ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD

NAME: IQRA
ROLL NO: By479083
COURSE: Business Taxation (5445)
PROGRAMME: BS ACCOUNTS AND FINANCE
ASSIGNMENT NO 1

Semester: Spring, 2022

Q. 1 WITH REFERENCE TO INCOME TAX ORDINANCE 2001 DEFINES THE

TERMS OF ROYALTY, INTANGIBLE ASSET, COMPANY AND SMALL COMPANY?
(1) The Income Tax Ordinance, 2001 up dated up to June 30, 2020 issued by the Federal Board of Revenue
(FBR), defined the meaning of ‗royalty‘ as any amount paid or payable, however described or computed, whether
periodical or a lump sum, as consideration for

 The use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other
like property or right;
 The use of, or right to use any copyright of a literary, artistic or scientific work, including films or video tapes for
use in connection with television or tapes in connection with radio broadcasting, but shall not include
consideration for the sale, distribution or exhibition of cinematograph films;
 The receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fiber
or similar technology in connection with television, radio or internet broadcasting;
 The supply of any technical, industrial, commercial or scientific knowledge, experience or skill;
 The use of or right to use any industrial, commercial or scientific equipment;
 The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the
application or enjoyment of, any such property or right as mentioned in sub-clauses (a) through (e); and
 The disposal of any property or right referred to in sub-clauses (a) through (e).
 A person shall be allowed an amortization 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 has 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) Subject to sub-section, the amortization deduction of a person for a tax year shall be computed according to the
following formula, namely:–

An intangible –
(a) With a normal useful life of more than ten years; or

(b) That does not have an ascertainable useful life, shall be treated as if it had a normal useful life of ten years.

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.

The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR),
explained ‗small company as a company registered on or after the first day of July, 2005, under the Companies
Ordinance, 1984 (XLVII) of 1984, which,

1) Has paid up capital plus undistributed reserves not exceeding fifty million rupees;
2) Has employees not exceeding two hundred and fifty any time during the year;
3) Has annual turnover not exceeding two hundred and fifty million rupees; and
4) Is not formed by the splitting up or the reconstitution of company already in existence.

Q.2 EXPLAIN IN INCOME FROM BUSINESS & ITS TAXATION TREATMENT AS PER
THE PROVISION OF THE INCOME TAX ORDINANCE 2001?
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; where any unpaid
rent allowed as a deduction under clause

(2) of sub-section (1) is wholly or partly recovered, the amount recovered shall be chargeable to tax in the tax
year in which it is recovered.

(3) Where a person has been allowed a deduction for any expenditure incurred in deriving rent chargeable to
tax under the head ―Income from Property‖ 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 Property‖ in the first tax
year following the end of the three years.

(4) Where an unpaid liability is chargeable to tax as a result of the application of sub-section

(5) Any expenditure allowed to a person under this section as a deduction shall not be allowed as a deduction
in computing the income of the person chargeable to tax under any other head of income.
(6) The provisions of section 21 shall apply in determining the deductions allowed to a person under this
section in the same manner as they apply in determining the deductions allowed in computing the income of a
person chargeable to tax under the head ―Income from Business‖ any income derived by any trade,
professional or similar association from the sale of goods or provision of services to its members. 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.

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‖. Where a
lessor, being a scheduled bank or an investment bank or a development finance institution or a Moradabad 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. Any amount received by a
banking company or a non-banking finance company, where such amount represents distribution by a mutual
fund 3[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. Where a
person carries on a speculation business –

(a) That business shall be treated as distinct and separate from any other business carried by the person;

(b) This Part shall apply separately to the speculation business and the other business of the person; b head
―Income from Business‖ for that year; and

(e) Any loss of the person arising from the speculation business sustained for a tax year computed in
accordance with this Part shall be dealt with under section 58. In this section, ―speculation business‖ means
any business in which a contract for the purchase and sale of any commodity (including 5[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 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;
 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
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 1[arbitrage] to guard against any loss which may arise in the
ordinary course of the person‘s business as such member.

Q.3 CALCULATES THE TAX LIABILITY OF MR. DASTGIR FROM THE FOLLOWING
RECORD:

No. Item Amount (Rs.)

1 Basic Salary 40,000 per month

2 House rent allowance 7,000 per month

3 Overtime 10,000 per year

4 Medical allowance 3,000 per month

5 Reimbursement 19,000 per year

6 Contribution to gratuity fund 6,000 per year

7 Children school fee paid 9,000 per month

8 Insurance premium paid Rs. 5,000 (total)

9 Donation to a relief fund Rs. 1,000 (annual)

 Basic Salary 40000 * 12 480000

HR Allowance 7000 * 1 7000

Medical Allowance 3000 * 12 36000

Overtime 10000 * 1 10000

Reimbursement Medical Expenses 19000 * 1 19000

Total Income 552000

Gratuity Fund 6000

School Fee 9000 * 12 108000

Insurance 5000

Donation 1000

Total Dedication 120000

Total Taxable Income (552000 - 120000) 432000

Q.4 UNDER THE INCOME TAX ORDINANCE 2001, EXPLAIN THE CONCEPT OF
INCOME FROM OTHER SOURCES AND ITS TAXATION.

INCOME FROM OTHER SOURCES

(1) Income of every kind received by a person in a tax year, 1[if it is not included in any other head,]
other than income exempt from tax under this Ordinance, shall be chargeable to tax in that year under
the head ―Income from Other Sources‖, including the following namely: —

 DIVIDEND
 ROYALTY
 PROFIT ON DEBT

Additional payment on delayed refund under any tax law

 Rent from the sub-lease of land or a building; income from the lease of any building together with plant
or machinery;
 Income from provision of amenities, utilities or any other service connected with renting of building;]
 Any annuity or pension;

Any prize bond, or winnings from a raffle, lottery, prize on winning a quiz, prize offered by companies for
promotion of sale] or cross-word puzzle.

Any other amount received as consideration for the provision, use or exploitation of property, including from
the grant of a right to explore for, or exploit, natural resources;

The fair market value of any benefit, whether convertible to money or not, received in connection with the
provision, use or exploitation of property;

Any amount received by a person as consideration for vacating the possession of a building or part thereof,
reduced by any amount paid by the person to acquire possession of such building or part thereof;

Any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under
Voluntary Pension System Rules, subject to sub-section, any amount or fair market value of any property
received without consideration or received as gift, other than gift received from 8[relative as defined in sub-
section (5) of section 85.

Where a person receives an amount referred to in clause (k) of sub-section (1), the amount shall be chargeable
to tax under the head ―Income from Other Sources‖ in the tax year in which it was received and the following
nine tax years in equal proportion.

Subject to sub-section (4) any amount received as a loan, advance, deposit 3[for issuance of shares] or gift
by a person in 4[a tax year] from another person (not being a banking company or financial institution)
otherwise than by a crossed cheque drawn on a bank or through a banking channel from a person holding a
National Tax Number 5[ ] shall be treated as income chargeable to tax under the head ―Income from Other
Sources‖ for the tax year in which it was received.

Sub-section (3) shall not apply to an advance payment for the sale of goods or supply of services.

Any profit on debt derived from investment in National Savings Deposit Certificates including Defense
Savings Certificate paid to a person in arrears or the amount received includes profit chargeable to tax
in the tax year or years preceding the tax year in which it is received; and
As a result the person is chargeable at higher rate of tax than would have been applicable if the profit
had been paid to the person in the tax year to which it relates, the person may, by notice in writing to
the Commissioner, elect for the profit to be taxed at the rate of tax that would have been applicable if
the profit had been paid to the person in the tax year to which it relates.

An election under sub-section (4A) shall be made by the due date for furnishing the person‘s return of
income for the tax year in which the amount was received or by such later date as the Commissioner
may allow by an order in writing.

 This section shall not apply to any income received by a person in a tax year that is chargeable
to tax under any other head of income or subject to tax under section. Subject to this Ordinance,
in computing the income of a person chargeable to tax under the head ―Income from Other
Sources‖ for a tax year, a deduction shall be allowed for any expenditure paid by the person in
the year to the extent to which the expenditure is paid in deriving income chargeable to tax
under that head, other than expenditure of a capital nature.
 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 3[ ] under the Zakat
and Ushr Ordinance, 1980 (XVIII of 1980), at the time the profit is paid to the person.
 A person receiving income referred to in clause 4[ ] (f) of sub-section (1) of section 39
chargeable to tax under the head ―Income from Other Sources‖ shall be allowed
 A deduction for the depreciation of any plant, machinery or building used to derive that income
in accordance with section 22; and (b) an initial allowance for any plant or machinery used to
derive that income in accordance with section 23.
 No deduction shall be allowed to a person under this section to the extent that the expenditure is
deductible in computing the income of the person under another head of income.
 The provisions of section 21 shall apply in determining the deductions allowed to a person
under this section in the same manner as they apply in determining the deductions allowed in
computing the income of the person chargeable to tax under the head "Income from Business".
 Expenditure is of a capital nature if it has a normal useful life of more than one year.
Q.5 UNDER THE PROVISIONS OF THE INCOME TAX ORDINANCE 2001 WHAT IS
ADJUSTMENT AND CARRY FORWARD OF LOSSES?

Set off and Carry Forward of Losses

While computing income of a person under a head of income, if the sum of deductions allowed to a
person under the head exceed the sum of amounts chargeable to the person under that head, then the
person is said to have suffered a ―loss‖ under that head of income.

The Income Tax Ordinance, 2001 provides us guidance for setting off losses against incomes of other
heads and carry forward of losses.

Set-off losses

According to Sec-56 of Income Tax Ordinance 2001, If a person sustains a loss under any head of
income in a tax year, the same can be set-off against the income from any other head of income except
for ―income under the heads ‗salary‘ or ‗income from property‘.

However the following are exception to the said rule:

1) Loss of speculation business cannot be set-off against any other income.

2) Capital loss cannot be set-off against any other income.
3) Loss from any head of income falling under presumptive tax regime.
4) Loss in a case where the income would have been an exempt income.

No loss except loss under the head ―Income from Business‖ (including income from speculation
business) and ―Capital gain‖ can be carried forward. If a person sustains loss under the head ―Income
from Business‖ in addition to loss under any other head, the loss under the head ―Income from
Business‖ shall be set-off last.

Carry forward of business losses:

According to Sec.57 of income Tax Ordinance 2001

a. If business loss (other than speculation loss) sustained in a tax year cannot be fully set-off in
that year with income under any other head, it can be carried forward to subsequent tax years.
b. In subsequent years, this loss can only be set-off against the person‘s income under the head
―Income from Business‖.
c. No loss shall be carried forward to more than six tax years immediately succeeding the tax year
in which the loss was first computed.
d. If the loss, which is carried forward, includes depreciation, initial depreciation, first year
allowance, accelerated depreciation and amortization allowed under respective sections, such
amounts shall be added to the deductions under said sections, for the following tax year(s) and
shall be carried forward till they are completely set-off.
e. While computing person‘s taxable income, the deductions available for depreciation, initial
depreciation, first year allowance, accelerated depreciation and amortization shall be taken into
account last.
f. No loss shall be carried forward for more than six tax years immediately succeeding the tax
year in which the loss was first computed.
g. If a person has a business loss carried forward for more than one tax years, the loss of earliest
tax year shall be set-off first.

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