any consideration for the rendering of any services on
connection with any of the above stated activities is also
royalty.

Speculation Business {Sec. 2(61)}

A speculation business means any business in which a contract
for the purchase and sale of any commodity (including stock and
share) is periodically or ultimately settled otherwise than by the
actual delivery or transfer of the commodity, but doesn’t include.

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Income tax definitions

1) A business in which contract is entered in to by a person

to guard against loss through future price fluctuations in
respect of other contracts entered in to by him for the
actual delivery of goods.
2) A business in which a contract in respect of stocks and
shares is made by a dealer, or investor there in to guard
against loss in his holding through price fluctuations etc.
3) A business in which contract is entered in to by a
member of a forward market or stock exchange in any
transaction to guard against any loss, which may arise in
the ordinary course of the person’s business as such
members, enters into a contract.

Tax {Sec. 2(63)}

Tax means any tax imposed under the income tax law
 Tax
1. Income tax
2. Additional tax
3. Penalties
4. Fee
5. Other charges
1) Income Tax
It is an annual tax and is charged in respect of tax
year of the tax payer.
2) Additional Tax
If any tax payer fails to pay tax at proper time, additional
tax is payable by him @18% pa. On the amount of tax not
paid.
3) Penalties
Under I.T.O* 2001, various authorities have been
empowered to penalties e.g. fails to file return of income in the
prescribed time, pay penalties 1/10th of 1% taxable.

4) Fee
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Income tax definitions
If a tax payer submits a wrong statement wrong a/c fee is
to be charged from that person.
5) Other charges
When a person fails to give notice of discontinue of his
business during the year.

Taxation Officer {Sec. 2(65)}

The following are including in the definition of taxation officer,
1. Additional commissioner of income tax
2. Deputy commissioner of income tax
3. Assistant commissioner of income tax
4. Income tax officer
5. Special offer
6. Any other officer with any designation appointed by
FBR of income tax ordinance 2001.

Tax Payer {Sec. 2(66)}

Tax payer mean,
1. A person who derives an amount charge able to tax
2. Representation of such person
3. A person responsible to deduct or collect tax and deposit
it with the government under the provision of income tax
law.
4. Any person required to furnish a return or pay tax under
income tax ordinance.
 Explanation
1. It is necessary for the following persons to
furnish the return of income.
a) Every person whose total income during the
tax year exceeds the prescribed limit.
b) Every company irrespective of its income.
c) Any person who has been charged to tax for
any of the two tax years immediately
preceding the previous tax year.
d) Any person who claims a loss carried
forward from a previous tax year.

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Income tax definitions

i. Any person who owns a motor

vehicle (other than a motor cycle)
in Pakistan.
ii. Every person who subscribes a
telephone including a mobile
phone in Pakistan.
iii. Any person who has travelled
abroad (other than a non resident)
during that year except for the
purpose of Hajj, Umrah or ziarat.
iv. Any person who is a member of a
club where the monthly
subscription exceeds rupees 500 or
the admission fee exceeds rupees
25000.
 Person will not applicable for tax
I. A widow.
II. An orphan below the age of 25 years.
III. A non resident person.
IV. A disable person

Tax Year {Sec. 2(68)}

The concept of tax year has been introduced in income tax law
through income tax ordinance 2001.
Tax year is a period of time for which tax is to be calculated
regarding a person. The tax year may be of three types.
i. Normal tax year
ii. Special tax year
iii. Transitional tax year
1) Normal tax year
It is a period of 12 months ending on june 30th and is known
by calender year in which the ending dates falls. Such a tax
year is known as Normal Tax Year.
2) Special tax year

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Income tax definitions
Any year which is specified by FBR for calculation of any
person or class of persons, or any source of income may
specify a period of twelve months as their tax year.
 Example
These specific periods of time to be considered as tax year
have been declared by the FBR keeping in view the nature of
business. In respect, the following years have been specified
by the board through notification in the official gazette.

Classes of tax payers Starting Date Ending Date

Companies manufacturing jute 1st July 30th June
goods
Companies manufacturing sugar 1st October 30th September
or cotton textile
All person exporting rice 1st January 31st December

Banking companies have to adopt the calender year as their tax year
in accordance with the banking companies ordinance 1962.

3) Transitional tax year

When a tax year of any class of persons or single person is
charged as a result of an order by FBR or CIT it results in the
emergence of a changing period is known as transitional tax year
and it is treated to be a separate tax year. It consists of the period
between the end of last year before change and the start of the
changed tax year.
 Example
Mr. Ali wants to change his tax year, as previously he
was observing normal tax year however due to
pressing needs of business, he now wants to adopt the
period of twelve months from 1st October to 30th
September as a special tax year. The CIT has allowed
his change on 15th June 2004. His tax year will be as
follows.

Normal tax year 1st July 2003 to 30th June

2004 (Previous in Tax practice)

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Income tax definitions

Transitional Tax year 1st July 2004 to 30th

September 2004 (Only for change of purpose)

Special tax Year 1st October 20014 to 30th

September 2004 (Approved by CIT)

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Income tax definitions

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