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Taxation Management ­ FIN 623
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MODULE 9
LESSON 9.39
CAPITAL GAINS
Disposals Not Chargeable To Tax Under Sec.79 Non Recognition Rules
No gain or loss shall be taken to arise on the disposal of an asset:
Between spouses under an agreement to live apart;
By reason of the transmission of the asset to an executor or beneficiary on the death of person;
By reason of a gift of the asset;
By reason of the compulsory acquisition of the asset under any law where the consideration
received for the disposal is reinvested by the recipient in an asset of a like kind within one year of
the disposal;
By a company to its shareholders on liquidation of the company; or
By an association of persons to its member on dissolution of the association where the assets are
distributed to members in accordance with their interests in the capital of the association
Exemptions in respect to capital gains have been outlined in various clauses of Part 1 of Second Schedule.
Exemptions as Contained in Second Schedule
Clause (110) Any income chargeable under the head "capital gains", being income from the sale of
Mudarba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984,
listed on any stock exchange in Pakistan or shares of public company and the Pakistan telecommunication
corporation vouchers issued by the Government of Pakistan derived by a tax-payer.
Clause(111) any income chargeable under the head "capital gains" being income from the sale of shares of
a public company derived by any foreign institutional investor as is approved by the federal Government for
the purpose of this clause
Clause (112) omitted.
Clause (113) any income chargeable under the head "capital gains" being income from the sale of shares of
a public company set up in any special industrial zone referred to in clause [126] of this schedule, derived
by a person for a period of five years from the date of commencement of its commercial production:
provided that the exemption under this clause shall not be available to a person from the sale of shares of
such companies which are not eligible for exemption from tax under clause (126 ).
Clause (114) any income chargeable under the head "capital gains " derived by a person from an industrial
undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of
the export processing zone Authority Ordinance 1980.
Clause(114A) any income chargeable under the head "capital gains", derived by a person from sale of ships
and all floating crafts including tugs, dredgers, survey vessels and other specialized craft up to tax year
ending on the thirtieth day of June ,2011]
Exercise on Capital Gain
Exercise-1:
On 1st July 2006, the Govt. prohibited the sale of plastic bags through an Ordinance and took over the
machines of M/s WW Ltd; amounting Rs. 1,000,000/-. As a compensation package the Govt. paid Rs.
2,500,000/- to the Company. The company purchased new machines of the related business on 1st April
2007 costing the company Rs. 4,000,000/-.
Calculate gain on disposal and also explain whether this gain is chargeable to tax.
Solution E 1:
Considerations received (A)
Rs. 2,500,000
Cost of Acquisition
(B)
Rs. 1,000,000
Capital Gain = (A ­ B)
Rs.1,500,000
Although there is gain of Rs.1,500,000/ on disposal but it is not chargeable to tax since amount of
consideration received has been invested in the like business during one year of disposal.
Exercise2: On 01/01/2004 Mr. Y purchased 10,000 shares at a price of Rs 30 per share. He sold these
shares on 20/06/2006 at a price of Rs 50 per share. Calculate the gain taxable on this disposal.
Solution Ex. 2:
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-  Consideration received on disposal (A) (10,000 x 50) =
Rs. 500,000
-  Cost of acquisition (B) (10,000 x 30) =
Rs. 300,000
-  Capital Gain (A-B)
Rs. 200,000
Since shares held by the person for more than one year therefore under the provision of law 3/4th of the
gain would be taxable. Hence:
Taxable Capital Gain= 200,000 x = Rs 150,000
Exercise 3:
On 01/10/2006, Mr. A had acquired mining rights at a cost of Rs 2,000,000. On 01/02/2007, he disposed
of the rights to Mr. Y for consideration of Rs 5,000,000. Calculate Capital Gain.
Solution to Ex. 3:
Consideration received on disposal (A)
Rs. 5,000,000
Cost of acquisition (B)
Rs. 2,000,000
Capital Gain
Rs. 3,000,000
Exercise4:
On 01/01/2004, M/s XYZ Pvt. Ltd. purchased 5000 shares of a public limited company at a price of Rs
100 per share. On 10/05/2006, the company disposed of these shares at a price of Rs 150 per share.
Compute taxable gain on disposal of these shares.
Solution to E 4:
Consideration received on disposal (A)
Rs. 750,000
Cost of acquisition (B)
Rs. 500,000
Capital Gain
Rs. 250,000
Since Capital assets held by the person for more than one year therefore under the provisions of law 3/4th
of the gain would be taxable. Hence,
Taxable Capital Gain = 250,000 x = Rs 187,500
However, in this case, gain shall not be taxable since exemption under clause 110 of part 1 of 2nd schedule
has been granted on gain on account of disposal of shares of a public limited company.
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MODULE 10
LESSON 10.39
INCOME FROM OTHER SOURCES (SECTION 39)
Incomes not covered by any given heads of income are covered under this head.
Some types covered under the head `Income from other Sources'
Income from Dividends
Income from Royalty
Profit on debt
Profit, yield, interest, premium etc. received as well as accrued.
However, Rental income (Leasing) received by a bank shall be `Income from Business' not "Income
from other sources'.
Any amount received by bank from Mutual Funds shall be taxed under the head `Income from Business'
not under `Income from other sources'.
Profit derived from National Saving Scheme is covered under the head `Income from other sources'.
Other Miscellaneous Incomes Covered Under the Head `Income From Other Sources'
Income from:
Annuities including annuities paid to a lender of trademark.
Pension
Income arising out of exploration rights (exploration of oil fields.
Income on account of interest- free loans (Over Bench mark rate).
Sum paid for vacating premises shall be treated as income of recipient.
Other Specific Items Covered Under the Head Income From Other Sources:
Sum received not through permissible banking channels on account of loans, Advances, Gifts, and
Deposits for issuance of Shares of companies offered for public subscription.
Sec. 39(3): if above sums received:
Otherwise than through crossed bank cheque
Otherwise than through banking channel or from a person not holding National Tax Number shall
be treated as income chargeable to tax under the head  `Income from Other Sources' for the tax
year in which it was received.
Exception to above:
Sub Sec. (4): sub Section 3 of section 39 shall not apply to an advance payment for the sale of
goods or supply of services.
Advances received from customers in connection with sale of goods & services are not to be
included /added to income.
However, advances received against execution of contract or any other purposes shall be included
to income if amount not received through crossed bank cheques or through permissible banking
channels.
Unexplained Investments
Sec. 111 unexplained income or assets
Where
A person has made an investment,
Any amount credited to person's books of account
A person has incurred expenditure
A person has made an investment,
Any amount credited to person's books of account
A person has incurred expenditure.
Sec. III unexplained income or assets
But no reasonable explanation offered regarding sources of fund ­the amount as (a), (b) and (c) above shall
be included in person's income chargeable to tax.
Sub Sec. 1 of Sec. 111 does not apply to any amount of Foreign Exchange remitted from outside
Pakistan through normal banking channels that is en-cashed into Pak. Rupees by a scheduled Bank and
encashment certificate from such bank is produced to that effect.
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Sub Sec. 1 of Sec 111 does not also apply to any unexplained amount relating to a period beyond pre-
ceding five tax years.
Immune (Exempted) Investments/Income
Private foreign Currency Accounts
Three years Foreign Currency Bearer Certificates
Rupees withdrawn or assets created out of:
Withdrawal from US Dollar Bearer Certificates,
Withdrawal from F.C. Accounts
Encashment of foreign exchange bearer certificates
Admissible Deductions:
Expenditure incurred to derive income chargeable to tax.
A person receiving any profit on debt chargeable to tax under the head Income from Other Sources'
shall be allowed a deduction for any Zakat paid by the person at the time the profit is paid to the
person, deducted at the time of making payment of profit.
Depreciation allowed as deduction.
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MODULE 11
LESSON 11.39
56.
SET OFF OF LOSSES
(1) Subject to sections 58 and 59, where a person sustains a loss for any tax year under any head
of income specified in section 11, the person shall be entitled to have the amount of the loss
set off against the person's income, if any, chargeable to tax under any other head of income
for the year.
(2) Except as provided in this Part, where a person sustains a loss under a head of income for a
tax year that cannot be set off under sub-section (1), the person shall not be permitted to
carry the loss forward to the next tax year.
(3) Where, in a tax year, a person sustains a loss under the head "Income from Business" and a
loss under another head of income, the loss under the head "Income from Business shall be
set off last.
57.  Carry forward of Business Losses
(1) Where a person sustains a loss for a tax year under the head "Income from Business"
(other than a loss to which section 58 applies) and the loss cannot be wholly set off under
section 56, so much of the loss that has not been set off shall be carried forward to the
following tax year and set off against the person's income chargeable under the head
"Income from Business" for that year.
(2) If a loss sustained by a person for a tax year under the head "Income from Business" is not
wholly set off under sub-section (1), then the amount of the loss not set off shall be carried
forward to the following tax year and applied as specified in subsection (1) in that year, and
so on, but no loss can be carried forward to more than six tax years immediately succeeding
the tax year for which the loss was first computed.
(2A) Where a loss, referred to in sub-section (2), relating to any assessment year commencing on
or after 1st day of July, 1995, and ending on the 30th day of June 2001, is sustained by a
banking company wholly owned by the Federal Government as on first day of June, 2002,
which is approved by the State Bank of Pakistan for the purpose of this sub-section, the
said loss shall be carried forward for a period of ten years.
(3) Where a person has a loss carried forward under this section for more than one tax year,
the loss of the earliest tax year shall be set off first.
(4) Where the loss referred to in sub-section (1) includes deductions allowed under sections 22,
23 and 24 that have not been set off against income, the amount not set off shall be added
to the deductions allowed under those sections in the following tax year, and so on until
completely set off.
(5) In determining whether a person's deductions under sections 22, 23 and 24 have been set
off against income, the deductions allowed under those sections shall be taken into account
last.
57A. Set off of business loss consequent to Amalgamation
(1) The accumulated loss under the head "Income from Business" (not being a loss to which
section 58 applies) of an amalgamating company or companies shall be set off or carried
forward against the business profits and gains of the amalgamated company and vice versa
up to a period of six tax years immediately succeeding the tax year in which the loss was first
computed in the case of amalgamated company amalgamating company or companies.
(2) The provisions of sub-section (4) and (5) of section 57 shall, mutatis mutandis, apply for the
purposes of allowing unabsorbed depreciation of amalgamating company or companies in
the assessment of amalgamated company and vice versa
(3) Where any of the conditions as laid down by the State Bank of Pakistan or the Securities and
Exchange Commission of Pakistan or any court, as the case may be, in the scheme of
amalgamation, are not fulfilled, the set off of loss or allowance for depreciation made in any
tax year of the amalgamated company or the amalgamating company or companies shall be
deemed to be the income of that amalgamated company or the amalgamating company or
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companies, as the case may be, for the year in which such default is discovered by the
Commissioner or taxation officer, and all the provisions of this 0rdinance shall apply
accordingly.
59.  Carry forward of Capital Losses
(1) Where a person sustains a loss for a tax year under the head "Capital Gains" (hereinafter
referred to as a "capital loss"), the loss shall not be set off against the person's income, if
any, chargeable under any other head of income for the year, but shall be carried forward to
the next tax year and set off against the capital gain, if any, chargeable under the head
"Capital Gains" for that year.
(2) If a capital loss sustained by a person for a tax year under the head "Capital Gains" is not
wholly set off under sub-section (1), then the amount of the loss not set off shall be carried
forward to the following tax year, and so on, but no loss shall be carried forward to more
than six tax years immediately succeeding the tax year for which the loss was first computed.
(3) Where a person has a loss carried forward under this section for more than one tax year, the
loss of the earliest tax year shall be set off first.
Deductible Allowances:
60.  Zakat
(1) A person shall be entitled to a deductible allowance for the amount of any Zakat paid by the
person in a tax year under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).
(2) Sub-section (1) does not apply to any Zakat taken into account under subsection (2) of
section 40.
(3) Any allowance or part of an allowance under this section for a tax year that is not able to be
deducted under section 9 for the year shall not be refunded, carried forward to a subsequent
tax year, or carried back to a preceding tax year.
61.  Charitable donations:
(1) A person shall be entitled to a tax credit in respect of any sum paid, or any property given by
the person in the tax year as a donation to ­
a)  any board of education or any university in Pakistan established by, or under, a Federal
or a Provincial law;
b)  any educational institution, hospital or relief fund established or run in Pakistan by
Federal Government or a Provincial Government or a local authority; or
c)  any non-profit organization.
Sub-section (1) substituted by Finance Act, 2003 which previously read as follows:
A person shall be entitled to a tax credit for a tax year in respect of any amount paid, or
property given by the person in the tax year as a donation to a non-profit organization."
(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be
computed according to the following formula, namely:
(A/B) x C
Where:
A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under
this Part;
B is the person's taxable income for the tax year; and
C is the lesser of:
(a) the total amount of the person's donations referred to in subsection (1) in the year, including
the fair market value of any property given; or
(b) where the person is:
(i)
an individual or association of persons, thirty per cent of the taxable income of
the person for the year; or
(ii)
a company, fifteen per cent of the taxable income of the person for the year.
(3) For the purposes of clause (a) of component C of the formula in subsection (2), the fair
market value of any property given shall be determined at the time it is given.
(4) A cash amount paid by a person as a donation shall be taken into account under clause (a) of
component C of sub-section (2) only if it was paid by a crossed cheque drawn on a bank.
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(5) The Central Board of Revenue may make rules regulating the procedure of the grant of
approval under sub-clause (c) of clause (36) of section 2 and any other matter connected
with, or incidental to, the operation of this section.
62.  Investment in shares
(1) A person other than a company shall be entitled to a tax credit for a tax year in respect of
the cost of acquiring in the year new shares offered to the public by a public company listed
on a stock exchange in Pakistan where the person other than a company is the original
allottee of the shares or the shares are acquired from the Privatization Commission of
Pakistan.
(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be
computed according to the following formula, namely:
(A/B) x C
Where:
A is the amount of tax assessed to the person for the tax year before allowance of any tax credit
under this Part;
B is the person's taxable income for the tax year; and
C is the lesser of:
(a) the total cost of acquiring the shares referred to in sub-section (1) in the year;
(b) ten per cent of the person's taxable income for the year; or
(c) two hundred thousand rupees.
(3) Where:
a)
a person has been allowed a tax credit under sub-section (1) in a tax year in
respect of the purchase of a share; and
b)   the person has made a disposal of the share within twelve months of the date
of acquisition,
The amount of tax payable by the person for the tax year in which the shares were
disposed of shall be increased by the amount of the credit allowed.
63. Contribution to an Approved Pension Fund
(1) An eligible person as defined in sub-section (19A) of section 2 deriving income chargeable
to tax under the head "Salary" or the head "Income from Business" shall be entitled to a tax
credit for a tax year in respect of any contribution or premium paid in the year by the person
in approved pension fund under the Voluntary Pension System Rules, 2005.
(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be
computed according to the following formula, namely:
(A/B) x C
Where:
A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit
under this Part;
B is the person's taxable income for the tax year; and
C is the lesser of
(a) the total contribution or premium referred to in sub-section (1) paid by the person in the
year; or
(b) twenty per cent of the eligible person's taxable income for the relevant tax year; Provided
that an eligible person (words "a person" substituted by Finance Bill 2006) joining the
pension fund at the age of forty-one years or above, during the first ten years starting from
July 1, 2006 (words "of the notification of the Voluntary Pension System Rules, 2005"
substituted by Finance Bill 2006), shall be allowed additional contribution of 2% per annum
for each year of age exceeding forty years. Provided further that the total contribution
allowed to such person shall not exceed 50% of the total taxable income of the preceding
year; or
(c) five hundred thousand rupees.
(3) The transfer by the members of approved employment pension or annuity scheme or approved
occupational saving scheme of their existing balance to their individual pension accounts
maintained with one or more pension fund managers shall not qualify for tax credit under this
section.
63. Retirement annuity scheme
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(1) Subject to subsection (3), a resident individual deriving income chargeable to tax under
the head "Salary" or the head "Income from Business" shall be entitled to a tax credit for
a tax year in respect of any contribution or premium paid in the year by the person under
a contract of annuity scheme approved by , Securities and Exchange Commission of
Pakistan of an insurance company duly registered under the Insurance Ordinance, 2000
(XXXIX of 2000), having its main object the provision to the person of an annuity in old
age.
(2) The amount of a resident individual's tax credit allowed under sub-section (1) for a tax
year shall be computed according to the following formula, namely:
(A/B) x C
Where:
A is the amount of tax assessed to the person for the tax year before allowance of any tax credit
under this Part;
B is the person's taxable income for the tax year; and
C is the lesser of:
a)  the total contribution or premium referred to in sub-section (1) paid by the
individual in the year;
b)  ten (Substituted for "five" by Finance Act, 2003) per cent of the person's taxable
(Substituted for "total" by Finance Act, 2003) income for the tax year; or
c)  two (Substituted for "one" by Finance Act, 2003) hundred thousand rupees.
(3) A person shall not be entitled to a tax credit under sub-section (1) in respect of a contract
of annuity which provides:
(a)  for the payment during the life of the person of any amount besides an annuity;
(b) for the annuity payable to the person to commence before the person attains the age
of sixty years;
(c)  that the annuity is capable, in whole or part, of surrender, commutation, or
assignment; or
(d) for payment of the annuity outside Pakistan.
64.
Profit on debt:
(1) A person shall be entitled to a tax credit for a tax year in respect of any profit or share
in rent and share in appreciation for value of house paid by the person in the year on a
loan by a scheduled bank or non-banking finance institution regulated by the Security
and Exchange Commission of Pakistan or advanced by Government or the local
authority or a statutory body or a public company listed on a registered stock exchange
in Pakistan where the person utilizes the loan for the construction of a new house or
the acquisition of a house.
Sub-Section (1) substituted by Finance Act, 2003 which previously read as follows:
"(1)  A person shall be entitled to a tax credit for a tax year in respect of any profit or
share in rent and share in appreciation of value of house paid by the person in the year on a
loan by a scheduled bank under a house finance scheme approved by the State Bank of
Pakistan or advanced by Government, the local authority or House Building Finance
Corporation where the person utilizes the loan for the construction of a new house or the
acquisition of a house."
(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be
computed according to the following formula, namely:
(A/B) x C
Where:
A is the amount of tax assessed to the person for the tax year before allowance of any tax credit
under this Part;
B is the person's taxable income for the tax year; and
C is the lesser of:
(a)  the total profit referred to in sub-section (1) paid by the person in the year;
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(b) forty (substituted "twenty five" by Finance Act, 2003) per cent of the person's
taxable (Substituted for "total" by Finance Act, 2003) income for the year; or
(c)  five (Substituted for "one" by Finance Act, 2003) hundred thousand rupees.
(3) A person is not entitled to tax credit under this section for any profit deductible under
section 17.
Common Rules
Income of joint owners Section 66
Where any property is own by two or more persons and there respective shares are definite and
ascertainable:
a) the persons shall not be assessed as an AOP in respect of the property; and
b) the share of each person in the income from property for a tax year shall be taken into
account in the computation of persons taxable income for that year.
This section shall not apply in computing income chargeable under the head "Income from Business"
Apportionment of deductions Section 67
Where the expenditure relates to:
The derivation of more than one head of income; or
The derivation of income comprising of taxable income and any income under final tax regime
The derivation of income chargeable to tax under a head of income and to some other purpose,
The expenditure shall be apportioned on any reasonable basis taking account of the relative nature and
size of the activities to which the amount relates.
Fair Market Value Section 68
Fair market value of any property or rent, asset, service, benefit or perquisites at a particular time shall
be the price which these mentioned above would ordinarily fetch on sale or supply in the open market at
that time.
Receipt of Income Section 69:
A person shall be treated as having received an amount, benefit, or perquisites if it is:
(a) actually received by the person
(b) applied on behalf of the person, at the instruction of the person or under any law; or
(c) made available to the person.
Recouped expenditure: Section 70
where a person has been allowed a deduction for any expenditure or loss incurred in a tax year in the
computation of persons income chargeable to tax under a head of income and, subsequently, the person has
received in cash or in kind, any amount in respect of such expenditure or loss, the amount so received shall
be included in the income chargeable under the head for the tax year in which it is received.
Currency Conversion: Section 71
Every amount taken into account under this ordinance shall be in Rupees
Where an amount is in a currency other than Rupees, the amount shall be converted to the Rupees at
the State Bank of Pakistan exchange rsate applicable on that date.
Cessation of Source of Income: Section 72
Where:
a)  any income is derived by a person in a tax year from any business, activity, investment or other
source that has ceased either before the commencement of the year or during the year; and
b)  if the income has been derived before the business, activity, investment or other source
ceased, it would have been chargeable to tax under this ordinance,
This ordinance shall apply to the income on the basis that the business, activity, investment or other
source had not ceased at the time the income was derived.
Rules to prevent double Derivation and double Deductions: Section 73
Sec 73
(1) Where:
(a) any amount is chargeable to tax under this ordinance on the basis that it is receivable, the
amount shall not be chargeable again on the basis that it is received; or
(b) any amount is chargeable to tax under this ordinance on the basis that it is received, the
amount shall not be chargeable again on the basis that it is receivable; or
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(2) For the purposes of this Ordinance,
Where:
(a) any expenditure is deductible under this Ordinance on the basis that it is payable, the
expenditure shall not be deductible again on the basis that it is paid; or
(b) any expenditure is deductible under this Ordinance on the basis that it is paid, the
expenditure shall not be deductible again on the basis that it is payable.
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MODULE 12
LESSON 12.39
TAXATION OF INDIVIDUALS
AND
TAXATION OF ASSOCIATION OF PERSONS
Exercise1-Sole Proprietorship
Mr. A is running business as sole proprietor. From the following information/data relevant to tax year
2007.
Opening Stock
Rs.800,000
Purchases
Rs.1,000,000
Sales
Rs.2,000,000
Carriage inwards
Rs.30,000
Closing stock
Rs.800,000
Electric bill of office paid
Rs 18,000
Telephone bill paid
Rs 20,000
Rent of office
Rs 120,000
Stationary for office
Rs 4000
Postages
Rs 3000
Salaries to staff
Rs 200,000
Advertisement expenses
Rs 10,000
Advance tax paid
Rs 60,000
Compute taxable income and tax thereon.
Solution to Ex. 1:
Tax Payer: Mr. A
.
Tax Year: 2007
Sole proprietorship
NTN: 000111
Trading and Profit & Loss Account
In Rs
Opening balance
800,000 Sale
2,000,000
Purchases
1,000,000 Closing Stock
800,000
Carriage inward
30,000
Gross profit
970,000
Total
2,800,000
2,800,000
Electricity
18,000
Telephone
20,000
Office rent
120,000
Stationary
4,000
Postages
3,000
Salaries
200,000
Advertising
10,000
Net profit
595,000
Total
970,000
970,000
Tax payable 595,000 x 12.50%=
Rs. 74,375
Advance tax paid
Rs 60,000
Tax payable
Rs 14,375
Tax paid with return
Rs 14,375
Tax payable / refundable
Nil
Exercise 2: Taxation of Association of Persons
From the following information/ data for tax year 2007 regarding M/S XYZ brothers, a partnership firm,
compute taxable income and tax liability of the firm as well as individual members.
This firm comprises of three partners Mr. X, Mr. Y and Mr. Z, each partner has equal share in profits.
Net profit of M/S XYZ brothers for tax year 2007 is worked out as Rs 900,000.
Mr. Z has also earned income amounting Rs 200,000 from other sources.
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Solution Exercise 2:
Tax Payer: M/S. XYZ
Tax Year: 2007
Partnership Firm
NTN: 000111
Net profit (taxable income)
= Rs 900,000
Tax liability of firm
(900,000 x 17.50 %*)
= Rs 157,500
*Tax rate at serial # 12 for income range Rs 800,000 to 1,000,000 is applied.
Note:
Tax liability is the obligation of firm and not of the partners. However, if partner has income from any
other source, his share of income from partnership is added to taxable income only for rate purposes.
Share of profit of each member Mr. X, Mr. Y and Mr. Z Rs 300,000 each.
Computation of tax liability of Mr. Z
Income from other sources
Rs200,000
Share of profit of Mr. Z from firm M/s XYZ brothers
(Add for rate purposes only)
Rs 300,000
Taxable income
Rs 500,000
Tax payable (500,000 x 10%)
Rs 50,000
Subtract tax liability due to addition of Rs 300,000 for rate purposes
(50,000/ 500,000 x 300,000 = 30,000)
Rs 30,000
Tax payable by Mr. Z
Rs 20,000
(50,000-30,000=20,000)
If Rs 300,000 would have not been added for rate purposes, Mr. Z would have paid tax at the rate of 4 %
that is 200,000 x 4% = 8,000 instead of Rs 20,000.
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MODULE 13
LESSON 13.39
TAXATION OF COMPANIES
Minimum Tax on Resident Companies Sec 113
Resident Company is subjected to minimum tax @ 0.50% of its turnover for a tax year, even in
cases where the company sustains loss.
Turnover under this section means:
the gross receipts, exclusive of sales tax and central excise duty or any trade discounts shown on
invoice or bills, derived from the sale of goods;
the gross fees for the rendering of services or giving benefits, including commissions;
the gross receipts from the executions of contracts; and
the company's share of the amounts stated above of any association of persons of which the
company is a member
Exercise-1
M/S XYZ (PVT) Ltd. filed return for tax year 2007, declaring taxable income of Rs. 1,300,000 and paid
entire liability of tax. On scrutiny of record by tax authorities, it came to their notice that following amounts
have been paid by Cash. In the light of this information/data compute tax liability of said company for tax
year-2007.
Salary
Rs. 30,000
Office Rent
Rs. 120,000
Professional Fee
Rs. 80,000
Postages
Rs. 8,000
Freight paid
Rs. 9,000
Electricity bill
Rs. 7,000
Telephone
Rs. 5,000
Penalty
Rs. 9,000
Solution of E-1
Add Back Inadmissible Deductions Under Section 21
Salary paid by cash
Rs. 30,000
Rent of office paid by cash
Rs. 120,000
Professional fee paid by cash
Rs. 80,000
Total Additions
Rs. 230,000
Declared income
Rs. 1,300,000
Tax already paid (1,300,000 x 35%)
Rs.  455,000
Additions made U/S 21
Rs.  230,000
Tax payable on additions
Rs.
80,500
Note:
Additions on account of rest of payments, although by cash not required to be added back as provided in
section 21(L)
Computation of Depreciation
Exercise 2
M/S A.K. Brothers is a partnership firm. In the books of accounts the following information/data has been
provided with respect to plant and machinery. Compute normal depreciation and initial allowance in the
light of the given information.
Book value of plant and machinery as on 01-07-2006
Rs. 1,800,000
Machinery disposed of during the year with book value.
Rs.  600,000
Additions of eligible depreciable asset during the year
Rs 1,000,000
Solution of E-2
Tax Payer: A.K. Brothers
Tax Year: 2007
Residential Status: Resident
NTN: 000111
Particulars
Book value
Depreciation
Opening W.D.V
1,800,000
----
Disposals
(600,000)
----
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Balance W.D.V
1,200,000(X)
----
Additions during Year
1,000,000
Initial allowance
@ 50% on 1,000,000
500,000
Balance book value
(Y) 500,000
Total book value (X+Y)
1,700,000
Normal Depreciation@ 15%
255,000
Total Depreciation
755,000
On Speculation Business
Exercise 3
M/s ABC Ltd. A manufacturing company has furnished the following accounting information for tax year
2007. Compute taxable income and tax thereon:
- Gross Income from normal business
Rs.2,500,000
- Expenditures on normal business
Rs. 1,000,000
- Gross income from speculation business
Rs. 600,000
- Expenditures on speculation business
Rs.300,000
- Loss carried forward on normal business
Rs. 200,000
- Loss Carried forward on speculation business
Rs. 900,000
- Advance Tax Paid
Rs. 200,000
Solution of E-4
Tax Payer: ABC Ltd.
Tax Year: 2007
Residential Status: Resident
NTN: 000111
Computation of taxable income and tax thereon:
In Rs.
Particulars
Speculation Operations
Normal Business
Total
Gross Income
600,000
2,500,000
3,100,000
Expenditures
(300,000)
(1,000,000)
(1,300,000)
Net Income
300,000
1,500,000
1,800,000
C/F Loss
(900,000)
(200,000)
(1,100,000)
Taxable Income
(600,000)
1,300,000
---
Note-1
Taxable Income:
Normal business Rs.1,300,000
Tax payable= (1,300,000 x 35%) = Rs. 455,000
Note-1:
Loss of Rs. 600,000 from speculation business can not be set off against business income, it can be set off
against speculation business income, and hence this loss of Rs. 600,000 shall be carried forward to next year.
Taxation of Companies
Exercise-4
M/S XYZ is a limited company, running a chain of hospitals. The company filed tax return along with
relevant accounts/ documents for tax year 2006. This return has been selected for total audit. As a taxation
officer, work out taxable income and tax liability of the said company for tax year 2006.
Medicines purchased Rs. 1,000,000
Ambulances- running expenses.
Rs. 300,000
Depreciation on ambulances
Rs. 40,000
Depreciation on other assets
Rs. 60,000
Salaries paid through bank accounts of employees
Rs. 300,000
Unsupported payment for purchase of stationery
Rs. 12,000
Depreciation on account of car owned by director and in his personal use Rs. 40,000
Payment of legal fee by cash
Rs. 60,000
Received payments from corporations on the panel of the hospitals
Rs. 6,000,000
Other receipts
Rs. 2,000,000
Gain on sale of a vehicle
Rs. 200,000
Purchase of X-Ray machine for shown as expense in revenue account
Rs. 1,000,000
Withholding tax deductions
Rs. 525,000
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Loss carried forward from tax year 2005
Rs. 1,200,000
Solution of E-4
Tax Payer: M/S XYZ Ltd.
Tax Year: 2006
Resident Company
NTN: 000111
Revenue Account as Submitted by Co.
RECEIPTS
EXPENDITURES
Particulars
Amount in Rs.  Particulars
Amount in Rs.
Medicines
1,000,000
From Corporations
6,000,000
Ambulances
300,000
Other Receipts
2,000,000
Depreciation (Ambulances)
40,000
Gain on Sale of Vehicles
200,000
Depreciation Others
60,000
Salaries thru bank
300,000
Unsupported PAMT
12,000
Depreciation on personal car
40,000
Legal Fee by cash
60,000
X-Ray machine
1,000,000
Net Profit
5,388,000
8,200,000
8,200,000
Computation of Tax Payable:
Net Profit as computed by Co.
5,388,000
Less set off of c/f losses
(1,200,000)
Taxable Income
4,188,000
Tax Payable 4,188,000x35%
1,465,800
Less withholding Tax deductions
525,000
Balance Tax Payable
940,800
Tax Paid with Return
940,800
Tax Payable/Refundable
NIL
Additions by Taxation Officer on account of inadmissible expenses:
Unsupported payments
12,000
Depreciation claimed on personal car of Director
40,000
Payment of legal fee by cash
60,000
Purchase of X-Ray machine ( to be capitalized, balance sheet item as such  1,000,000
not to be shown in Revenue a/c)
Total additions
1,112,000
Tax payable on account of add backs (1,112,000 x 35%= 389,200)
389,200
The company shall have to pay tax amounting Rs 389,200.
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MODULE 14
LESSON 14.39
Presumptive income
Taxation of permanent establishment (pe)
Presumptive Income:
Under normal tax regime, income tax is chargeable on taxable income but under some exceptional
circumstances, the income tax shall be charged on gross receipts. This is also called as presumptive tax
regime. Under following situations the tax will be charged on gross receipts basis.
Tax on dividends:
(a) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of
the First Schedule, on every person who receives a dividend from a company.
(b) The tax imposed under sub-section (1) on a person who receives a dividend shall be computed
by applying the relevant rate of tax to the gross amount of the dividend.
(c) This section shall not apply to a dividend that is exempt from tax under this Ordinance.
6.
Tax on Certain Payments to Non-Residents:
(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division IV of Part I of
the First Schedule, on every non-resident person who receives any Pakistan-source royalty or fee
for technical services.
(2) The tax imposed under sub-section (1) on a non-resident person shall be computed by applying
the relevant rate of tax to the gross amount of the royalty or fee for technical services.
(3) This section shall not apply to:
(a) any royalty where the property or right giving rise to the royalty is effectively connected
with a permanent establishment in Pakistan of the non-resident person;
(b) any fee for technical services where the services giving rise to the fee are rendered through
a permanent establishment in Pakistan of the non-resident person; or
(c) any royalty or fee for technical services that is exempt from tax under this Ordinance.
(4) Any Pakistani-source royalty or fee for technical services received by a non-resident person to
whom this section does not apply by virtue of clause (a) or (b) of sub-section (3) shall be treated
as income from business attributable to the permanent establishment in Pakistan of the person.
7.
Tax on Shipping and Air Transport Income of a Non-Resident Person
(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division V of Part I of
the First Schedule, on every non-resident person carrying on the business of operating ships or
aircraft as the owner or chatterer thereof in respect of­
(a) the gross amount received or receivable (whether in or out of Pakistan) for the carriage of
passengers, livestock, mail or goods embarked in Pakistan; and
(b) the gross amount received or receivable in Pakistan for the carriage of passengers, livestock,
mail or goods embarked outside Pakistan.
(2) The tax imposed under sub-section (1) on a non-resident person shall be computed by applying
the relevant rate of tax to the gross amount referred to in subsection (1).
(3) This section shall not apply to any amounts exempt from tax under this Ordinance.
Taxation of PE
105. Taxation of a Permanent Establishment in Pakistan of a Non-Resident Person.
(1) The following principles shall apply in determining the income of a permanent establishment in
Pakistan of a non-resident person chargeable to tax under the head "Income from Business",
namely:
(a) The profit of the permanent establishment shall be computed on the basis that it is a
distinct and separate person engaged in the same or similar activities under the same or
similar conditions and dealing wholly independently with the nonresident person of which
it is a permanent establishment;
(b) subject to this Ordinance, there shall be allowed as deductions any expenses incurred for
the purposes of the business activities of the permanent establishment including executive
and administrative expenses so incurred, whether in Pakistan or elsewhere;
(c) no deduction shall be allowed for amounts paid or payable by the permanent establishment
to its head office or to another permanent establishment of the non-resident person (other
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than towards reimbursement of actual expenses incurred by the non-resident person to
third parties) by way of:
(i)
royalties, fees or other similar payments for the use of any tangible or
intangible asset by the permanent establishment;
(ii)
compensation for any services including management services performed
for the permanent establishment; or
(iii)
profit on debt on moneys lent to the permanent establishment, except in
connection with a banking business; and
(d) no account shall be taken in the determination of the income of a permanent establishment
of amounts charged by the permanent establishment to the head office or to another
permanent establishment of the non-resident person (other than towards reimbursement of
actual expenses incurred by the permanent establishment to third parties) by way of:
(i)
royalties, fees or other similar payments for the use of any tangible or
intangible asset;
(ii)
compensation for any services including management services performed by
the permanent establishment; or
(iii)
profit on debt on moneys lent by the permanent establishment, except in
connection with a banking business.
(2) No deduction shall be allowed in computing the income of a permanent establishment in
Pakistan of a non-resident person chargeable to tax under the head "Income from Business" for
a tax year for head office expenditure in excess of the amount as bears to the turnover of the
permanent establishment in Pakistan the same proportion as the non-resident's total head office
expenditure bears to its worldwide turnover.
(3) In this section, "head office expenditure" means any executive or general administration
expenditure incurred by the non-resident person outside Pakistan for the purposes of the
business of the Pakistan permanent establishment of the person, including:
(a) any rent, local rates and taxes excluding any foreign income tax, current repairs, or
insurance against risks of damage or destruction outside Pakistan;
(b) any salary paid to an employee employed by the head office outside Pakistan;
(c) any traveling expenditures of such employee; and
(d) any other expenditures which may be prescribed
(4) No deduction shall be allowed in computing the income of a permanent establishment in
Pakistan of a non-resident person chargeable under the head "Income from Business" for:
(a) any profit paid or payable by the non-resident person on debt to finance the operations
of the permanent establishment; or
(b) any insurance premium paid or payable by the non-resident person in respect of such
debt.
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Table of Contents:
  1. AN OVERVIEW OF TAXATION
  2. What is Fiscal Policy, Canons of Taxation
  3. Type of Taxes, Taxation Management
  4. BASIC FEATURES OF INCOME TAX
  5. STATUTORY DEFINITIONS
  6. IMPORTANT DEFINITIONS
  7. DETERMINATION OF LEGAL STATUS OF A PERSON
  8. HEADS OF INCOME
  9. Rules to Prevent Double Derivation of Income and Double Deductions
  10. Agricultural Income
  11. Computation of Income, partly Agricultural,
  12. Foreign Government Officials
  13. Exemptions and Tax Concessions
  14. RESIDENTIAL STATUS & TAXATION 1
  15. RESIDENTIAL STATUS & TAXATION 2
  16. Important Points Regarding Income
  17. Geographical Source of Income
  18. Taxation of Foreign-Source Income of Residents
  19. Exercises on Determination of Income 1
  20. Exercises on Determination of Income 2
  21. SALARY AND ITS COMPUTATION
  22. Definition of Salary
  23. Significant points regarding Salary
  24. Tax credits on Charitable Donations
  25. Investment in Shares
  26. SALARY AND ITS COMPUTATION EXERCISES 1
  27. SALARY AND ITS COMPUTATION EXERCISES 2
  28. SALARY AND ITS COMPUTATION EXERCISES 3
  29. Tax treatment of Gratuity
  30. Gratuity Exercise
  31. PROVIDENT FUND
  32. Exemptions on Business income, Treatment of Speculation Business
  33. Deductions Allowed & Not Allowed
  34. Deductions: Special Provisions, Depreciation
  35. Methods of Accounting
  36. Taxation of Resident Company
  37. Taxation of Companies: Exercises
  38. Computation of Capital Gain
  39. Disposals Not Chargeable To Tax
  40. TAX RETURNS & ASSESSMENT OF INCOME UNIVERSAL SELF ASSESSMENT SCHEME
  41. Normal Assessment, USAS, Provisional Assessment, Best Judgment Assessment
  42. ADVANCE TAX COLLECTION & RECOVERY OF TAX PENALTIES & PROSECUTION
  43. What is Value Added Tax (VAT)?
  44. SALES TAX
  45. SALES TAX RETURNS