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TOPIC

INCOME FROM
BUSINESS

TOPIC
INCOME FROM
BUSINESS

ADEEL KHAN

BUSINESS

[SECTION 2(9)]

According to Income Tax Ordinance 2001, the


term business includes:
Trade
Manufacturing
Commerce
Profession or Vocation
Concern
Adventure

TRADE

Trade means selling of goods for the


purpose of making profit which a trader
has purchased or manufactured.

MANUFACTURING

It means to work upon something by


hand or machine as to convert it into a
form which has greater value to
consumers.
Example
Conversion of wooden
piece into a chair.

COMMERCE

It includes all the institutions and activities


which are helpful in transferring goods
from the place of production to the
ultimate consumer.
Example
Transportation
Banking
Insurance
Advertising

PROFESSION OR VOCATION

Services rendered on the basis of


manual skill or specialized knowledge
and experience in a particular field is
known as profession or vocation.
Example
Doctors
Engineer
Accountant
Carpenters

CONCERN

Any regulated system of the


management of an organization which
has an adequate degree of trade,
commerce and manufacturing.

ADVENTURE

Any transaction is termed as an


adventure in the nature of trade if
some elements of trade are present
therein.

NOTE
The business does not include
employment.

INCOME CHARGEABLE UNDER BUSINESS [SECTION


18]

It includes:
Profit and gain in tax year
Any income derived by trade,
professional, AOP from sale of good or
services
Income from hire or lease of tangible
movable property

INCOME CHARGE

Profit on debt
Management fee derived by management
company
Fair market value of any benefit or perquisite
derived in the course of business relationship

TYPES OF BUSINESS:

There are two types of business.


Speculation Business
Non-Speculation Business

SPECULATION BUSINESS:

SEC 2 (61)

Speculation is a method of short-term


investing whereby traders essentially
bet on the direction an asset's price will
move.

CATEGORIES OF INCOME
The income from business are to be
shown separately under the following
sub-heads:
Income from speculation business
Income from non-speculation
business


TAXABILITY OF SPECULATION BUSINESS
[SECTION 19]
Treated as separate block of income
Profits or gains are computed separately
The principles of apportionment of expenditures
shall be applied (Section 67).
Any profit and gains arising from the speculation
business for a tax year shall income from business
loss from speculation business can only be set off
against the income of any other speculation
business carried on by person (Section 58).
.

ADMISSIBLE & NON- ADMISSIBLE DEDUCTION

WHAT IS DEDUCTION?
Any item or expenditure subtracted from gross
income to reduce the amount of income subject
to tax.

ADMISSIBLE DEDUCTIONS
Expenses incurred for the purposes of
business
Loss on animal used for business
Depreciation & amortization of assets
Amalgamation expenses incurred by an
amalgamated company

EXPENSES INCURRED FOR PURPOSES OF BUSINESS


[SEC20 (1)]

Expenses fully related to business


Expenses partially related to business

Example
- Salary
- Interest
- Training expenses
- Insurance premium

- Loss of animals
- Rent for premises
- Bad debts
- Repair charges

ANIMALS USED FOR BUSINESS

[SEC20(1A)]

Animals used for purpose of business


have died or become permanent
useless ,the differences b\w the actual
and the damage cost will be allowed.

EXAMPLE

Detail

Actual cost of the animals to the taxpayer

Less: amount realized in respect of carcasses or animals

Amount allowed as deduction

Amount

1,00,000

4,000

96,000


DEPRECIATION AND AMORTIZATION ON ASSETS
[20(2)]

As per Income Tax Ordinance


Depreciation and
Amortization is allowed regarding
Depreciable assets
Intangible assets
with useful life of
more than one year
Pre-commencement
expenditure

AMALGAMATION EXPENSES [20(3)]

Any expenditure made by


amalgamated company is allowed as a
deduction. These expenses may be;
Legal expenses;
Financial advisory services
Other administrative
costs relating to planning
and implementation

EXAMPLE
Mr. Zahid has a taxable salary of Rs. 3, 60,000/- during the year.
He was also running a Manufacturing concern of which the annual sales were
Rs.80,00,000/.
The Gross profit was 25% of the annual sales. Following are further details
regarding
expenses
of this business:
Sr.#
EXPENSES
TOTAL
TRANSACTI
MODE OF
Requirement: Find out tax liability of Mr.Zahid
ON
PAYMENT
1.

Utility bills

80,000

5,000
40,000
5,000
30,000

Cash
Cross Cheque
Cross Cheque
Cash

2.

Donation to unapproved institution

20,000

8,000
12,000

Cross Cheque
Cross Cheque

3.

Building repair

60,000

4.

Machinery repair

40,000

5.

Rent paid of house used for personal purpose

20,000

5,000
5,000
20,000
30,000
15,000
5,000
5,000
15,000
12,000

Cross cheque
Cash
Cross Cheque
Cash
Cash
Cash
Cross Cheque
Cross Cheque
Cash

8,000

Cash

SOLUTION
Income from salary
Income from Business:
Sales
Gross Profit 80,000@ 25%
20, 00,000
LESS: Admissible Deductions
Utility Bills
Building Repair
Machinery Repair
18,50,000
TOTAL INCOME
22,10,000

3, 60,000
80, 00,000

40,000

80,000
30,000
1, 50,000

Tax Calculation
Initial tax
Add
(22, 10,000-15, 00,000)@20%

1, 47,500
1, 42,000
2, 89,500

NOTES

Utility bills can be paid in cash or


cheque as are exempt from being paid
through cross cheque.
Donations to unapproved institution are
not admissible.
Rent paid of house used for personal
purpose is not admissible.

DEDUCTIONS NOT ALLOWED


[SECTION 21]

Tax Levied on Profits or


Gains: [Section 21(a)]
Tax Deducted at
Source [Section 21(b)]
Entertainment
Expenditures [Section
21(c)]
Contribution to any
Unapproved Fund
[21(e)]

DEDUCTIONS NOT ALLO

Fine or Penalty
[Section 21(g)]
Personal
Expenditure [21(h)]
Salary exceeding
prescribed [sec
21(m)]
Capital expenditure

DEDUCTIONS NOT ALLO

Transfer to Reserve
Fund [21(i)]
Reward of Members
of AOP [21(j)]
Any Expenditure
Exceeding Prescribed
Limit [21(l)]

MINIMUM TAX ON THE


INCOME OF CERTAIN
PERSONS (SEC 113)

MINIMUM TAX APPLIED:

In case of Certain persons


In case of Builders
In case of Educational Institutions
In case of Land Developers

MINIMUM TAX ON THE INCOME OF CERTAIN PERSONS


(SECTION 113):

This section shall apply upon:


A resident company.
An individual having turnover of fifty millions rupees or
above.
An association of persons having turnover of fifty million
rupees.
The above mentioned persons shall pay minimum tax @
1% of the
turnover.
Minimum tax is to be paid if it exceeds the actual tax.

PROBLEM:
XYZ private limited has a taxable income of Rs. 6, 00,000/- for the
tax year 2014. Its turnover during the year was Rs 5, 00, 00,000/-.
Find its tax liability.

SOLUTION:

Income tax = 6, 00,000 @ 32% ==1,92,000

Minimum tax liability = 5, 00, 00,000 @ 1% = 5, 00,000

Income tax liability is whichever of above two is higher. Hence tax


liability is Rs. 5, 00,000/-.

MINIMUM TAX ON BUILDERS (SEC 113A):

Minimum tax is levied on income of builders arising


from construction and sale of residential, commercial or
other buildings. Builders are required to pay minimum
tax @ of Rs. 25/- per Square foot actually sold or booked
for sale during a year.

Problem:
M/S ABC Enterprises is an Association of Persons it is doing the business of
constructing and selling building. During the year the income from the business is Rs.
8, 00,000/-. During the year actually M/S ABC Enterprises sold and booked 24,000
square feet of area.
Find out the tax liability of M/S ABC Enterprise:

Solution:
Income from business of construction is equal to 8, 00,000
Tax on 8, 00,000
Initial........................................................... 35,000
(8, 00,000-7, 50,000) @ 15% ..................... 7,500
Total Tax
42,500
Minimum Tax Liability on Builders (Rs. 25 per square feet booked or sold)
= Square feet booked or sold x 25
= 24,000 x 25 = 6, 00,000
Minimum Tax liability of Rs. 6, 00,000 calculated being a builder is higher than of the
Normal Tax Rs. 42,500 hence tax payable is Rs. 6, 00,000.

COLLECTION OF ADVANCE TAX BY EDUCATIONAL


INSTITUTIONS:
An Advance tax @ 5% on the amount of fee paid shall be
collected by the educational institution. This means tuition fees
and all charges. The tax is required to be collected in the same
manner as the fee is charged, The advanced tax under this
provision shall not be charged if the annual fee does not exceed
Rs. 2, 00,000/-

MINIMUM TAX ON LAND DEVELOPERS:


Minimum Tax has been levied in income of land developers
arising from development and sale of residential, commercial or
other plots. The said developers shall pay tax @ of Rs.50/- per
square yard actually sold or booked for sale during the year.