Lecture Notes On Income From Business - TY 2019

Income from Business
Class Notes
Imran Shahzad CFE Tax Year -2019

Mr. Imran Shahzad – ACA Lecture Notes on Income from Business
Income from Business

A. Definitions
a) Business Income ( S – 18)
b) Speculative Income ( S – 19)
c) Long Term Contract ( S – 36)
B. Deductions
a. General
i. Admissible Deductions (S – 20)
ii. In-admissible Deductions (S – 21)
b. Capital Expenditures
i. Depreciation (S – 22)
ii. Initial Allowance (S – 23)
iii. Intangibles (S – 24)
iv. Amortization (S – 25)
c. Disposal of Assets
i. Disposal and acquisition of assets (S – 75)
ii. Cost (S – 76)
iii. Consideration received (S – 77)
iv. Non-arm's length transactions (S – 78)
v. Non-recognition rules (S – 79)
d. Specific Deductions
i. Scientific Research Expenditure ( S – 26)
ii. Employee Training and Facilities ( S – 27)
iii. Profit on debt & Thin Capitalization ( S – 28)
iv. Bad Debts ( S – 29)
e. Method of accounting
i. Method of accounting ( S – 32)
ii. Cash-basis accounting ( S – 33)
iii. Accrual-basis accounting ( S – 34)
iv. Stock-in-trade ( S – 35)
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18. Income from business.

1. The following incomes of a person for a tax year, other than income exempt from tax under this
Ordinance, shall be chargeable to tax under the head “Income from Business”–
a. the profits and gains of any business carried on by a person at any time in the year;
b. any income derived by any trade, professional or similar association from the sale of goods or
provision of services to its members;
c. any income from the hire or lease of tangible movable property;
d. the fair market value of any benefit or perquisite, whether convertible into money or not, derived
by a person in the course of, or by virtue of, a past, present, or prospective business relationship
Example:
Mr. Engineer contracted with DHA to build phase- 120 in Lahore. DHA decided to give them
Rs.100 million and 1 canal plot in the same phase. The fair market value of the plot was Rs.10
million. The total business income is Rs.110 million (100+10).
Explanation (ITO).-
For the purposes of this clause, it is declared that the word ‘benefit’ includes any benefit derived by
way of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy
Department, Circular No.29 of 2002 or in any other scheme issued by the State Bank of Pakistan.
e. any management fee derived by a management company (including a modaraba management

company)
2. Any profit on debt derived by a person where the person’s business is to derive such income shall be
chargeable to tax under the head “Income from Business” and not under the head “Income from Other
Sources”.
Example:
Mr. Sood deposited Rs.1 million in HBL bank. HBL issued loan to Mr. Majboor Rs.1 million. HBL
charged interest from Mr. Majboor Rs.200,000/- and paid interest to Mr. Sood Rs. 100,000/-. The
taxable income of HBL under the head BUSINESS shall be Rs. 200,000/- and taxable income of Mr.
Sood shall be Rs. 100,000/- under the head INCOME FROM OTHER SOURCES. Mr. Sood is running
a business of cloth in Azam cloth market
3. Where a lessor, being a scheduled bank or an investment bank or a development finance institution or
a modaraba or a leasing company has leased out any asset, whether owned by it or not, to another
person, any amount paid or payable by the said person in connection with the lease of said asset shall
be treated as the income of the said lessor and shall be chargeable to tax under the head “Income from
Business”.
Examples:
1- ABL bank (scheduled bank) owned a building in Lahore and let out the same building to Noor Enterprises
at ALV of Rs. 500/- and also leased 5 cars at annual rent of Rs.200/-. ABL also taken a building on rent in
Karachi for his office purposes. The upper portion of that building is given on rent to Mr. Bhai Jaan at an
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annual rent of Rs.50/-. Total income (Rs. 750/-) received from Lahore building (owned), Karachi building
(being a tenant) and lease of car shall be taxed under the head BUSINESS income.
2- Mr. Ameer is running a business of rent-a-car and also owned a building in Lahore. He let out the same
building to Noor Enterprises at ALV of Rs. 500/- and also leased 5 cars at annual rent of Rs.200/-. Mr.
Ameer also taken a building on rent in Karachi for his office purposes. The upper portion of that building
is given on rent to Mr. Bhai Jaan at an annual rent of Rs.50/-. The detail of taxable income shall be as
follows
Income from Property Rs. 500

Income from Business Rs.200
Income from Other Sources Rs.50
Total Taxable Income Rs.750
4. Any amount received by a banking company or a non-banking finance company, where such amount
represents distribution by a mutual fund or a Private Equity and Venture Capital Fund out of its income
from profit on debt, shall be chargeable to tax under the head “Income from Business” and not under
the head “Income from Other Sources”
19. Speculation business.

1. Where a person carries on a speculation business –
a. that business shall be treated as distinct and separate from any other business carried on by
the person;
b. this Part shall apply separately to the speculation business and the other business of the
person;
c. Common expenditures shall be made as if the profits and gains arising from a speculation
business were a separate head of income;
d. any profits and gains arising from the speculation business for a tax year computed shall be
included in the person’s income chargeable to tax under the head “Income from Business”
for that year; and
e. any loss of the person arising from the speculation business sustained for a tax year shall be
treated separately under section 58. (not under section 57 i.e. Carry forward of business losses)
Definition:
2. In this section, “speculation business” means any business in which a contract for the purchase
and sale of any commodity (including stocks and shares) is periodically or ultimately settled
otherwise than by the actual delivery or transfer of the commodity, but does not include a
business in which –
a. a contract in respect of raw materials or merchandise is entered into by a person in the course
of a manufacturing or mercantile business to guard against loss through future price
fluctuations for the purpose of fulfilling the person’s other contracts for the actual delivery
of the goods to be manufactured or merchandise to be sold;
b. a contract in respect of stocks and shares is entered into by a dealer or investor therein to
guard against loss in the person’s holding of stocks and shares through price fluctuations;
or
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c. a contract is entered into by a member of a forward market or stock exchange in the course
of any transaction in the nature of jobbing arbitrage to guard against any loss which may
arise in the ordinary course of the person’s business as such member.
Example:
In August 2015, LT signed a future contract with Mubarak Enterprises (ME) for the purchase of
500 metric tons of maize at Rs. 15,800 per metric ton. The delivery was expected to be made in
October 2015. ME also agreed to repurchase the entire lot at the price prevailing on the date of
sale. In October 2015 price of maize increased to Rs. 18,240 per metric ton and LT sold the entire
lot to ME without taking delivery. (CA-Inter, Spring 2016)
Ans: The gain Rs.1,220,000 [500 x (18,240 – 15,800)] is taxable under the head speculative income.
Section 20: Deductions in computing income chargeable under the head
(1) A deduction shall be allowed for any expenditure incurred by the person in the year wholly and
exclusively for the purposes of business.
Example:
Salary, wages, repair, stationery etc.
(1A) Animals which have been used for the purposes of the business or profession otherwise than as stock-
in-trade and have died or become permanently useless for such purposes, the difference between the actual
cost to the taxpayer of the animals and the amount, if any, realized in respect of the carcasses or animals.
Example:
 Habib Dairy Ltd purchased three cows for dairy business at Rs.100,000/- each in tax year 20X1. Vaccination
cost of each cow was Rs.2,000/-. One cow became permanently disabled and was sold at Rs.20,000/- in tax
year 20X3. Compute the deductions allowed under the business income
ANS: In tax year 20X1 total business expenditures will be Rs.6,000/- (2,000 x 3). Similarly, no
expenditures will be allowed in 20X2. In tax year 20X3 Rs.80,000 (100,000-20,000) will be charged
as business expense.
 Cost of sale included Rs. 400,000 in respect of the cost of two cows as they became permanently useless for
milking purposes. These cows were originally purchased for TL’s dairy farm in Faisalabad for Rs. 200,000
each. TL sold these cows in the market for Rs. 80,000 each, for which no entry has been made in the accounts.
(ATX-June -16)
ANS: Cost, net of sale, is an allowable deduction, which means 400,000 – 160,000 (80kx2) =
240,000 should be deducted from account. Rather 240k the company has deducted Rs.400k. The
additional cost of Rs.160,000 should be added back in the profits of the company
(2) Where expenditures incurred in acquiring a depreciable asset or an intangible, with a useful life of
more than one year or is pre-commencement expenditure, the person must depreciate or amortize the
expenditures. (because capital expenditures are not allowed).
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Examples:
 Office building purchased at Rs.50 million. This is not a business expenses rather depreciation shall be
charged.
 Administrative expenses included Rs.4.8 million, paid against purchase of industrial software having a
useful life of three years. This amount will be added back in the accounting profit and amortization for the
year will be deducted to reach at taxable income.
 The Company incurred an expenditure of Rs.2,000,000 on sales promotion. It has been estimated that the
benefit of such expenditure will extend to 3 years and, therefore, the same is being amortized over a period
of 3 years. However, for tax purposes, the whole of the expenditure has been claimed.
(3) Where any expenditure is incurred by an amalgamated company on legal and financial advisory
services and other administrative cost relating to planning and implementation of amalgamation, a
deduction shall be allowed for such expenditure.
Examples:
A Ltd. and B Ltd. merged to form a new company X Ltd. X Ltd. paid Rs.5 million for the merger. 5
million is allowed as an expense to X Ltd. These expenditures are not allowed to A Ltd and B Ltd.
Section 21: Deductions not allowed
Following expenditures are not allowed as an expense:
(a) any tax paid or payable by the person in Pakistan or a foreign country, levied on the profits or gains
of the business or assessed as a percentage or otherwise on the basis of such profits or gains;
Examples:
Following tax payments are not allowed as business expense:
 Tax paid at the time of filing of tax return;
 Tax assessed by the commissioner of inland revenue;
 Sales tax claimable as input tax
 Tax payable on foreign source income.
 Withholding tax of Rs.600,000 i.e. 20% of purchase price, paid in August 20X5.
Following payments are allowed as business expense:

Custom duty paid at import stage
Short Sales tax liability paid of previous year
Vehicle tax paid in cash amounting to Rs. 55,000 for eight office cars
(b) any amount of tax deducted under from an amount derived by the person;
Example:
Payment received against supply of goods Rs.95,500/- net of tax deducted @ 4.5%. The total
taxable income shall be Rs.100,000/- (95,500/95.5x100) because tax deducted shall not be allowed
as an expense.
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(c) If payment is made for any expenditures (revenue and capital) person was required to deduct or
collect tax. If tax should not be deducted, and payment is made without deduction of tax, then this
is not a default and expense shall be allowed. (unless the person has paid or deducted and paid the
tax)
Example:
 Zahoor Ltd business expenses included rent of branch office Rs.360,000/- and manager salary Rs.
350,000/-. Income tax has not been withheld from salaries and rent. Rent expenses are not allowed as
an expense because payment is made without deduction of tax whereas, salary is allowed as tax expense
because tax should not be deducted as it is below Rs.400,000/-.
 Hameed paid Rs. 50,000/- as consultancy to a non-resident without deduction of tax this amount is not
allowed as an expense
 Bashir paid Rs. 50,000/- as consultancy to Mr. Michael (a non-resident) without deduction of tax
because he has taken exemption certificate from tax department. This amount is allowed as an expense
because was not deductible.
If stock is purchased and payment is made without deduction of tax then 20% amount shall be added
back. (all other expenditures are fully disallowed)
Example:
Stock Enterprises, purchased stock (raw material and finished goods) of Rs.100,000/- and made a
payment of Rs.100,000/- against services. The payments were made through cheques but tax was
not deducted. Total expenditures disallowed will be:
Stock (100,000 x 20%) Rs.20,000/-

Services Rs.100,000/-
If a person does not deduct or collect tax while making payment against business expenditures but he
pays that tax from business or he pays tax by commissioner demand, then that expenditure will be
allowed as an expense but not the tax paid (tax born by the employer is an expense).
Example:
 Hameed paid Rs. 50,000/- as consultancy to a non-resident without deduction of tax (@10%) but he deposited
Rs.5,000/- as tax in government treasury. Total expense allowed is Rs.50,000/-. Tax deposited Rs.5,000/- is
not allowed as an expense.
 Mr. Raees paid salary of Rs. 500,000/- to his manager for the current year without deduction of tax of
Rs.2,000/- but he deposited Rs.2,000/- as tax in government treasury. Total expense allowed is Rs.502,000/-.
Tax deposited Rs.2,000/- is allowed as an expense because section 13 says, tax born by the employer shall be
a part of salary.
(d) any entertainment expenditure in excess of such limits or in violation of such conditions as may be
prescribed;
Examples:
 Administration expenditures includes entertainment expenditure of Rs. 128,000 incurred on arrival of
foreign customers for business purposes are allowed as an expense
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 Administration expenditures includes entertainment expenditure of Rs. 130,000 incurred by the director
for personal hoteling purposes are not allowed as an expense
(e) Any contribution made by the person to a fund that is not a recognized provident fund approved
pension fund, approved superannuation fund or approved gratuity fund.
Examples:
 Salary expenses included, contribution to an un-approved provident fund of Rs.500,000/- . this is not allowed
as an expense.
 Salary expenses included, contribution to an approved provident fund of Rs.500,000/- . this is allowed as an
expense.
(f) Any contribution made by the person to any provident or other fund established for the benefit of
employees of the person, unless the person has made effective arrangements to secure that tax is
deducted under section 149 from any payments made by the fund in respect of which the recipient
is chargeable to tax under the head "Salary";
Example:
Salary expenses included, contribution to an un-approved provident fund of Rs.500,000/- however,
the organization has made effective arrangements to secure that tax shall be deducted under section 149.
this is allowed as an expense.
(g) any fine or penalty paid or payable by the person for the violation of any law, rule or regulation.
However, business penalties are allowed.
Examples:
 Cost of sales included Rs. 45,000 paid as fine for violation of contract with a customer for delay in supply
of goods. This deduction is allowed.
 Operating expenses included penalty of Rs. 25,000 imposed by the Commissioner Inland Revenue for late
filing of annual return of income for the tax year 20X7. This expense is not allowed.
(h) Any personal expenditures incurred by the person;
Example:
Administration expenditures includes entertainment expenditure of Rs. 130,000 incurred by the
director for personal hoteling purposes are not allowed as an expense
(i) any amount carried to a reserve fund or capitalized in any way;
Example:
Sinking fund reserve created to redeem a loan is not allowed.
(j) any profit on debt, brokerage, commission, salary or other remuneration paid by an association of
persons to a member of the association;
Example:
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Salary and wages include, salary paid by AOP to Mr. Rasheed and Mr. Hameed Rs.50,000/- and
Rs.35,000/- per month. AOP has also paid Rs.25,000/- per month to Mr. Atta (son of Mr. Rasheed)
who is working as marketing manager for the firm.
Answer: Payment to Mr. Atta is allowed whereas, salary to Mr. Rasheed and Mr. Hameed is
disallowed
(l) any expenditure for a transaction, paid or payable under a single account head which, in aggregate,
exceeds fifty thousand rupees, made other than by a crossed cheque drawn on a bank or by crossed bank
draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the
business bank account of the taxpayer:
Provided that online transfer of payment from the business account of the payer to the business account
of payee as well as payments through credit card shall be treated as transactions through the banking
channel, subject to the condition that such transactions are verifiable from the bank statements of the
respective payer and the payee:
Provided further that this clause shall not apply in the case of:
(a) expenditures not exceeding ten thousand rupees;
(b) expenditures on account of
(i) utility bills;
(ii) freight charges;
(iii) travel fare;
(iv) postage; and
(v) payment of taxes, duties, fee, fines or any other statutory obligation;
Example:
Sr. Transaction Decision
1 Total office expenditures during the year were Rs.150,000/-. All payments 20,000 is Disallowed
were made through cross cheques except Rs.20,000/- and Rs.9,000/- in
cash.
2 Total office expenditures during the year were Rs.49,000/-. All payments Nothing is disallowed
were made through cross cheques except Rs.20,000/- and Rs.9,000/- in
cash.
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3 Total Freight charges during the year were Rs.150,000/-. The whole Nothing is disallowed
expenditures were incurred in cash.
4 Director of the company paid printing charges Rs.150,000/- through his Disallowed
personal bank account.
(m) any salary paid or payable exceeding fifteen thousand rupees per month other than by a crossed cheque
or direct transfer of funds to the employee ‘s bank account;
(n) except as provided in Division III of this Part, any expenditure paid or payable of a capital nature; and
Example:
Administrative expenditures included Rs.500,000/- software purchased for the company.
Answer: Disallowed, rather amortization is allowed under this Ordinance
(o) any expenditure in respect of sales promotion, advertisement and publicity in excess of 10% of turnover
incurred by pharmaceutical manufacturers.
Sr. Transaction Decision
1 Rimington Pharma (a manufacturer) turnover for the year was Rs.20 Only Rs.2 million is
million. Sales promotion expenditures incurred were Rs.5 million. allowed as exp.
2 Hashish Pharma (a trader) turnover for the year was Rs.20 million. Sales Nothing is disallowed
promotion expenditures incurred were Rs.5 million.
3 Resham Textile’s turnover for the year was Rs.20 million. Sales promotion Nothing is disallowed
expenditures incurred were Rs.5 million.
22. Depreciation & Capital Expenditures

 Method of depreciation
 Rate of depreciation (dep.) and initial allowance (IA)
 Computation of dep. and IA (asset fully and partially used for business)
 Written down value of a depreciable asset (taxable entity and exempt entity)
 Computation of gain/loss
o Normal / general case
o Partial used asset disposed off
o Passenger Transport Vehicle NOT plying for hire (Value > Rs. 2.5 million)
o Disposal of Immoveable Property (SP>Cost)
o Export of depreciable assets
o Disposed of assets in group
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 Cost and Consideration of an asset
(1) Subject to this section, a person shall be allowed a deduction for the depreciation of the person‘s
depreciable assets used in the person‘s business in the tax year.
(2) Subject to sub-section the depreciation deduction for a tax year shall be computed by applying the rate
specified in Part I of the Third Schedule against the written down value of the asset at the beginning of
the year.
Rate of Initial
Assets
Depreciation Allowance
Building (all types) 10% 15%
15% N/A
Furniture (including fittings)
Machinery and plant (not otherwise specified), Motor vehicles (all types), 15% 25%
ships, technical or professional books
100% N/A
A ramp built for disable persons not exceeding Rs. 250,000 each.
(3) Where a depreciable asset is used in a tax year partly in deriving income from business chargeable to
tax and partly for another use, the deduction allowed under this section for that year shall be restricted to
the fair proportional part of the amount that would be allowed if the asset was wholly used to derive income
from business chargeable to tax.
Example – (A 22):
Mr. Depreciable purchased a building at a price of Rs. 10 million, for house and his office purposes
and started using a portion of his house for business office. The area covered by his office is almost
60%.
100% Use 60%
Cost of Building 10,000,000
Initial Allowance (1,500,000) (1,500,000)
8,500,000
Depreciation (850,000) (510,000)
WDV - Year 1 7,650,000 (2,010,000)
Year – 2 Depreciation (765,000) (459,000)

WDV - Year 2 6,885,000
Year -1 Tax allowances - fully business used = (2,350,000)
Tax allowances - 60% business used = (2,010,000)
(Dep. Not allowed 340k)
Year -2 Tax allowances - fully business used = (765,000)
Tax allowances - 60% business used = (459,000)
(Dep. Not allowed 306k)
Total Depreciation not allowed in two years (340+306) = 646,000
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(5) The written down value of a depreciable asset of a person at the beginning of the tax year shall be
a. where the asset was acquired in the tax year, the cost of the asset to the person as reduced by any initial
allowance in respect of the asset under section 23; or
b. in any other case, the cost of the asset to the person as reduced by the total depreciation deductions
(including any initial allowance under section 23) allowed to the person in respect of the asset in previous
tax years.
Explanation,- For the removal of doubt, it is clarified that where any building, furniture, plant or machinery
is used for the purposes of business during any tax year for which the income from such business is exempt,
depreciation admissible under sub-section (1) shall be treated to have been allowed in respect of the said
tax year and after expiration of the exemption period, written down value of such assets shall be determined
after reducing total depreciation deductions (including any initial allowance under section 23) in
accordance with clauses (a) and (b) of this sub-section.
Example (B22):
Exempt Ltd. was incorporated in 2017. Its business income was exempted for two years under
Income Tax Laws. It purchased building, plant and a car in 2017. The depreciation for the year
2019 shall be as follows: (Assume same tax rules in the previous years)
Year Assets Building Plant-A Car-A Tax Allowances

Depreciation Rates 10% 15% 15%
2017 Cost 5,000,000 3,000,000 1,500,000
Initial allowance (750,000) (750,000) (1,500,000)
Depreciable Value 4,250,000 2,250,000 1,500,000
Depreciation (425,000) (337,500) (225,000) (987,500)
WDV – 2017 3,825,000 1,912,500 1,275,000 (2,487,500)
2018 Depreciation (382,500) (286,875) (191,250) (860,625)
WDV – 2018 3,442,500 1,625,625 1,083,750 (860,625)
2019 Depreciation (344,250) (243,844) (162,563) (750,656)
WDV - 2019 3,098,250 1,381,781 921,188 (750,656)
(8) Where, in any tax year, a person disposes of a depreciable asset, no depreciation deduction shall be
allowed under this section for that year and gain / loss shall be = Consideration – Tax WDV
(9) Where the asset is partly used for business purposes, the written down value of the asset to compute
gain, shall be increased by the amount, that is not allowed as a deduction, because of partial use for business
purposes.
Example:
Assume the data given in example A22, the asset was sold at Rs. 9million. Computation of gain or
loss when the asset was fully used for business or if used 60% for the business.
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Full business Use 60% business use

Sale Price 9,000,000 9,000,000
WDV (6,885,000) (6,885,000)
Depreciation not allowed 0 (646,000)
Taxable Gain 2,115,000 1,469,000
Special Cases:
Passenger Transport Vehicle NOT plying for hire (Value > Rs. 2.5 million)
(10+13) The maximum cost for depreciation purposes of a passenger transport vehicle not plying for hire,
is 2.5 million rupees and gain on that vehicle shall be computed as follows:
2.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐺𝑎𝑖𝑛 = 𝑆𝑃 𝑥 − 𝑇𝑎𝑥 𝑊𝐷𝑉 (𝑏𝑎𝑠𝑒𝑑 𝑜𝑛 2.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛)
𝐴𝑐𝑢𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
Actual Price = 6,000,000 Vehicle Value

Allowed Cost 2,500,000
Initial Allowance -
2,500,000
Depreciation (375,000)
WDV - Year -1 2,125,000
Depreciation Year -2 (244,375)
1,880,625
Sale Price 5,000,000
Gain 202,708.33
2.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
202,708 = 5,000,000 𝑥 − 1,880,625
6,000,000
Disposal of Immoveable Property (SP>Cost)
13 (d) where the consideration received on the disposal of immovable property exceeds the cost of the
property, the consideration received shall be treated as the cost of the property.
Example: Assume the data in example A 22, building was fully used for business purposes and was sold
in third year at 15 million.
𝐺𝑎𝑖𝑛 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 − (𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝑇𝑎𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒)
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𝐺𝑎𝑖𝑛 = 15,000,000 − (15,000,000 − 3,115,000)
Gain 3,115,000 = 1,500,000 +850,000+765,000
Export of depreciable assets
(14) Where a depreciable asset that has been used by a person in Pakistan is exported or transferred out of
Pakistan, the person shall be treated as having disposed of the asset at the time of the export or transfer
for a consideration received equal to the cost of the asset.
𝐺𝑎𝑖𝑛 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 − (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑎𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒)
The gain shall be equal to accumulated tax depreciation and initial allowance
Assets disposed off in group
Consideration shall be apportioned according to their FMV at the time of the transaction. e.g. Assets A &
B disposed off at a price of Rs.100 when the FMV of A & B were Rs.50 &Rs.70. The consideration shall
be calculated as follows
50 70
Asset - A 𝑥 100 = 41.67 Asset- B 𝑥 100 = 58.33
120 120
(12) The depreciation deductions allowed to a leasing company or an investment bank or a modaraba or a
scheduled bank or a development finance institution in respect of assets owned by the leasing company or
an investment bank or a modaraba or a scheduled bank or a development finance institution and leased to
another person shall be deductible only against the lease rental income derived in respect of such assets.
Exam Examples:
During the year, MTL purchased computer hardware for Rs. 575,000, professional books for Rs. 400,000
and furniture and fixtures for Rs. 625,000. These assets remained in use for 146 days during the year ended
30 September 2016. MTL did not charge any depreciation on these assets. (Dec-16)
Administrative expenses included an amount of Rs. 425,000 in respect of write off of an old machine which
is no longer used by BL in its business operations. The accounting and tax written down values of the
machine were the same. The machine is expected to fetch Rs. 5,000 if sold in the open market. (June -17)
Definitions u/s 22
―depreciable asset‖ means any tangible movable property, immovable property (other than unimproved
land), or structural improvement to immovable property, owned by a person that —
(a) has a normal useful life exceeding one year; (b) is likely to lose value as a result of normal wear and
tear, or obsolescence; and (c) is used wholly or partly by the person in deriving income from business
chargeable to tax,
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but shall not include any tangible movable property, immovable property, or structural improvement to
immovable property in relation to which a deduction has been allowed under another section of this
Ordinance for the entire cost of the property or improvement in the tax year in which the property is
acquired or improvement made by the person; and
―structural improvement‖ in relation to immovable property, includes any building, road, driveway, car
park, railway line, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power
lines, water or sewerage pipes, drainage, landscaping or dam
Jointly Owned by a Taxpayer and an Islamic Financial Institution
Provided that where a depreciable asset is jointly owned by a taxpayer and an Islamic financial institution
licensed by the State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case
may be, pursuant to an arrangement of Musharika financing or diminishing Musharika financing, the
depreciable asset shall be treated to be wholly owned by the taxpayer.
23. Initial allowance.
(1) A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax
year shall be allowed a deduction for initial allowance.
When the asset is used by the person for the purposes of his business for the first time OR
the tax year in which commercial production is commenced, whichever is later.
eligible depreciable asset‖ means a depreciable asset other than —
(a) any road transport vehicle unless the vehicle is plying for hire;
(b) any furniture, including fittings;
(c) any plant or machinery that has been used previously in Pakistan; or
(d) any plant or machinery in relation to which a deduction has been allowed under another section of this
Ordinance for the entire cost of the asset in the tax year in which the asset is acquired
Issue Cost Value

Cost price in general 76(2)  Consideration given;
 FMV of an assets given (in kind);
 Incidental expenditures for the acquisition and disposal of asset; and
 Any other expenditure to alter or improve the asset.
Application of Personal The FMV at the time it is so applied = Cost to the business
asset in business 76(3)
Own Manufactured Assets  Total cost of incurred in producing or construction;
76(4)  Incidental expenditures for the acquisition and disposal of asset; and
 Any other expenditure to alter or improve the asset.
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Asset acquired with loan in After application of sec.71, adjust exchange difference in the cost of
foreign currency 76(5) an asset ( in year of occurrence for the purpose of depreciation).
Hedging position shall also be considered for this section 76(6)
Part of the asset retained The cost of the asset retained shall be apportioned on the basis of
and part is disposed off the FMV (at the time of acquisition of an asset)
76(7)
Payment in Kind 76(8&9) Cost of the asset = amount chargeable to tax + amount exempt from
tax
e.g. agricultural produce used in the manufacturing of asset X. The
FMV on that day shall be the cost of asset X.
Government rebate, Reduce the cost or WDV of the asset.
commission or grant etc.
76(10)
Waiver of debt (payable) Deduct from the cost or WDV
relating to asset
Asset acquired by waiving The value of the debt waived.
loan receivable (exchange
of asset)
Leased assets purchased Residual value or bargain price
Co-ownership Cost of each member shall be considered differently.
Service charges included in Not to be included
cost
Group of assets acquired in Cost shall be apportioned according to their FMV at the time of
single transaction acquisition.
Sale Price of Assets
Issue Sale Value

Normal Case 77(1) Total amount received + FMV of asset received at the time of
disposal.
Payment in Kind FMV of the asset acquired
Asset lost or Destroyed Consideration = Compensation + indemnity + insurance + scrape
77(2) value
Application of business Consideration = FMV at the time of disposal
asset in personal or other
use 75(3 & 3A) & 77(3)
Disposal of group of assets Consideration shall be apportioned according to their FMV at the
in single transaction 77(5) time of the transaction. E.g. Assets A & B disposed off at a price of
Rs.100 when the FMV of A&B was Rs.50 &Rs.70. The
consideration shall be calculated as follows
A 50/120*100 =41.67
B 70/120*100 =58.33
Sale by a leasing entity Amount realized during the terms of agreement +Residual value
77(4) OR Cost (Whichever is higher)
Non-arm’s length FMV at the time of disposal
transaction
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24. Intangibles.
—(1) A person shall be allowed an amortisation deduction in accordance with this section in a tax year for
the cost of the person‘s intangibles–
a. that are wholly or partly used by the person in the tax year in deriving income from business
chargeable to tax; and
b. that have a normal useful life exceeding one year.
(2) No deduction shall be allowed under this section where a deduction has been allowed under another
section of this Ordinance for the entire cost of the intangible in the tax year in which the intangible is
acquired.
(3+6) Subject to sub-section (7), the amortization deduction of a person for a tax year shall be computed
as
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒
𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝑥 𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑢𝑠𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑌𝑒𝑎𝑟𝑠 𝑥 365
(4) An intangible shall be treated as if it had a normal useful life of ten years when has a normal useful
life of more than ten years; or does not have an ascertainable useful life.
(5) Where an intangible is used in a tax year partly in deriving income from business chargeable to tax and
partly for another use, the deduction allowed under this section for that year shall be restricted to the fair
proportional part of the amount that would be allowed if the intangible were wholly used to derive income
from business chargeable to tax.
(8) Where, in any tax year, a person disposes of an intangible, no amortization deduction shall be allowed
under this section for that year and gain/loss shall be computed as = Consideration – WDV
(written down value = Cost – Accumulated amortization)
(9) For the purposes of sub-section (8) —
Definitions u/s 24
―cost‖ in relation to an intangible, means any expenditure incurred in acquiring or creating the
intangible, including any expenditure incurred in improving or renewing the intangible; and
―intangible‖ means any patent, invention, design or model, secret formula or process, copyright 1, trade
mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise,
license, intellectual property, or other like property or right, contractual rights and any expenditure that
provides an advantage or benefit for a period of more than one year (other than expenditure incurred to
acquire a depreciable asset or unimproved land).
Examples:
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1- Administrative expenditures include Computer software of Rs. 2,800,000. The software was acquired on
25 February 2016 with an estimated useful life of 4 years. Special year ended September (Dec -16)
Ans: Add back Rs.2.8 million in profit and loss and deduct Rs.418,082 (2,800,000 ÷4) x (218/365)
2- Administrative expenditures include Rs. 5,000,000 being the cost of a right to use a formula for the
development of a new chemical compound. TL obtained the rights on 1 March 20X5 from High Tec Inc.
USA for twelve years. Special year ended December (June – 16)
Ans: Add back Rs.5 million in profit and loss and deduct Rs. 37,742,000= (5,000÷10×306 ÷365)
25. Pre-commencement expenditure.
1. A person shall be allowed a deduction for any pre-commencement expenditure in accordance with
this section.
2. Pre-commencement expenditure shall be amortized on a straight-line basis @ 20% per annum.
3. The total deductions allowed under this section in the current tax year and all previous tax years in
respect of an amount of pre-commencement expenditure shall not exceed the amount of the
expenditure.
4. No deduction shall be allowed under this section where a deduction has been allowed under another
section of this Ordinance for the entire amount of the pre-commencement expenditure in the tax
year in which it is incurred.
―pre-commencement expenditure‖ means any expenditure incurred before the commencement of a

business wholly and exclusively to derive income chargeable to tax, including the cost of feasibility studies,
construction of prototypes, and trial production activities, but shall not include any expenditure which is
incurred in acquiring land, or which is depreciated or amortized under section 22 or 24.
Cost of sales included Rs. 80,000/- incurred for test run.
Ans: Add back Rs.80,000 profit and loss and deduct Rs. 16,000 (80,000 x 20%)
26. Scientific research expenditure.
(1) A person shall be allowed a deduction for scientific research expenditure incurred in Pakistan in a tax
year wholly and exclusively for the purpose of deriving income from business chargeable to tax.
Definitions
―scientific research‖ means any activity undertaken in Pakistan in the fields of natural or applied science
for the development of human knowledge;
―scientific research expenditure‖ means any expenditure incurred by a person on scientific research
undertaken in Pakistan for the purposes of developing the person‘s business, including any contribution to
17 | P a g e
a scientific research institution to undertake scientific research for the purposes of the person‘s business,
other than expenditure incurred –
(a) in the acquisition of any depreciable asset or intangible;
(b) in the acquisition of immovable property; or
(c) for the purpose of ascertaining the existence, location, extent or quality of a natural deposit; and
―scientific research institution‖ means any institution certified by the Board as conducting scientific
research in Pakistan.
27. Employee training and facilities.

A person shall be allowed a deduction for any expenditure (other than capital expenditure) incurred in
a tax year in respect of—
(a) any educational institution or hospital in Pakistan established for the benefit of the person‘s
employees and their dependents;
(b) any institute in Pakistan established for the training of industrial workers recognized, aided, or run
by the Federal Government 2or a Provincial Government or a 3Local Government; or
(c) the training of any person, being a citizen of Pakistan, in connection with a scheme approved by
the 4Board for the purposes of this section.
28. Profit on debt, financial costs and lease payments.

(Refer Khalid Petiwala Book, profit on debt and thin capitalization)
29. Bad debts.

Conditions to claim Bad Debts
A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are
satisfied, namely:—
(a) the amount of the debt was –
(i) previously included in the person‘s income from business chargeable to tax; or
(ii) in respect of money lent by a financial institution in deriving income from
business chargeable to tax;
(b) the debt or part of the debt is written off in the accounts of the person in the tax year;
and
(c) there are reasonable grounds for believing that the debt is irrecoverable.
Bad Debts allowed recovered

Where a person has been allowed a deduction in a tax year for a bad debt and in a subsequent tax year the
person receives in cash or kind any amount in respect of that debt, the following rules shall apply,
namely:–
Actual bad debts < Bad debts allowed

(a) where the amount received exceeds the difference between the whole of such bad debt and the
amount previously allowed as a deduction under this section, the excess shall be included in the
person‘s income under the head ―Income from Business‖ for the tax year in which it was received; or
Actual bad debts > Bad debts allowed

(b) where the amount received is less than the difference between the whole of such bad debt and the
amount allowed as a deduction under this section, the shortfall shall be allowed as a bad debt deduction
18 | P a g e
in computing the person‘s income under the head ―Income from Business‖ for the tax year in which it
was received.
Example:
Good Debts Enterprises (GDE) made a sale of Rs.100/- to Bad Debts Ltd. (BDL) in tax year 2018.
This sale was shown in the taxable income of 2018. In 2019, DGE received nothing from BDL and
booked it as bad debts in its books of accounts and claim bad debts from tax department. Tax
department only allowed Rs.60/- as bad debts by assuming that Rs.40/- will be recovered from the
BDL. Following are the possible situations and their tax treatment in 2020:
Actual
Bad debts
Receipts from Actual Bad debts Tax Treatment
Situation allowed
BDL (Rupees) (Rupees)
(Rupees)
(Rupees)
1 2 3 4 5 = 3-4
A 10 90 (100-10) 60 30 Expenses
B 30 70 (100-30) 60 10 Expenses
C 40 60 (100-40) 60 No Treatment
D 60 40 (100-60) 60 20 Income
E 80 20 (100-80) 60 40 Income
F 100 NIL (100-100) 60 60 Income
32. Method of accounting.

A person‘s income chargeable to tax shall be computed in accordance with the method of
accounting regularly employed by such person.
A company shall account for income chargeable to tax under the head ―Income from Business‖ on
an accrual basis,
Individual and Company may account for such income on a cash or accrual basis.
FBR may prescribe that any class of persons shall account for income chargeable to tax under the head
―Income from Business‖ on a cash or accrual basis.
Change in Accounting Method of Accounting

A person may apply, in writing, for a change in the person‘s method of accounting and the
Commissioner may, by an order in writing, approve such an application but only if satisfied that the
change is necessary to clearly reflect the person‘s income chargeable to tax under the head ―Income
from Business‖.
If a person‘s method of accounting has changed, the person shall make adjustments to items of income,
deduction, or credit, or to any other items affected by the change so that no item is omitted and no item
is taken into account more than once.
33. Cash-basis accounting.

A person accounting for income chargeable to tax under the head ―Income from Business‖ on a cash
basis shall derive income when it is received and shall incur expenditure when it is paid.
19 | P a g e
34. Accrual-basis accounting.

(1) A person accounting for income chargeable to tax under the head ―Income from Business‖ on an
accrual basis shall derive income when it is due to the person and shall incur expenditure when it is
payable by the person.
(2) Subject to this Ordinance, an amount shall be due to a person when the person becomes entitled to
receive it even if the time for discharge of the entitlement is postponed or the amount is payable by
instalments.
all the events that determine liability have occurred and the amount of the liability can be determined
with reasonable accuracy.
(5) Where a person has been allowed a deduction for any expenditure incurred in deriving income
chargeable to tax under the head ―Income from Business‖ and the person has not paid the liability or
a part of the liability to which the deduction relates within three years of the end of the tax year in which
the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head
―Income from Business‖ in the first tax year following the end of the three years.
(5A) Where a person has been allowed a deduction in respect of a trading liability and such person has
derived any benefit in respect of such trading liability, the value of such benefit shall be chargeable to
tax under 4the head ―Income from Business‖ for the tax year in which such benefit is received.
(6) Where an unpaid liability is chargeable to tax as a result of the application of sub-section (5) and
the person subsequently pays the liability or a part of the liability, the person shall be allowed a
deduction for the amount paid in the tax year in which the payment is made.
35. Stock-in-trade.
Cost of sales shall be computed as follows:
opening value of the person ‘s stock-in-trade

Add: cost of stock-in-trade acquired
Less: closing value of stock-in-trade
Valuation of Closing Stock

Cost or NRV
Closing stock shall be computed at cost or NRV whichever is lower.
Absorption Cost Method / Prime Cost Method
 Prime cost or absorption cost method may be adopted by a person who is preparing its
accounts on cash basis and
 Absorption cost method accounting shall be adopted by a person who is preparing its
accounts on accrual basis.
FIFO / Weighted Average

Where particular items of stock-in-trade are not readily identifiable, a person may account for that
stock on the first-in-first-out method or the average-cost method but, once chosen, a stock valuation
method may be changed only with the written permission of the Commissioner and in accordance
with any conditions that the Commissioner may impose.
20 | P a g e
Where the person commenced to carry on business in the year, the fair market value of any stock-in-
trade acquired by the person prior to the commencement of the business.
Method of Accounting
Individual / AOP Companies
Cash Basis Accrual Basis
Prime Cost
Absorption Cost
Closing Stock
Valuation
Example (ATX- Dec 2015)
ZJ Limited (ZJL) is an unlisted public company showed a profit before tax Rs.46.5 million
and its cost of sales included cost of opening and closing stock-in-trade of Rs. 25,690,000
and 29,200,000 respectively comprising of raw and packing materials, work-in-process and
finished goods. ZJL computes the cost of stock-in-trade using marginal cost method. The
values of opening and closing stock-in-trade under absorption cost method were Rs.
28,460,000 and Rs. 32,350,000 respectively.
Ans:
Definitions u/s 35
―absorption-cost method‖ means the generally accepted accounting principle under which the cost
of an item of stock-in-trade is the sum of direct material costs, direct labour costs, and factory overhead
costs;
―average-cost method‖ means the generally accepted accounting principle under which the valuation
of stock-in-trade is based on a weighted average cost of units on hand;
―direct labour costs‖ means labour costs directly related to the manufacture or production of stock-
in-trade;
―direct material costs‖ means the cost of materials that become an integral part of the stock-in-trade
manufactured or produced, or which are consumed in the manufacturing or production process;
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―factory overhead costs‖ means the total costs of manufacturing or producing stock-in-trade, other
than direct labour and direct material costs;
―first-in-first-out method‖ means the generally accepted accounting principle under which the
valuation of stock-in-trade is based on the assumption that stock is sold in the order of its acquisition;
―prime-cost method‖ means the generally accepted accounting principle under which the cost of
stock-in-trade is the sum of direct material costs, direct labour costs, and variable factory overhead
costs;
―stock-in-trade‖ means anything produced, manufactured, purchased, or otherwise acquired for
manufacture, sale or exchange, and any materials or supplies to be consumed in the production or
manufacturing process, but does not include stocks or shares; and
―variable factory overhead costs‖ means those factory overhead costs which vary directly with
changes in volume of stock-in-trade manufactured or produced.
36. Long-term contracts.

(1) A person accounting for income chargeable to tax under the head ―Income from Business‖ on an
accrual basis shall compute such income arising for a tax year under a long-term contract on the basis
of the percentage of completion method.
(2) The percentage of completion of a long-term contract in a tax year shall be determined by comparing
the total costs allocated to the contract and incurred before the end of the year with the estimated total
contract costs as determined at the commencement of the contract.
Definitions u/s 36
―long-term contract‖ means a contract for manufacture, installation, or construction, or, in relation
to each, the performance of related services, which is not completed within the tax year in which work
under the contract commenced, other than a contract estimated to be completed within six months of
the date on which work under the contract commenced; and
―percentage of completion method‖ means the generally accepted accounting principle under which
revenue and expenses arising under a long-term contract are recognised by reference to the stage of
completion of the contract, as modified by sub-section (2).
Reconciliation of Accounting Profit with Taxable Income

Profit as per accounts 41,000
Add: In Admissible Expenditures:
Dep. in Cost of goods sold 2,000
Salary 500
Accounting Depreciation 3,500
Office Expenditures 2,000
Entertainment expenditures 5,000
Tax 1,500 14,500
55,500
Less: Admissible Expenditures:
Tax Depreciation (4,000)
Taxable Business Income 51,500
Tax @ 29% x 51,500 14,935
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Lecture Notes On Income From Business - TY 2019

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Income from Business

Imran Shahzad CFE Tax Year -2019

Income from Business

18. Income from business.

e. any management fee derived by a management company (including a modaraba management

Income from Property Rs. 500

19. Speculation business.

Section 20: Deductions in computing income chargeable under the head

Section 21: Deductions not allowed

Following expenditures are not allowed as an expense:

Following payments are allowed as business expense:

Stock (100,000 x 20%) Rs.20,000/-

(h) Any personal expenditures incurred by the person;

(i) any amount carried to a reserve fund or capitalized in any way;

(a) expenditures not exceeding ten thousand rupees;

(b) expenditures on account of

(i) utility bills;

(ii) freight charges;

(iii) travel fare;

(iv) postage; and

Sr. Transaction Decision

Answer: Disallowed, rather amortization is allowed under this Ordinance

Sr. Transaction Decision

22. Depreciation & Capital Expenditures

 Cost and Consideration of an asset

Building (all types) 10% 15%

Year – 2 Depreciation (765,000) (459,000)

Year Assets Building Plant-A Car-A Tax Allowances

Full business Use 60% business use

Actual Price = 6,000,000 Vehicle Value

Disposal of Immoveable Property (SP>Cost)

𝐺𝑎𝑖𝑛 = 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 − (𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 − 𝑇𝑎𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒)

𝐺𝑎𝑖𝑛 = 15,000,000 − (15,000,000 − 3,115,000)

Gain 3,115,000 = 1,500,000 +850,000+765,000

Export of depreciable assets

𝐺𝑎𝑖𝑛 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 − (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑎𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒)

Assets disposed off in group

Jointly Owned by a Taxpayer and an Islamic Financial Institution

23. Initial allowance.

eligible depreciable asset‖ means a depreciable asset other than —

Issue Cost Value

Sale Price of Assets

Issue Sale Value

(written down value = Cost – Accumulated amortization)

(9) For the purposes of sub-section (8) —

25. Pre-commencement expenditure.

―pre-commencement expenditure‖ means any expenditure incurred before the commencement of a

Cost of sales included Rs. 80,000/- incurred for test run.

26. Scientific research expenditure.

27. Employee training and facilities.

28. Profit on debt, financial costs and lease payments.

29. Bad debts.

Bad Debts allowed recovered

Actual bad debts < Bad debts allowed

Actual bad debts > Bad debts allowed

32. Method of accounting.

Change in Accounting Method of Accounting

33. Cash-basis accounting.

34. Accrual-basis accounting.

opening value of the person ‘s stock-in-trade

Valuation of Closing Stock

FIFO / Weighted Average

Individual / AOP Companies