CHAPTER – 9 INCOME FROM BUSINESS (174)

INCOME FROM BUSINESS

INTRODUCTION
Business income is any income realized as a result of business activity. Business income is a type
of earned income and is classified as ordinary income for tax purposes. Business income may
include income received from the sale of products or services. For example, fee received by a
person from the regular practice of a profession are business income. Rents received by a person
in the real estate business are business income.
Business income can be offset by business expenses and business losses. It can be either positive
or negative in any given year.
The profit motive behind business income is universal to most business entities. However, how
business income is taxed is treated differently for each of the most common business forms, sole
proprietorships, partnerships, and corporate organizations. In this chapter we are going to learn
how Income from Business is taxed in Pakistan.
Definition of Business [Section 2(10)]
“Business” includes
• any trade, commerce, manufacture, profession, vocation or
• adventure or concern in the nature of trade, commerce, manufacture, profession or
vocation, but
does not include employment;
Income from business
Section 18 of the Income Tax Ordinance, 2001 outlines the scope of income under this head. The
following incomes of a person for a tax year shall be chargeable to tax under the head “Income
from Business”:
✓ The profits and gains of any business carried on by a person at any time in the year;
✓ Any income derived by any trade, professional or similar association from the sale of goods
or provision of services to its members; Example: ICAP membership fee
Explanation: It is clarified that income derived by cooperative societies from sale of goods
immoveable property or provision of service to its members is taxable. Example: security
services, electricity provision
✓ Any income from the hire or lease of tangible movable property; Example rent a car
business
✓ 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. The word benefit includes any benefit derived by way of waiver of profit on
debt or the debt itself under circular/scheme issued by the State Bank of Pakistan. Example
loan waived by the bank
✓ Any management fee derived by a management company (including a modaraba
management company)
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✓ Profit on debt where the person’s business is to derive such income (e.g. banks and
financial institutions). In other cases it will be chargeable to tax under the head “Income
from other sources”)
✓ Lease rentals derived by a scheduled bank, investment bank, development finance
institution, modaraba or a leasing company.
✓ Any amount distributed by a mutual fund or a private equity and venture capital fund, out of
its income from profit on debt, to a banking company or a non-banking finance company
shall be chargeable to tax under the head income from business and not under the head
income from other source.
BASIC CONCEPTS
Notional income
Notional income means the income that is not actually received by a person. Unrealized gains like
gain on translation of foreign currency are considered notional gains and are taxed only when these
are actually received. Other examples of notional income include gain on revaluation of fixed
assets, accrued interest income etc.
Real income
Real income is the amount of money actually received by a person and it is fully taxable as it has
been actually realized.
Capital expenditure
Capital expenditures represent major investments of capital that a company makes to maintain or,
more often, to expand its business and generate additional profits. Capital expenses are for the
acquisition of long-term assets, such as facilities or manufacturing equipment. Because such
assets provide income-generating value for a company for a period of more than one year,
companies are not allowed to deduct the full cost of the asset in the year the expense is incurred;
they must recover the cost over the useful life of the asset.
Revenue expenditure
Revenue expenses are shorter-term expenses required to meet the ongoing operational costs of
running a business, and thus are essentially the same as operating expenses. Unlike capital
expenditures, revenue expenses can be fully tax-deducted in the same year the expenses occur.
In relation to the major asset purchases that qualify as capital expenditures, revenue expenditures
include the ordinary repair and maintenance costs that are necessary to keep the asset in working
order without substantially improving or extending the useful life of the asset. Revenue expenses
related to existing assets include repairs and regular maintenance as well as repainting and
renewal expenses. Revenue expenditures can be considered to be recurring expenses in contrast
to the one-off nature of most capital expenditures.
The purpose of capital expenditures is commonly to expand a company's ability to generate
earnings, whereas revenue expenditures are more commonly for the purpose of maintaining a
company's ability to operate. Profits can arise only out of the trading (revenue) receipts. Capital
receipts are not taxable unless expressly made taxable under the Income Tax Ordinance, 2001.
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Residential status and taxability

A resident person is taxed on his worldwide business income whereas a non-resident liable to tax
in respect of his income to the extent it is Pakistan-sourced.
Method of Accounting
Income may be recorded using the cash or accrual basis of accounting. Companies are, however,
required to follow the accrual system of accounting for its business income.
Recouped expenditure (Sec 70)
Any amount received subsequently in respect of deduction previously allowed as deduction will be
added in the income in the year of receipt, as provided in Section 70 below:
Where a person has been allowed a deduction for any expenditure or loss incurred in a tax year in
the computation of the person‘s 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 that
head for the tax year in which it is received.
Exercise:

M/s ABC claimed deduction of following finance charges against the income of preceding years:
Year Amount of finance charges
200W 150,000
200X 75,000
200Y 85,000
The aforesaid mark-up remained payable to the bank and could not be paid due to adverse liquidity
position of ABC. On 15 May 200Z, the bank agreed to waive off mark up to the extent of Rs.250,000
under a rescheduling agreement. M/s ABC interested to know that what is the tax exposure on
such waiver of mark up and in case said amount is taxable then how the said sum is added to
preceding years income.

Answer
The aforesaid amount of Rs. 250,000 is taxable in the hands of ABC in the year of Waiver i.e.
tax year 200Z and it will not be included in the preceding years.
TAX ACCOUNTING
Section overview
✓ General accounting
✓ Method of accounting [Section 32]
✓ Cash Basis Accounting [Section 33]
✓ Accrual Basis Accounting [Section 34]
✓ Valuation of stock in trade [Section 35]
General accounting
The question arises how to compute the income under this head of income. Therefore, it is essential
to know the method of accounting required by the law in order to ascertain the actual income of a
taxpayer:
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Method of accounting (Section 32)

✓ 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, while other persons may account for such income on a cash
or accrual basis.
✓ The Board 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.
✓ An application may be made by a person, in writing, for a change in the person’s method
of accounting to the Commissioner. The Commissioner may by an order, in writing approve
such an application but only if he is satisfied that the change is necessary to clearly reflect
the person’s income chargeable 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.
Cash Basis Accounting (Section 33)
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.
Accrual Basis Accounting (Section 34)
✓ 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.
✓ An amount shall become due to the person when the person becomes entitled to receive it
or is liable to pay it even if the time for receipt / payment is postponed or the amount is
payable by installments.
✓ An amount shall become payable by a person when all the events, that determine liability,
have occurred and the amount of the liability can be determined with reasonable accuracy.
✓ If the liability or a part of the liability for which the deduction claimed is not paid within three
years from 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.
✓ If an unpaid liability which is charged to tax as above is subsequently paid in full or in part,
the person shall be allowed a deduction for the amount paid in the tax year in which the
payment is made.
✓ 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 head “Income from Business” for the tax year in which
such benefit is received.
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Valuation of stock in trade [Section 35]

✓ The cost of stock-in-trade disposed of by the person in the year shall be computed in
accordance with the following formula, namely:
(A + B) – C
✓ Where:
• A is the opening value of the person’s stock-in-trade for the year;
• B is cost of stock-in-trade acquired by the person in the year; and
• C is the closing value of stock-in-trade for the year.
✓ The opening value of stock-in-trade of a person for a tax year shall be:
• the closing value of the person’s stock-in-trade at the end of the previous year; or
• 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. This fair market value shall be determined at the time the stock is ventured
in the business.
✓ The closing value of a person’s stock-in-trade for a tax year shall be the lower of cost or net
realizable value of the person’s stock-in-trade on hand at the end of the year.
✓ A person accounting for income chargeable to tax under the head “Income from Business”
on a cash basis may compute the person’s cost of stock-in-trade on the prime-cost method
or absorption-cost method, and a person accounting for such income on an accrual basis
shall compute the person’s cost of stock-in-trade on the absorption-cost method.
✓ 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.
In this section:
Definitions
“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;
“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;
“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;
“Factory overhead costs” means the total costs of manufacturing or producing stock-in trade,
other than direct labour and direct material costs;
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“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;
“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;
“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.
Deductions
Expenditure incurred wholly and exclusively for the purpose of business is generally allowable in
tax except for certain specific provisions of law which are discussed later in the chapter.
Taxability of certain receipts
Those profits and gains of a business are chargeable to tax which are carried on by the taxpayer
at any time during the tax year. However, following receipts are taxable even if the taxpayer does
not carry on business during the tax year:
• Recovery in cash or kind against a deduction/loss allowed previously against business
Income [Section 70]
• Gain on sale of depreciable assets [Section 22(8)]
• Recovery of bad debts allowed in preceding years [Section 29(3)]
• Trading liabilities or any portion thereof which is found not to have been paid within the
expiration of three years of the end of the tax year in which it was allowed [Section 34(5)]
• Sum received after discontinuance of a business [Section 72(a) & (b)]
DEDUCTIONS AGAINST BUSINESS INCOME
Section overview
✓ Deductions admissible – general provisions
✓ Inadmissible deductions
✓ Deductions admissible – special provisions
Admissible Deductions – general provisions
Section 20 of the Ordinance prescribes general principles with respect to admissibility of
deductions. The said section states that:
• A deduction shall be allowed for any expenditure incurred by the person in the year wholly
and exclusively for the purposes of business.
• Deduction equal to the difference of the amount of actual cost of animals used for the
purposes of business or profession (otherwise than as stock in trade) and the amount
realized in respect of carcasses or animals shall be allowed where the animals have died
or become permanently useless for such purposes.
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Example:
Mr. A purchased a cow for Rs. 50,000 for the purpose of selling fresh milk. After 6 months the cow
fell ill and was useless for the purpose of business therefore, he decided to sell it. The cow was
sold for Rs. 31,000. What is the amount of allowable deduction in respect of this transaction?
Solution “Rupees”
Purchase cost of cow 50,000
Disposal proceeds from sale of cow (31,000)
Deduction allowed 19,000
• Expenses incurred by amalgamated company for legal and financial services and other
related costs on amalgamation will be allowed as deduction.
Inadmissible deductions [(Section 21)]
Section 21 of the Ordinance provides that no deduction shall be allowed in computing the income
of a person under the head “Income from Business” for:
1) Any Cess, Rate or Tax Paid/Payable to Govt. as Percentage of Profit
Any cess, rate or tax paid or payable by the person in Pakistan or a foreign country that is
levied on the profits or gains of the business or assessed as a percentage or otherwise on
the basis of such profits or gains;
Note: In case where sales tax/Federal excise duty paid by a taxpayer is not charged by him
to his customer, such sales tax/Federal excise duty paid shall be allowed as deduction.
(Inadmissible inputs are allowed as expense).
Mainly such cess, rate or tax as percentage of profit includes the Workers profit participation
fund, Workers welfare fund and income tax so are inadmissible. However, Income Tax
Ordinance 2001 allowed the deduction of WPPF and WWF from taxable income and not
from income from business.

Example:
Example
Mr A is a resident person doing business in Karachi. He paid following taxes during the year
Income tax in Pakistan 350,000
Income tax in USA 175,000
Property tax on his residential property in cantonment Karachi 172,000
Token tax on his 4x4 car 25,000
Solution
The income tax paid in Pakistan and USA shall not be allowed as deduction as they are based on
profits and gains of business however the property tax and token tax shall be allowed as deduction.
2) Tax deducted on payments received by taxpayer
Any amount of tax deducted at source under the provisions of the Income Tax Ordinance,
2001 from an amount derived by the person;
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3) Tax deduction from Payments made by taxpayer

Any expenditure from which the person is required to deduct or collect tax under the Income
Tax Ordinance, 2001, unless the person has paid or deducted and paid the tax:
Provided that disallowance in respect of purchases of raw materials and finished goods
under this clause shall not exceed twenty per cent of purchases of raw materials and
finished goods:
Provided further that recovery of any amount of tax under sections 161 or 162 shall be
considered as tax paid.
✓ Any sum paid on account of salary, rent, brokerage or commission, profit on debt, payment
to non-resident, payment for services or fee paid by the person from which the person is
required to deduct tax, unless the person has paid or deducted and paid the tax.
Explanation
It means deduction under this section is applicable when
• Payer is withholding agent under the law,
• Tax need to be deducted from payments made to payee.
All persons are not withholding agent for all types of payments like all sole proprietors and AOP
are not liable to deduct income tax on payments made for purchase of goods and services and
commissions. Likewise certain payments made to payee are not subject to withholding tax for
example if salary per annum is less than 600,000/- of employee or annual rent is less than 200,000/-
The payments made for supply of goods upto 75,000/- and for supply of services upto 30,000/- to
single person during complete tax year is not subject to deduction of tax.
Example
A Ltd. Purchased raw material amounting Rs. 100,000 but no tax was deducted while making
payment. What is the amount that will be considered inadmissible by taxation authorities?

Solution
According to above provision if tax is not deducted on making payment for raw material or finished
goods 20% of the total amount will be considered as inadmissible deduction so Rs. 20,000 will be
amount of disallowance in above example.
4) Entertainment
Any entertainment expenditure in excess of such limits or in violation of such conditions as
may be prescribed;
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Limits prescribed for allowing any expenditure on entertainment are as under (Rule 10).
Expenditure should be incurred in deriving income from business chargeable to tax and should not
be in excess of following limits or in violation of condition specified:
Such expenditure is:
(a)
• incurred outside Pakistan on entertainment in connection with business
transactions: or
• allocated as head office expenditure;
(b) incurred in Pakistan on the entertainment of foreign customers & suppliers;
(c) incurred on the entertainment of customers& clients at the person’s business
premises;
(d) incurred on the entertainment at the meeting of shareholders, agents, directors or
employees; or
(e) incurred on entertainment at the opening of branches.
Note: All these people (who are entertained) should be related directly to the person’s
business.
Entertainment means the provision of meals, refreshments and reasonable leisure facilities
in accordance with the traditions and norms of business in Pakistan.
5) Contribution to Provident/Gratuity or Super Annuation Fund etc.
✓ Any contribution made by the person to a fund that is not a recognized provident
fund, approved superannuation fund, or approved gratuity fund or approved pension
fund;
✓ an amount in excess of fifty percent of contribution made by a person to an approved
gratuity fund, an approved pension fund or an approved superannuation fund
✓ 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".
Fine or Penalty
Any fine or penalty paid or payable by the person for the violation of any law, rule or regulation;
Certain payments are not considered as penalty or fine for being inadmissible because these may
have to pay in ordinary course of business like penalty for late repayment of loan, demurrage to
custom authorities, surcharge on late payment of utility bills or penalties for non-compliance of
normal business contracts.
6) Personal Expenditures
Any personal expenditure incurred by the person;
The personal expenses is inadmissible because only those expenses incurred to generate
the income are allowable as deduction from income.
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7) Amount transferred to reserves

Any amount carried to a reserve fund or capitalized in any way;
8) Payment by AOP to its members
Any profit on debt, brokerage, commission, salary or other remuneration paid by an
association of persons to a member of the association;
All such amounts received by members would be considered as Share of AOP in the hands
of members which are exempt for members but added in taxable income for rate purposes
only. It means that AOP will pay the tax on the income without such deduction and taxable
income less income tax would be divisible income and that will be allocated to members.
9) Payment of business expenses through banking channel
Any salary paid or payable exceeding 32,000 per month other than by a crossed cheque or
direct transfer of funds to the employee’s bank account or through digital means;
Any expenditure for a transaction, paid or payable under a single account head which, in
aggregate, exceeds 250,000, 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:
However, 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:
Summary
Particulars Salary and Wages Other than Salary
Per Cash can be paid upto Upto Rs. 25,000 per single
Transaction/month 32,000 per month per transaction can be made in
limit for Cash employee cash
Maximum Limit No limit; can be paid to as Rs. 250,000 under a single
many employees the head can be paid in cash during
organization have complete tax year. The single
head for example means
repairs, travelling,
entertainment etc.
It is important to note that the above provisions shall not apply in the case of:
Expenditures not exceeding Rs. 25,000
Expenditures on account of:
✓ utility bills;
✓ freight charges;
✓ travel fare;
✓ postage; and
✓ payment of taxes, duties, fee, fines or any other statutory obligation
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10) Capital Nature

Any expenditure paid or payable of a capital nature. However, depreciation or amortization
shall be allowed in respect of a depreciable asset, intangible or pre-commencement
expenditure; and
11) Sales Promotion by Pharmaceutical
Any expenditure in respect of sales promotion, advertisement and publicity in excess of ten
per cent of turnover incurred by pharmaceutical manufacturers.
12) Commission on products listed in 3rd Schedule of Sales Tax Act, 1990
Any amount of commission paid or payable in respect of supply of products listed in the
Third Schedule of the Sales Tax Act, 1990, where the amount of commission paid exceeds
0.2% of gross amount of supplies thereof unless the person to whom commission is paid
or payable, as the case may be, is appearing in the active taxpayer list under this
Ordinance.
13) Utility bill in excess of limits
Any expenditure on account of utility bill in excess of such limits and in violation of such
conditions as may be prescribed; and
14) Expenditure attributable to sales made to persons required to be registered
Any expenditure attributable to sales made to persons required to be registered but not
registered under the Sales Tax Act, 1990 by an industrial undertaking computed according
to the following formula, namely:
(A/B) x C
Where—
A is the total amount of deductions claimed under this Part;
B is the turnover for the tax year; and
C is the total amount of sales exclusive of sales tax and federal excise duty to persons
required to be registered but not registered under the Sales Tax Act, 1990 where sales
equal or exceed Rs. 100 million per person:
Provided that disallowance of expenditure under this clause shall not exceed 10% of total
deductions claimed under this Part:
Provided further that the Board may, by notification in the official Gazette, exempt persons
or classes of persons from this clause on the basis of hardship.
Provided also that this clause shall come into force with effect from 1st October 2020.
15) Integration of business
any expenditure attributable to sales claimed by any person who is required to integrate but
fails to integrate his business with the Board through approved fiscal electronic device and
software: Provided that disallowance of expenditure under this clause shall not exceed eight
percent of the allowable deduction
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Illustration ICAP Adopted

Head Of Account Amount
Rent Paid to Mr. X for Lahore office rented premises 720,000
Air Tickets purchased 520,000
Payment of salary of Mr. Ali one month only 125,000
Bill paid for repair of car 420,000
Electricity bill paid 950,000
Telephone bill paid 270,000
Paid professional tax 200,000
Paid audit fee in cash 350,000
Paid to tax consultant 550,000
Compute the addition under Section 21(l) of the Income Tax Ordinance, 2001
Solution
No addition is required on account of payments relating to Air Ticketing, Electricity, Telephone and
Professional Tax. The balance addition under section 21(l) is computed as under
Nature of payment Amount
Rent paid to Mr. X for Lahore office rented premises 720,000
Payment of Salary to Mr. Ali u/s 21(m) 125,000
Bill paid for repair of car 420,000
Paid audit fee 350,000
Paid tax consultant 550,000
Addition under Section 21(l) 2,165,000
Deductions admissible – Special provisions
✓ Any expenditure incurred by the person in the year wholly and exclusively for the purposes
of business.
✓ Animals used for the purposes of the business or profession otherwise as stock in trade.
✓ Depreciation of tangible fixed assets where they have a useful life of more than 1 year.
[Section 22]
✓ Initial allowance on eligible depreciable assets. [Section 23]
✓ Amortization of intangibles where they have a useful life of more than 1 year. [Section 24]
✓ Pre-commencement expenditure at the rate of 20% on straight line basis [Section 25]
✓ Scientific research expenditures [Section 26]
✓ Employee training facilities expenditure [Section 27]
✓ Profit on debt if related to taxable business income [Section 28]
✓ Entertainment expenditures in the limits as prescribed [Rule 10]
✓ Bad debts written off in the accounts subject to fulfillment of certain conditions [Section 29]
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Scientific research expenditure [Section 26]

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
search undertaken in Pakistan for the purposes of developing the person’s business, including any
contribution to a scientific research institution to undertake scientific research for the purposes of
the person’s business, other than expenditure incurred:
✓ in the acquisition of any depreciable asset or intangible;
✓ in the acquisition of immovable property; or
✓ 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.
Employee training and facilities [Section 27]
A person shall be allowed a deduction for any expenditure (other than capital expenditure) incurred
in a tax year in respect of:
✓ any educational institution or hospital in Pakistan established for the benefit of the person’s
employees and their dependents;
✓ any institute in Pakistan established for the training of industrial workers recognized, aided,
or run by the Federal Government or a Provincial Government or a Local Government; or
✓ the training of any person, being a citizen of Pakistan, in connection with a scheme
approved by the Board for the purposes of this section.
Profit on debt, financial costs and lease payments [Section 28]
Following amounts incurred in a tax year shall be allowed as deduction in computing income under
the head Income from Business:
✓ Profit on debt if and to the extent the proceeds of debt are utilized for business purpose;
✓ Lease rentals of an asset to a scheduled bank, financial institution, an approved modaraba
or leasing company or a Special Purpose Vehicle (SPV) on behalf of the Originator. It
means only lease rental is allowed in case of lessee and if lessee has recorded asset on
finance lease basis than the markup on lease liability and depreciation on leased assets
will be added in taxable income of lessee and lease rental will be allowed as deduction
from taxable income from business;
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Provided that for the purpose of determining the deduction on account of lease rentals the
cost of a passenger transport vehicle not plying for hire to the extent of principal amount
shall not exceed two and a half million rupees;
✓ Financial cost of securitization of receivables by an Originator in respect of SPV;
✓ Share of profit under musharika scheme to a bank;
✓ Share of profit to a certificate holder under a musharika scheme approved by SECP and
Religious Board under Modaraba Ordinance;
✓ On funds borrowed from a modaraba or participation term certificate holders;
✓ By a bank to a person maintaining PLS account or a deposit with the bank;
✓ SBPs share of profit by House Building Finance Corporation, National Development
Leasing Corporation or Small and Medium Enterprises Bank on any investment or credit
line provided by the SBP.
Debt [Section 2(15)]
Debt means any amount owing, including accounts payable and the amounts owing under
promissory notes, bills of exchange, debentures, securities, bonds or other financial instruments.
Bad debts [Section 29]
✓ A person shall be allowed a deduction for a bad debt in a tax year if the following conditions
are satisfied, namely:
• The amount of the debt was:
❖ previously included in the person’s income from business chargeable to tax;
or
❖ in respect of money lent by a financial institution in deriving income from
business chargeable to tax;
• The debt or part of the debt is written off in the accounts of the person in the tax
year; and
• There are reasonable grounds for believing that the debt is irrecoverable.
✓ The amount of the deduction allowed to a person for a tax year shall not exceed the amount
of the debt written off in the accounts of the person in the tax year.
✓ Where a deduction is allowed in a tax year for a bad debt written off and in a subsequent
tax year the person receives in cash or kind any amount in respect of that debt, a
computation shall be made as under:
a- b
Here
(a) is amount received against the written off debt; and
(b) is the difference between whole amount of bad debt and bad debt allowed as a deduction
under Income Tax Ordinance, 2001.
If (a) is greater than (b), the difference shall be treated as income of the person. In other
case, where (a) is less than (b) the difference shall be treated as bad debts for the year in
which the amount is received.
CHAPTER – 9 INCOME FROM BUSINESS (188)

Exercise:
Mr. C is dealing in the business of electric equipment’s. He claimed a deduction of Rs. 600,000 in
respect of a bad debt during 30 June [Link] was allowed deduction amounting Rs. 500,000
against this claim. He received Rs. 200,000 in respect of this debt during the year ended 30 June
2020. What will be the amount of deduction/income while computing business income for the year
ended 30 June 2021?
Solution
a = Rs. 200,000
b = Rs. 100,000
(Deduction) / income = a–b
= Rs. 200,000 – 100,000
= Rs. 100,000
As “a” is greater than “b” therefore difference of a and b is treated as income.
Calculation of b Rs.
Amount of bad debt 600,000
Less: Bad debt allowed as deduction 500,000
b 100,000
Exercise:
MS Shagufta is running a business in the name of Al Nafay Business Solutions. In the tax year
2022, she claimed bad debts of RS 1,000,000 and RS 1,500,000 from its clients Mr Junaid and Mr
Nawaz. She was allowed deduction of bad debts of RS 750,000 and RS 800,000 with respect of
receivable from Mr Junaid and Mr Nawaz in Tax year 2022. During 2023, she received following
sums from these two debtors:
Mr Junaid Rs.900,000
Mr Nawaz Rs.500,000
Work out the amount to be added/allowed on account of bad debts in the tax year 2023.
Solution: Mr Junaid Mr Nawaz
Bad Debts Claimed in 2023 A 1,000,000 1,500,000
Allowed in 2023 B 750,000 800,000
Receipts during 2024 C 900,000 500,000
Actual Bad Debts D=A-C 100,000 1,000,000
Tax Treatment:
Tax Income / (Expenses) B-D 650,000 (200,000)
Reversal of Accounting Income E 900,000 500,000
The accounting profit will be reduced by Rs. 1,400,000 (Rs. 900,000 + Rs. 500,000). Regarding
receipts from Mr. Junaid, Rs. 650,000 will be treated as income (being the difference between
Allowed and Actual Rs. 750,000 - Rs. 100,000). On the other hand, further bad debts of Rs.
200,000 will be allowed as a tax expense (i.e., the difference between allowed and actual: Rs.
800,000 - Rs.1,000,000) against receipts from Mr. Nawaz.
CHAPTER – 9 INCOME FROM BUSINESS (189)

DEPRECIATION AND RELATED CONCEPTS

Acquisition of assets
Section 75 of the Ordinance provides the conditions under which an asset is considered as
acquired. These conditions are as follows:
✓ A person shall be treated as having acquired an asset at the time the person begins to own
the asset, including at the time the person is granted any right.
✓ The application of a personal asset to business use shall be treated as an acquisition of the
asset by the owner at the time the asset is so applied
Purchase of immoveable property in cash
In case any immovable property having fair market value (fbr value or DC rate whichever is
applicable) greater than five million rupees is purchased in cash, then it will have following
implications:
✓ Such amount shall not be treated as cost for computation of any gain on disposal (sale
value will be treated as capital gain)
✓ Such person shall pay a penalty of 5% of the FBR value or DC rate whichever is higher.
Fair market value (Sec 68)
▪ Fair market value (FMV) of any property, or rent, asset, service, benefit or perquisite at a
particular time shall be the price which the property, or rent, asset, service, benefit or
perquisite would ordinarily fetch on sale or supply in the open market at that time.
▪ The fair market value of any property, or rent, asset, service, benefit or perquisite shall
be determined without having regard to any restriction on transfer or to the fact that it is
not otherwise convertible to cash.
▪ Where the price referred above is not ordinarily ascertainable, the Board may, from time
to time, by notification in the official gazette determine the fair market value of the
immoveable property of the area and areas as may be specified in the notification.
▪ Where the fair market value of any immoveable property of an area or areas has not been
determined by the Board in the notification referred as above, the fair market of such
immoveable property shall be deemed to be the value fixed by the district officer (revenue)
or provincial or any other authority authorize in this behalf for the purposes of stamp duty.
Exercise:
XYZ purchased a second hand car from M/s ABC Ltd, an associated company. The cost of
that car is Rs.500,000 in the books of ABC Ltd whereas written down value of the said car is
Rs.350,000. One of the car dealers told the company that the value of the said car in the
market is Rs. 250,000.
Required:
What is the value of the car as per the Income Tax Ordinance, 2001?
CHAPTER – 9 INCOME FROM BUSINESS (190)

Answer
Value of the Car as per the Income Tax Ordinance, 2001 is its fair market value i-e Rs .250,000.
Disposal of assets
According to Section 75 of the Ordinance
✓ An asset is considered as disposed when it is
• sold, exchanged, transferred or distributed; or
• cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
✓ The transmission of an asset by succession or under a will shall be treated as a disposal of
the asset by the deceased at the time asset is transmitted.
✓ The application of a business asset to personal use shall be treated as a disposal of the
asset by the owner of the asset at the time the asset is so applied.
✓ Where a business asset is discarded or ceases to be used in business, it shall be treated
to have been disposed of.
✓ A disposal also includes the disposal of a part of an asset.
Purchase of assets through banking channel (Sec 75A)
No person shall purchase (otherwise than by a crossed cheque or through demand draft or pay
order or any other crossed banking instrument showing transfer of amount from one bank account
to another bank account);
(a) immovable property having fair market value greater than five million Rupees; or
(b) any other asset having fair market value more than one million Rupees
In case the transaction is not undertaken by the banking channel as specified above then;
i. such asset shall not be eligible for any allowance (i-e. depreciation, initial allowance,
amortization and pre-commencement expenditure etc.)
ii. such amount shall not be treated as cost in terms of section 76 for computation of any
gain on sale of such asset
Cost of Asset
As per Section76 of the Ordinance cost of asset comprises of following:
Normal Case
✓ The total consideration given by the person for the asset, including the fair market value of
any consideration in kind determined at the time the asset is acquired
✓ Any incidental expenditure incurred by the person in acquiring and disposing of the asset;
andany expenditure incurred by the person to alter or improve the asset
Personal Use Asset transferred to Business
✓ The cost of a personal asset treated as acquired by the business shall be the fair market
value of the asset determined at the date it is applied to business use.
Asset Produced/constructed
✓ The cost of an asset produced or constructed by a person shall be the total costs incurred
by the person in producing or constructing the asset plus any expenditure incurred by the
person on the alteration, improvement or disposal of such asset.
CHAPTER – 9 INCOME FROM BUSINESS (191)

Asset acquired from loan in foreign currency

✓ Where an asset has been acquired by a person with a loan denominated in a foreign
currency and, before full and final repayment of the loan, there is an increase or decrease
in the liability of the person under the loan as expressed in Rupees, the amount by which
the liability is increased or reduced shall be added to or deducted from the cost of the asset,
as the case may be.
Difference, if any, on account of foreign currency fluctuation, shall be taken into account in
the year of occurrence for the purposes of depreciation. In determining whether the liability
of a person has increased or decreased, account shall be taken of the person’s position
under any hedging agreement relating to the loan.
Cost when part of asset is disposed
✓ Where a part of an asset is disposed of by a person, the cost of the asset shall be
apportioned between the part of the asset retained and the part disposed of in accordance
with their respective fair market values determined at the time the person acquired the
asset.
Asset acquired against supply of taxable goods or services
✓ Where the acquisition of an asset by a person is the derivation of an amount chargeable to
tax, the cost of the asset shall be the amount so charged plus any amount paid by the
person for the asset.
Asset acquired against supply of exempt goods or services
✓ Where the acquisition of an asset by a person is the derivation of an amount exempt from
tax, the cost of the asset shall be the exempt amount plus any amount paid by the person
for the asset.
Cost where grant/subsidy etc. received against asset purchased
✓ The cost of an asset does not include the amount of any grant, subsidy, rebate, commission
or any other assistance (other than a loan repayable with or without profit) received or
receivable by a person in respect of the acquisition of the asset, except to the extent to
which the amount is chargeable to tax under this Ordinance.
Notwithstanding anything contained in this section, the Board may prescribe rules for determination
of cost for any asset.
Example
Haseeb Industries Ltd is establishing a new unit for which different assets have been acquired
during the year.
✓ Work on building for new unit is almost 30% complete. Expenses incurred on the new
building are as follows:
Rupees
Material 5,000,000
Labour 4,000,000
Other expenses 2,500,000
CHAPTER – 9 INCOME FROM BUSINESS (192)

Land for new building was acquired from Govt. Market Price of the land is Rs.15,000,000
but Govt. is providing land at half rate to promote industry.
✓ A new generator was acquired by paying Rs. 4,500,000 and an old generator in exchange.
The FMV of the old generator was Rs. 1,300,000.
✓ Equipment was transferred from the existing unit. Cost of this equipment was Rs. 1,800,000
whereas FMV on the date of transfer was Rs. 2,100,000.
✓ A new plant was purchased for Rs. 7,000,000. Finance for the purchase of plant was
obtained from X-bank Ltd through foreign currency loan of $ 70,000. Exchange rate at the
time of purchase of plant was Rs.100 per dollar whereas exchange rate at the time of
payment was Rs. 105 per dollar.
✓ The installation charges of the plant were Rs. 500,000.
✓ A new truck was purchased for Rs. 1,200,000.
Required: Calculate total cost of company’s assets for tax purposes.
Solution

Cost of assets purchased Rupees

Cost of Building
-Material 5,000,000
-Labour 4,000,000
-Other expenses 2,500,000 11,500,000

Cost of land (15,000,000 X 50%) 7,500,000

Generator cost
-Cost of new generator 4,500,000
-FMV of exchanged generator 1,300,000 5,800,000

Cost of equipment transferred 2,100,000

Cost of plant
-Purchase cost 7,000,000
-Exchange difference (105-100) X 70,000 350,000
-Installation charges 500,000 7,850,000

Cost of new truck 1,200,000

Total cost of assets purchased 35,950,000

CHAPTER – 9 INCOME FROM BUSINESS (193)

Consideration received on disposal of assets

Section77 of the Ordinance provides guidance to establish the amount of consideration on
disposal of assets. The relevant provisions of the said section have been discussed below:
In Normal Cases
✓ The consideration received by a person on disposal of an asset shall comprise higher of
• Amount received, or
• Fair market value of the asset And
• Fair market value of any consideration received in kind at the time of disposal
Asset is Lost/Destroyed
✓ Where an asset has been lost or destroyed by a person, the consideration received for the
asset shall include any compensation, indemnity or damages received by the person on
account of
• an insurance policy, indemnity or other agreement;
• a settlement; or
• a judicial decision.
Asset Transferred to Personal Use
✓ Where an asset is put to personal use or where the asset is ceased or discarded for
business use, the fair market value of the asset will be treated as consideration received in
respect of such asset.
Leased Assets
✓ The consideration received by a scheduled bank, financial institution, modaraba, or leasing
company approved by the Commissioner in respect of an asset leased by the company to
another person shall be the residual value received by the leasing company on maturity of
the lease agreement subject to the condition that the residual value plus the amount
realized during the term of the lease towards the cost of the asset is not less than the
original cost of the asset.
Multiple Assets Sold Together
✓ Where two or more assets are disposed of by a person in a single transaction and the
consideration received for each asset is not specified, the total consideration received by
the person shall be apportioned among the assets disposed of in proportion to their
respective fair market values determined at the time of the transaction.
The basis of computation would be as under:
Total consideration received * FMV of single asset
FMV of all Assets
Example
Company sold two vehicles A and B for Rs. 1,500,000 while the FMV of vehicle A was Rs. 800,000
and FMV of B was Rs. 900,000. Calculate the sale consideration of A and B.
CHAPTER – 9 INCOME FROM BUSINESS (194)

Solution Rupees
Sale Consideration of A 1,500,000 * 800,000/(800,000+900,000)= 705,883
Sale Consideration of B 1,500,000 * 900,000/(800,000+900,000)= 794,117
✓ The Board may prescribe rules for determination of consideration received for any asset.
Sale Consideration of Immovable Property Exceeds the Cost of Asset
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.
Case 1 Case 2
During the year Mr. A sold Building the During the year Mr. A sold Building the
particulars of which are as under: particulars of which are as under:
(Rs.) (Rs.)
Cost of Property 1,000,000 Cost of Property 1,000,000
WDV 450,000 WDV 450,000
Sale Proceed 800,000 Sale Proceed 1,800,000
Calculate Gain/(Loss) on disposal Calculate Gain/(Loss) on disposal
Solution Solution
(Rs.) (Rs.)
Sale Proceed 800,000 Sale Proceed 1,800,000
Less Cost (450,000) Less Cost (1800000-550000) (1,250,000)
Gain/(Loss) 350,000 Gain/(Loss) 550,000
Sale Consideration where Asset Exported after use
✓ 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.
Case 1 Case 2
During the year Mr. A Exported the machinery During the year Mr. A Exported the machinery
after use in Pakistan the particulars of which after use in Pakistan the particulars of which
are as under: are as under:
(Rs.) (Rs.)
Cost of Machinary 1,000,000 Cost of Machinary 1,000,000
WDV 450,000 WDV 450,000
Sale Proceed 800,000 Sale Proceed 1,800,000
Calculate Gain / (Loss) on disposal Calculate Gain / (Loss) on disposal
Solution Solution
(Rs.) (Rs.)
Sale Proceed 1,000,000 Sale Proceed 1,000,000
Less: Cost (450,000) Less: Cost (450,000)
Gain / (Loss) 550,000 Gain / (Loss) 550,000
CHAPTER – 9 INCOME FROM BUSINESS (195)

Basis of Calculation
✓ The depreciation is allowed on cost. The calculation of cost is also specified by law
indifferent scenarios.
✓ The normal depreciation is allowed on depreciable assets while initial depreciation is
allowed on eligible depreciable assets.
✓ The method for calculation is written down value/reducing balance method.
Full year depreciation will be charged in year of acquisition/use while no depreciation will be
charged in year of disposal.
Depreciable Asset
According to Income Tax Ordinance, 2001 depreciable asset means any tangible movable
property, immovable property (other than unimproved land), or structural improvement to
immovable property, owned by a person that —
• has a normal useful life exceeding one year;
• is likely to lose value as a result of normal wear and tear, or obsolescence; and
• is used wholly or partly by the person in deriving income from business chargeable to tax,
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.
However, 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.
Structural improvement
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.
DEPRECIATION
Depreciation deduction is determined in accordance with Section 22 of the Ordinance.
1) Depreciation as deduction
✓ 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.
✓ the depreciation deduction for a tax year shall be computed by applying the rates
(provided below) against the written down value of the asset at the beginning of the
year.
CHAPTER – 9 INCOME FROM BUSINESS (196)

Assets Rate
Building (all types) 10%
Furniture (including fittings) and machinery and plant (not 15%
otherwise specified), Motor vehicles (all types), ships, technical
or professional books
Computer hardware including printer, monitor and allied items 30%
machinery and equipment used in manufacture of I.T. products,
aircrafts and aero engines
Below ground installation in Oil concern 100%
Offshore platforms and production installations in petroleum oil 20%
concern
Ramp built to provide access to persons with disabilities not 100%
exceeding Rs. 250,000 each
✓ Depreciation is allowed on proportional basis if the asset was also used for the
purpose other than deriving business income in a tax year.
✓ The total deductions allowed to a person during the period of ownership of a
depreciable asset under this section and Section 23 shall not exceed the cost of
the asset.
✓ Full year deduction will be allowed in the year of acquisition whereas no depreciation
deduction will be allowed in the year of disposal
2) Written down value of a depreciable asset
✓ The written down value of a depreciable asset of a person at the beginning of the
tax year shall be:
• 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
• 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.
✓ 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 written down value of the
asset shall be computed on the basis that the asset has been solely used to derive
income from business chargeable to tax.
Cost of Structural Improvement to Immovable Property
✓ The cost of immovable property or a structural improvement to immovable property shall
not include the cost of the land.
CHAPTER – 9 INCOME FROM BUSINESS (197)

Passenger transport vehicle not plying for hire

✓ The cost of a depreciable asset being a passenger transport vehicle not plying for hire shall
not exceed Seven and half million rupees.
✓ consideration received on disposal of the passenger transport vehicle for the purposes of
determination of gain/loss shall be computed according to the following formula:
A x B/C
where
• A Disposal proceeds
• B Cost of the asset for taxation purposes
• C Actual cost of the asset
INITIAL ALLOWANCE
✓ According to provisions of Section23 of the Ordinance 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 called as initial allowance within later of
• The tax year in which the asset is used first time
• The tax year in which commercial production is commenced
✓ The amount of the initial allowance of a person shall be computed by applying the following
rates as specified in Part II of the Third Schedule against the cost of the asset.
Assets Rate
Plant and machinery 25%
Building Nil
✓ A deduction allowed under this section to a leasing company, investment bank, modaraba
or a scheduled bank or a development finance institution in respect of assets owned by
them and leased to another person shall be deducted only against the leased rental income
derived in respect of such assets.
Eligible depreciable asset
Section 23(5) states an asset as eligible depreciable asset other than following:
✓ any road transport vehicle unless the vehicle is plying for hire;
✓ any furniture, including fittings;
✓ any plant or machinery that has been used previously in Pakistan or
✓ any plant or machinery in relation to which a deduction has been allowed under another
section of the Ordinance for the entire cost of the asset in the tax year in which the asset is
acquired.
✓ immovable property or structural improvement to the immovable property
Accelerated depreciation to alternate energy projects
Section23B of the Ordinance states that an accelerated depreciation will be allowed to alternate
energy projects as per conditions given below:
✓ Any plant, machinery and equipment installed for generation of alternate energy by an
industrial undertaking set up anywhere in Pakistan and owned and managed by a company
CHAPTER – 9 INCOME FROM BUSINESS (198)

shall be allowed first year allowance in lieu of initial allowance under Section 23 of
Ordinance, at the rate of 90% against the cost of eligible depreciable assets put to use after
first day of July, 2009.
✓ A deduction allowed under this section to a leasing company, investment bank, modaraba
or a scheduled bank or a development finance institution in respect of assets owned by
them and leased to another person shall be deducted only against the leased rental income
derived in respect of such assets.
 CHAPTER – 9 INCOME FROM BUSINESS (199)

Calculation of Depreciation
Example
Mr. A started business on 15 March 2018 and purchased following assets during the Year.
Particulars Purchased Purchased Disposal
Cost Year 1 Cost Year 2 WDV Year 2
Rs. Rs. Rs.
Plant and Machinery New 5,000,000 2,000,000
Land 2,000,000
Building 3,000,000 1,000,000
Furniture and Fixture 1,000,000 500,000 300,000
Vehicle for Staff 1,000,000
Calculate depreciation for Year 1 and Year 2.
Solution

Calculation of Dep reciation

Land Plant and Building Furniture Vehicle Total
Machinery Depreciation
------------------------------------------ R u p e e s ----------------------------------------
Cost A 2,000,000 5,000,000 3,000,000 1,000,000 1,000,000

not
Initial Allowance Rate B N/A 25% allowed not allowed not allowed
Initial Allowance C (A*B) 1,250,000 1,250,000
WDV after Initial Allow D (A-C) 2,000,000 3,750,000 3,000,000 1,000,000 1,000,000

Normal Depreciation
Rate E N/A 15% 10% 15% 15%
Normal Depreciation F (D*E) 562,500 300,000 150,000 150,000 1,162,500
Closing Written Down
Value at Year 1 G (D-F) 2,000,000 3,187,500 2,700,000 850,000 850,000

Opening WDV Year 2 H G 2,000,000 3,187,500 2,700,000 850,000 850,000

Purchased I 2,000,000 1,000,000 500,000
Disposal WDV J (300,000)
not
Initial Allowance Rate K N/A 25% allowed not allowed not allowed
Initial Allowance L (I*K) 500,000 500,000
WDV after Initial Allow M (H+I-J-L) 2,000,000 4,687,500 3,700,000 1,050,000 850,000

Normal Depreciation
Rate N N/A 15% 10% 15% 15%
Normal Depreciation O (M*N) 703,125 370,000 157,500 127,500 1,358,125
Closing Written Down
Value at Year 2 P (M-O) 2,000,000 3,984,375 3,330,000 892,500 722,500
CHAPTER – 9 INCOME FROM BUSINESS (200)

Depreciation Other Aspects

Written down value of asset in case of exempt income
✓ 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
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).
Exercise:
Day Light Limited (DLL), an investment finance services company, provided consumer loans to
various customers during tax years 2023 and 2024. Following information is available from
DLL’s records for the two tax years:
Description 2024 2023
Interest earned on consumer loans 58M 50M
Provision for bad debts 2.1M 3.2M
Required:
In the light of Income Tax Ordinance, 2001 discuss the tax treatment of provision for bad debts
for tax year 2024.
Allowable provision for the year 2023 2024
Rs. 58M x 3% 1.74
Rs. 50M x 3% 1.5
Provision already made 3.2 2.1
Excess provision to be carried forward (1.70)
Unadjusted provision from last year 1.70
Total 3.8
Excess provision to be carried forward (2.06)
Gain/loss on disposal of assets
✓ Where, in any tax year, a person disposes of a depreciable asset, and
• the consideration received exceeds the written down value of the asset at the time
of disposal, the excess shall be chargeable to tax in that year under the head of
Income from Business; or
• the consideration received is less than the written down value of the asset at the
time of disposal, the difference shall be allowed as a deduction in computing the
person‘s income chargeable under the head of Income from Business for that year.
Partial Use of Asset for Business
✓ 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.
CHAPTER – 9 INCOME FROM BUSINESS (201)

✓ Where the asset is partly used for business, the written down value of the asset for the
determination of gain or loss shall be increased by the amount that is not allowed as a
deduction.
Example
Mr. B disposed of following assets during the year:
✓ A heavy load Equipment costing Rs. 1,500,000 was exchanged with a lower load equipment
along with disposal proceeds of Rs.500,000. The FMV of the asset acquired is Rs. 700,000.
✓ During the year store room caught fire and plant costing Rs. 1,000,000 was destroyed
however insurance company approved claim of Rs. 550,000.
✓ One of the vehicles was transferred to Mr. B’s son. This vehicle was purchased for Rs.
800,000 two years ago while the FMV at the date of transfer was Rs. 600,000.
✓ Mr. B disposed of two motor bikes for Rs. 80,000. Cost and FMV of these bikes were as
follows:
--------Rupees--------
Motor Bike Cost FMV
First bike 51,000 48,000
Second bike 42,000 35,000
Total 93,000 83,000
Solution
Rupees
Consideration of heavy load equipment (700,000+500,000) 1,200,000
Consideration for destroyed plant 550,000
Consideration for vehicle transferred to B's Son 600,000
Consideration for first bike (80,000 X 48,000/83,000) 46,265
Consideration for second bike (80,000 X 35,000/83,000) 33,735
Total consideration 2,430,000

Assets owned by financial institutions and their depreciation

✓ Any asset owned by a leasing company or an investment bank or a modaraba or a
scheduled bank or a development finance institution and leased to another person is treated
as used in the leasing company or the investment bank or the modaraba or the scheduled
bank or the development finance institution‘s business
✓ A deduction allowed under this section to a leasing company, investment bank, modaraba
or a scheduled bank or a development finance institution in respect of assets owned by
them and leased to another person shall be deducted only against the leased rental income
derived in respect of such assets.
CHAPTER – 9 INCOME FROM BUSINESS (202)

INTANGIBLES
Section.24 of the Ordinance deals with Intangibles.
Intangible means any patent, invention, design or model, secret formula or process, copyright,
trade mark, scientific or technical knowledge, computer software, motion picture film, export
quotas, franchise, licence, 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).
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.
Amortization deduction
✓ 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:
o that are wholly or partly used by the person in the tax year in deriving income from
business chargeable to tax; and
o that have a normal useful life exceeding one year.
✓ 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.
✓ 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 total deductions allowed to a person during the period of ownership of an Intangible
shall not exceed the cost of the Intangible.
Calculation of Amortization
✓ The amortization deduction of a person for a tax year shall be computed according to the
following formula
▪ A/B
Where
A Cost of Intangible
B Normal useful life of the intangible in whole years
✓ For the purpose of determining normal useful life an intangible having
o normal useful life of more than twenty-five years; or
o an unascertainable useful life
shall be treated as if it had a normal useful life of twenty-five years.
✓ Where an intangible is not used for the whole of the tax year in deriving income from
business chargeable to tax, the deduction allowed under this section shall be computed
according to the following formula
CHAPTER – 9 INCOME FROM BUSINESS (203)

A x B/C
Where
A Amount of amortization
B Number of days in the tax year the intangible is used
C Number of days in the tax year
Gain/loss on disposal of Intangibles
✓ Where, in any tax year, a person disposes of an Intangible, and
o the consideration received exceeds the written down value of the asset at the time
of disposal, the excess shall be chargeable to tax in that year under the head of
Income from Business; or
o the consideration received is less than the written down value of the asset at the
time of disposal, the difference shall be allowed as a deduction in computing the
person‘s income chargeable under the head of Income from Business for that year.
✓ The written down value of an intangible at the time of disposal shall be the cost of the
intangible reduced by the total deductions allowed to the person in respect of the intangible
or, where the intangible is not wholly used to derive income chargeable to tax, the amount
that would be allowed if the intangible were wholly so used.
✓ The consideration received on disposal of an intangible shall be determined in accordance
with Section 77.
✓ An intangible that is available for use on a day (including a non-working day) is treated as
used on that day.
Pre-commencement expenditure
Section 25 defines pre-commencement expenditure as the 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 amortised
under Section 22 or 24.
Deduction will be allowed for pre-commencement expenditure as per following conditions:
✓ Pre-commencement expenditure shall be amortized on a straight-line basis at the rate of
20% per annum.
✓ The total deductions allowed for pre-commencement expenditure in the current tax year
and all previous tax years shall not exceed the amount of the expenditure.
✓ 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.
Question
In Income Tax Ordinance, 2001 the term “disposal” has a wider connotation than sale because it
includes exchange, relinquishment, and extinguishment. List the situations under which an asset
owned by a person shall be treated to have been disposed of. (05)
(Autumn 2014 Q4)
CHAPTER – 9 INCOME FROM BUSINESS (204)

Answer:
Under the following situations an asset shall be treated to have been disposed off:
(a) A person who holds an asset shall be treated as having made a disposal of the asset at the
time the person parts with the ownership of the asset, including when the asset is:
(i) sold, exchanged, transferred or distributed; or
(ii) cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
(b) The transmission of an asset by succession or under a will shall be treated as a disposal of
the asset by the deceased at the time asset is transmitted.
(c) The application of a business asset to personal use shall be treated as a disposal of the
asset by the owner of the asset at the time the asset is so applied.
(d) Where a business asset is discarded or ceases to be used in business, it shall be treated
to have been disposed of.
(e) 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.
Minimum tax on the income of certain persons [Sec113]
(1) This section shall apply to a resident company, permanent establishment of a resident
company, an individual (having turnover of hundred million rupees or above in the tax year
2017 or in any subsequent tax year) and an association of persons (having turnover of
hundred million rupees or above in the tax year 2017 or in any subsequent tax year)] where,
for any reason whatsoever allowed under this Ordinance, including any other law for the
time being in force —
(a) loss for the year;
(b) the setting off of a loss of an earlier year;
(c) exemption from tax;
(d) the application of credits or rebates; or
(e) the claiming of allowances or deductions (including depreciation and amortization
deductions) no tax is payable or paid by the person for a tax year or the tax
payable or paid by the person for a tax year is less than 1.25% of the amount
representing the persons’ turnover from all sources for that year:
(2) Explanation. - For the purpose of this sub-section, the expression tax payable or paid
does not include-
(a) tax already paid or payable in respect of deemed income which is assessed as
final discharge of the tax liability under Section 169 or under any other provision
of this Ordinance; and
(b) tax payable or paid under Super tax for rehabilitation of temporary displaced
persons (Section 4B).
CHAPTER – 9 INCOME FROM BUSINESS (205)

(3) Where this section applies:

(a) the aggregate of the persons’ turnover as defined in subsection (3) for the tax year
shall be treated as the income of the person for the year chargeable to tax;
(b) the person shall pay as income tax for the tax year (instead of the actual tax
payable under this Ordinance), minimum tax ranging from 0.25% to 1.25% for
different categories of Persons;
(c) where tax paid under sub-section (1) exceeds the actual tax payable under Part I,
clause (1) of Division I, or Division II of the First Schedule, the excess amount of
tax paid shall be carried forward for adjustment against tax liability under the
aforesaid Part of the subsequent tax year
Provided that the amount under this clause shall be carried forward and adjusted against
tax liability for three tax years immediately succeeding the tax year for which the amount
was paid.
(4) Turnover means,-
(a) the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty
or any trade discounts shown on invoices, or bills, derived from the sale of goods,
and also excluding any amount taken as deemed income and is assessed as final
discharge of the tax liability for which tax is already paid or payable;
(b) the gross fees for the rendering of services for giving benefits including
commissions; except covered by final discharge of tax liability for which tax is
separately paid or payable;
(c) the gross receipts from the execution of contracts; except covered by final discharge
of tax liability for which tax is separately paid or payable; and
(d) the company’s share of the amounts stated above of any association of persons of
which the company is a member.
Example of Assets transferred during lease or on completion
Example: Cost
Motor vehicle Rs.
Cost at the time acquired 1,000,000
Finance obtained under finance lease 1,000,000
Bargain purchase price:
Before payment of 7th installment 1,000,000
After payment of 7th but before payment of 11th installment 750,000
After payment of 11th but before payment of 17th installment 500,000
After payment of 17th but before payment of 22th installment 250,000
Residual value on maturity of lease 70,000
Monthly lease rentals 60,000
No. of installments 22
CHAPTER – 9 INCOME FROM BUSINESS (206)

Answer:
Cost of motor vehicle for the purpose of depreciation deduction Rs.
Before payment of 7 installments 1,000,000
After paying 7 installments 750,000
After paying 11 installments 500,000
After paying 17 installments 250,000
On maturity of lease i.e. after paying 22 installments 70,000
Example of in-House production of Assets
Example – Boiler Produced in house by the entity for its factory Rs. in ‘000’
Cost incurred to produce
Material 150,000
Wages 75,000
Consumables (Nuts, Botls Welding material) 30,000
Fuel and power (electricity, gas, etc.) 9,000
Other Manufacturing Costs 9,500
Cost of the boiler for the purposes of depreciation deduction 273,500

Things to do:
ICAP Example Page 128 Burewala express
ICAP Example Page 109 XYZ limited
ICAP Example page 122 multiple scenarios
ICAP Example page 118 CFG (Pvt) limited

SPECULATION BUSINESS [SECTION 19]

Speculation business is defined in [Section 19 (2)] of the Ordinance in the following manner:
“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 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 (arbitrage) to guard against any loss which may
arise in the ordinary course of the person’s business as such member.
CHAPTER – 9 INCOME FROM BUSINESS (207)

Tax implications for speculation business

Where a person carries on a speculation business:
✓ that business shall be treated as distinct and separate from any other business carried on
by the person;
✓ this part shall apply separately to the speculation business and the other business of the
person;
✓ Section 67 - Apportionment of deductions shall apply as if the profits and gains arising
from a speculation business were a separate head of income;
✓ any profits and gains arising from the speculation business for a tax year computed in
accordance with this part shall be included in the person`s income chargeable to tax under
the heading “Income from Business”
✓ any loss of the person arising from the speculation business sustained for a tax year
shall be set off only against the income of the person from any other speculation
business of the person chargeable to tax for that year; (cannot be adjusted against any
other head of income).
✓ if a speculation loss sustained by a person for a tax year is not wholly set off, then the
amount of the loss not set off shall be carried forward to the following tax year and
applied against the income of any speculation business of the person in that year and so
on, but no speculation loss shall be carried forward to more than six tax years
immediately succeeding the tax year for which the loss was first computed.
Example
Mr. A is an oil dealer and is involved in oil business since many years. Occasionally, he also deals
in future market contracts of oil. Revenue and expenses of both types of businesses are given
below:
Description Normal business (Rs.) Speculative business (Rs.)
Revenue 850,000 200,000
Salaries and wages 160,000 -
Commission expense 50,000 30,000
Other expenses 75,000 15,000
Carry forward loss from previous year in respect of speculative business is Rs. 32,000.
Calculate tax liability if all above figures pertain to tax year 2024.
CHAPTER – 9 INCOME FROM BUSINESS (208)

Solution
------------- Rs. -------------
Description Normal business Speculative business
Revenue 850,000 200,000
Salaries and wages 160,000 -
Commission expense 50,000 30,000
Other expenses 75,000 15,000
Total expenses (285,000) (45,000)
Taxable income 565,000 155,000
Carry forward loss - (32,000)
Taxable income/ (loss) 565,000 123,000
Taxable income from normal business 565,000
Taxable income from speculation business 123,000
Total taxable income under income from business 688,000
Tax liability 18,800

Example:
M/s XYZ Enterprises deals in cloth trading. Total revenue from cloth trading was Rs. 10,000,000
during the year 20YY. The gross profit from the trading business was amounting to Rs. 2,000,000.
During the year, the price fluctuations were very high in cloth market. Considering this trend, M/s
XYZ Enterprises also made forward purchasing of cloth to reap the benefit of price fluctuations. In
April 20YY, The enterprises agreed to purchase Bengali cloth of 20,000 bundles at the rate of 100
per bundle, the delivery of which was expected in June 20YY. The seller agreed to purchase the
same goods at the rate ruling at the date of sale. In June the price of Bengali cloth has been
increased to Rs. 120 per bundle. M/s XYZ Enterprises disposed of that cloth of 20,000 bundles to
the seller at the market prevailing rate without taking any delivery of stocks, Total revenue from
sale of cloth aggregates to Rs. 2,400,000, Therefore, the Enterprise earned income of Rs. 400,000.
Total administrative and general expenses of Rs. 1,000,000 were incurred during the year 20YY.
Compute the taxable income and tax liability.
It is worth mentioning that carry forward loss of the Enterprise was Rs. 1,000,000 in respect of
business. Whereas speculation loss was Rs. 250,000.
CHAPTER – 9 INCOME FROM BUSINESS (209)

Answer:
Particulars Speculation Business Trading Business Total
Gross Revenue 2,400,000 10,000,000 12,400,000
Gross Profit 400,000 2,000,000 2,400,000
Expenditure (1,000,000 x 193,548 806,452 1,000,000
2,400,000/12,400,000)
Net income 206,452 1,193,548 1,400,000
Carry forward loss 250,000 1,000,000 1,250,000
Taxable Income/ (loss) for the *(43,548) 193,548
year

*Speculation loss carried forward

** Loss of speculation business cannot be set off with trading business.
CHAPTER – 9 INCOME FROM BUSINESS (210)

PRACTICE QUESTIONS
QUESTION NO.1
Abbas, a resident individual, is engaged in the business of manufacturing various consumer goods
under the name and style of ‘Kamyab Enterprises (KE)’. Following information has been extracted
from KE’s records for the year ended 30 June 2024:
Rupees
Sales 43,089,000
Cost of sales (26,042,000)
Gross profit 17,047,000
Administrative and selling expenses (7,800,000)
Financial charges (2,100,000)
Other income 5,560,000
Profit before tax 12,707,000
Additional information:
Cost of sales includes:
(i) accounting depreciation of Rs. 1,200,000. The tax written down values of KE’s fixed assets
on 1 July 2023 were:
Rupees
Plant and machinery 6,860,000
Computers and related products 800,000
Motor vehicles (80% for business purposes) 3,000,000
A new computer was purchased on 1 April 2024 for Rs. 150,000.
Motor vehicle which was purchased on 15 June 2022 at the cost of Rs. 1,000,000 was sold for Rs.
750,000 on 31 May 2024. Carrying value of this motor vehicle was equal to sale proceeds.
(ii) an amount of Rs. 40,000 paid to factory supervisor on 23 March 2024 as advance salary
for the month of April. Since he was in urgent need of the amount and the banks were
closed on 23 March 2024 due to the Pakistan Day, he was paid in cash.
Administrative and selling expenses include:
(i) Expenditure on ‘In-house scientific research’ related to KE’s business. It includes salaries
of Rs. 880,000 paid to scientists, material of Rs. 230,000 used in the research and Rs.
700,000 paid to a company in China for supporting KE’s scientists in the research work.
This expenditure was not recorded as intangible asset as it could not provide an advantage
for a period of more than one year.
(ii) an expense of Rs. 650,000 paid as an instalment towards the purchase price of an industrial
plot.
(iii) purchase of goats worth Rs. 225,000 for sacrifice on Eid-ul-Azha. The payment was made
through cross cheque.
(iv) donations of Rs. 1,000,000 to approved non-profit organizations. 40% of this amount was
donated to organizations listed on the Thirteenth Schedule of the Income Tax Ordinance,
2001. All donations were made through crossed cheques..
(v) an insurance premium of Rs. 200,000 paid to a registered insurance company for health
insurance of Abbas and his dependents.
CHAPTER – 9 INCOME FROM BUSINESS (211)

Other income includes:

(i) an amount of Rs. 720,000 received from income tax department on account of tax refund
related to tax year 2021. This amount includes an additional payment of Rs. 80,000 due to
delay in tax refund.
(ii) capital gains of Rs. 430,000 and Rs. 250,000 on sale of investments in shares of Manzil
Limited, a public unlisted company and Himmat Limited, a public listed company
respectively on 20 June 2024. Both investments were made on 1 January 2022.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute
total income, taxable income and net income tax payable by or refundable to Abbas for the tax year
2024.
Note: Your computation should commence with profit before tax figure of Rs. 12.707 million.
Ignore minimum tax under section 113.
Show all relevant exemptions, exclusions and disallowances. (18)
(Autumn 2021, Q.4)
QUESTION NO.2
(a) What do you understand by the term ‘Turnover’ as provided in section 113 of the Income
Tax Ordinance, 2001? List the persons who are required to pay minimum tax on the basis
of turnover. (08)
(b) Gillani and Company (GC), a sole proprietor, is dealing in various consumer products in
Pakistan. During the year ended 30 June 20X4, GC’s taxable income for the year was Rs.
6.1 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the amount of net income tax
payable by GC and amount of income tax to be carried forward, if any, for the tax year 20X4, in
each of the following situations:
(i) GC’s sales were Rs. 120,500,000 inclusive of sales tax.
(ii) GC’s sales were Rs. 110,000,000 inclusive of sales tax (05)
(Spring 2021, Q.2)
QUESTION NO. 3
Muhammad Asghar owns an industrial undertaking under the name and style of Asghar &
Company (AC) which is engaged in the business of manufacturing pharmaceutical products.
Following information is available for the year ended 31 December 20X3:
Rs. in '000
Turnover 324,850
Cost of goods sold (217,197)
Gross profit 107,653
Administrative and distribution expenses (88,980)
Marketing expenses (19,765)
Other income 3,560
Profit before tax 2,468
CHAPTER – 9 INCOME FROM BUSINESS (212)

Additional information:
(i) Cost of goods sold includes:
• raw materials of Rs. 7,800,000. No withholding tax was deducted at the time of payment.
• accounting depreciation of Rs. 2,100,000 on plant and machinery.
• provision for slow moving inventory of Rs. 1,800,000.
(ii) Administrative and distribution expenses include:
• Rs. 676,500 paid to a local hotel for holding annual Eid-Milan party for the employees and
their families.
• Rs. 1,235,000 paid as penalty to a customer in settlement of his claim for damages under
a contract for the supply of a batch of vaccines. Laboratory tests and in-house investigations
revealed that the level of impurities in the vaccines exceeded the acceptable level as agreed
in the contract.
• Rs. 2,300,000 paid as donation to a hospital established by the local government.
(iii) Marketing expenses include a reward of Rs 500,000. The reward was paid in cash to one of
the salesmen for exceeding his sales target.
(iv) Other income includes:
• dividend of Rs. 174,000. This amount was received from a listed company after deduction
of income tax at the rate of 15% and Zakat of Rs. 30,000 deducted under the Zakat and
Usher Ordinance, 1980.
• gain of Rs. 660,000 on sale of shares in Akash (Pvt) Limited (APL) in November 20X3. 60%
of the shares in APL are owned by the Federal Government. AC purchased these shares
in June 20X1.
Other information:
(i) A second hand plant was imported from France at a cost of Rs. 2,500,000. Withholding tax of
Rs. 150,000 was deducted at import stage. The plant was installed in the month of September
20X3. AC incurred Rs. 375,000 on the installation of plant which is included in administrative
and distribution expenses.
(ii) Pre-commencement expenditures of Rs. 3,400,000 were charged to accounting profit and loss
for the year ended 31 December 20X2. However, for tax purposes, it has to be amortized over
the period of five years.
(iii) Tax depreciation other than imported plant amounted to Rs. 1,900,000.
(iv) Income tax deducted by the customers u/s 153 and advance income tax paid u/s 147 during
the year amounted to Rs. 1,400,000 and Rs. 200,000 respectively.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute
total income, taxable income and net income tax payable by or refundable to AC for the tax
year 20X4. (19)
Note: Your computation should commence with profit before tax figure of Rs. 2,468K.
Ignore minimum tax under section 113.
Show all relevant exemptions, exclusions and disallowances.
(Spring 2021, Q.3)
CHAPTER – 9 INCOME FROM BUSINESS (213)

QUESTION NO.4
For the purpose of this question, assume that the date today is 31 August 2024.
Shahid is engaged in the business of manufacturing and supplying of auto parts. Following is the
extract of his profit or loss statement for the tax year 2024:
Rs. in '000’
Sales 29,058
Cost of goods sold (18,724)
Gross profit 10,334
Operating expenses (3,137)
Financial charges (2,030)
Other income 1,260
Profit before tax 6,427
Additional information:
The above accounts have been prepared on cash basis and stock-in-trade has been valued on
prime cost method. However, Shahid wants to change the method of accounting from cash basis
to accrual basis. In this respect, following information has been gathered:
Opening Closing
Balances Balances
--------- Rs. in '000 ---------
Stock-in-trade using prime cost method 1,800 2,800
Stock-in-trade using absorption cost method 2,300 3,200
Cost of goods sold includes:
• purchase of packing material of Rs. 440,000 from Nasir Traders. No withholding tax was
deducted at the time of payment.
• freight charges of Rs. 85,000. These were paid in cash for transporting goods from
suppliers.
Operating expenses include:
• salary of Rs. 80,000 per month paid to Shahid’s brother who handles administrative matters
of the business.
• expenditure of Rs. 950,000 incurred on the development of a product which is expected to
generate revenue for five years.
• penalty of Rs. 15,000 for late filing of income tax return.
Financial charges include profit on debt of Rs. 450,000 earned on fixed deposit account maintained
with a bank. The bank withheld income tax and Zakat amounting to Rs. 45,000 and Rs. 93,750
respectively.
Other income includes:
• capital gain of Rs. 45,000 received, net of withholding tax of Rs. 6,750, on sale of 20,000
shares in Metal Limited (ML) in November 2023. ML is listed on PSX.
• On 1 January 2021, Shahid purchased these shares for Rs. 200,000 at initial public offering.
CHAPTER – 9 INCOME FROM BUSINESS (214)

• Rent of Rs. 980,000 received from an agriculture land in Badin. No withholding tax was
deducted at the time of receipt.
Tax depreciation for the year amounts to Rs. 680,000.
Tax deducted at source by customers amounts to Rs. 875,000.
The unabsorbed tax depreciation brought forward from Tax year 2023 amounts to Rs. 568,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute
total income, taxable income and net tax payable by or refundable to Shahid for the tax year 2024.
(Use accrual basis of accounting) (18)
Note: • Your computation should commence with profit before tax figure.
• Ignore minimum tax under section 113.
• Show all relevant exemptions, exclusions and disallowances.
(Spring 2020 Q.1)
QUESTION NO. 5
Respond to the following independent scenarios, under the provisions of the Income Tax
Ordinance, 2001:
(a) Sikandar has revalued his factory building in accordance with International Financial
Reporting Standards and consequently charged depreciation on the revalued amount.
Explain the tax implication of the revaluation. (02)
(b) Shahbaz has acquired machinery for his new factory against a loan repayable in USD.
Discuss what would be the cost of machinery for the purpose of depreciation deduction.
(02)
(Autumn 2019 Q.3 (c,d))
QUESTION NO. 6
Following transactions pertain to Salam Limited (SL) which took place during the tax year 2024:
(i) A machine costing Rs. 1,800,000, being used in SL’s Karachi factory was transferred to its
subsidiary in Ghana. The fair market value and tax written down value of the machine on
the date of transfer were Rs. 2,500,000 and Rs. 600,000 respectively. (02)
(ii) On 1 January 2024, SL entered into a forward contract for the purchase of raw materials to
be used in its business to guard against loss through price fluctuations. On the date of
maturity of the forward contract, SL did not take the delivery of the raw materials but the
contract was settled by making a payment of Rs. 500,000. (03)
Required:
Explain the taxability of the above transactions.
(Spring 2019, Q3(b))
CHAPTER – 9 INCOME FROM BUSINESS (215)

QUESTION NO. 7
Saleem is a resident taxpayer and runs a fitness centre in DHA Karachi. He files his return of
income regularly. Following information pertains to his business for the tax year 2024:
(i) Accounting profit before tax amounted to Rs. 2,350,000.
(ii) Administrative expenses include annual rent of the premises used for fitness centre
amounting to Rs. 1,560,000. Withholding tax of Rs. 144,000 was deducted from the rent
payment but was not deposited in the government treasury.
(iii) A passenger transport vehicle used for pick and drop of employees of fitness centre was
disposed of for Rs. 3,500,000. The vehicle was purchased for Rs. 4,500,000 in tax year
2022. No accounting depreciation was provided during the year 2024. Accounting gain of
Rs. 200,000 has been recorded in the profit or loss account. Tax loss of Rs 180,556 was
calculated by the tax expert.
(iv) On 1 July 2023, a car was acquired on finance lease for Rs. 3,000,000. Advance tax paid
at the time of acquisition and registration of vehicle aggregated Rs. 85,000. The vehicle has
been used 70% for business purposes and 30% for Saleem’s personal use.
Accounting depreciation of Rs. 600,000 and financial charges of Rs. 462,000 were recorded
in the profit or loss account. Lease rentals paid during the year amounted to Rs. 857,000.
(v) During the year, Saleem recorded gain of Rs. 50,000 on disposal of shares. Details are as
under:
Name of investee company Sold on Purchased on Gain/(loss) on
disposal (Rs.)
Sun (Private) Limited 1 Aug 2023 1 Sep 2016 500,000
Moon Limited - a listed company 15 Sep 2023 1 Jan 2018 (700,000)
Planet Limited - a listed company 1 Feb 2023 1 Jan 2019 250,000
50,000
Required:
Compute Saleem’s taxable income under appropriate head of income and tax liability for the tax
year 2024. (12)
(Autumn 2018 Q.5)
CHAPTER – 9 INCOME FROM BUSINESS (216)

QUESTION NO. 8
Mr. Qateel, a resident individual, is engaged in the manufacture of various consumer goods under
the name and style ‘Qateel Enterprises (QE)’. The following information has been extracted from
the records of QE for the financial year ended 30 June 2024

Rupees
Total turnover 28,500,000
Cost of sales (26,155,000)
Gross profit 2,345,000
Operating expenses (4,500,000)
Operating loss (2,155,000)
Finance charges on lease of machinery (35,703)
Other income 5,000,000
Profit before tax 2,809,297

Additional information:
(i) Cost of sales includes:
• Rs. 45,000 paid as fine for violation of contract with a customer for delay in supply
of goods.
• Accounting depreciation of Rs. 1,900,000 (including depreciation on leased assets).
(ii) Operating expenses include:
• Rs. 450,000 paid for renewal of a manufacturing license for fifteen years.
• Vehicle tax paid in cash amounting to Rs. 55,000 for eight office cars.
• Rs. 200,000 paid as security deposit to K-Electric (KE) for replacement of
transformer at the factory.
• Rs. 300,000 collected by KE as advance tax through monthly electricity bills.
• cash donation to poor families amounting to Rs. 64,600 and donation of Rs.
2,000,000 paid through cheque to Edhi Foundation, which is listed in Thirteenth
Schedule of the ITO, 2001.
• penalty of Rs. 25,000 imposed by the Commissioner Inland Revenue for late filing
of annual return of income for the tax year 2023.
• Entertainment expenditure of Rs. 128,000 incurred on arrival of foreign customers
for business purposes.
(iii) Other income includes:
• Dividend of Rs. 580,000 received from listed companies. The amount is net of
income tax at the rate of 15% and Zakat of Rs. 100,000 deducted under the Zakat
and Usher Ordinance, 1980.
• Capital gain of Rs. 1,200,000 from sale of shares of a private limited
[Link] were acquired on 1 August 2018.
CHAPTER – 9 INCOME FROM BUSINESS (217)

(iv) On 30 June 2024, leased machinery was transferred to Qateel on maturity of lease. The
leasing company was asked to adjust the amount of security deposit against the residual
value of Rs. 100,000. The date of commencement of lease was 1 July 2019.
Lease rentals paid during the year amounted to Rs. 270,000.
On the date of maturity, the accounting written down value and market value of the
machinery was Rs. 590,490 and Rs. 800,000 respectively.
(v) During the year, a warehouse was constructed for storage of goods at a cost of Rs.
1,040,000. No accounting depreciation has been recorded on it.
(vi) Tax depreciation for the Tax year 2024 without considering the effect of para (iv) and (v)
above, amounted to Rs. 1,560,000.
(vii) Advance income tax paid during the year amounted to Rs. 480,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute
the total income, taxable income and net tax payable by or refundable to QE for the year ended 30
June 2024. (18)
(Spring 2018 (Q1)
Note: • Ignore minimum tax under section 113.
• Show all the relevant exemptions, exclusions and disallowances.
QUESTION NO 9
Under the Income Tax Ordinance, 2001 certain persons are required to pay minimum tax
amounting to 1.25% of their turnover from all sources.
(a) Explain the term ‘Turnover’ for the purpose of determining the minimum tax. (05)
(b) List the persons who are required to pay minimum tax. (03)
(Autumn 2017 Q.5 (a,b))
QUESTION NO 10
Mushtaq is a sole proprietor of Mushtaq Enterprises (ME) engaged in the business of
manufacturing of different products. ME’s P&L account shows PBT of Rs. 1.8 million for the year
ended 30 June 2024. A review of ME’s records has revealed the following information.
(i) ME employs five salesmen. Rs. 22,000 per month were paid to each salesman in cash
which includes reimbursement of Rs. 6,000 per month incurred on entertainment of
customers at the business premises.
(ii) Administrative expenses include Rs. 150,000 which were paid to a research institute in
China for the purpose of developing a new product.
(iii) Accounting loss on the sale of patents was Rs. 65,000. The tax written down value of these
patents at the beginning of the year was Rs. 430,000 and these were sold for Rs. 524,000.
Amortization charged to the profit and loss account on these patents for the current year
was Rs. 25,000.
CHAPTER – 9 INCOME FROM BUSINESS (218)

(iv) Receivables from Atif and Aslam which had been written off in the previous year were
recovered. Details are as follows:
Atif Aslam
------Rupees------
Claimed bad debts in last tax return 800,000 1,200,000
Allowed by tax authorities last year 550,000 600,000
Amount recovered during the year 700,000 400,000
(v) ME has opened a sales office in Dubai. In this respect, furniture costing Rs. 850,000 with
written down value (WDV) of Rs. 650,000 was shifted to Dubai office. The tax WDV of the
furniture at the beginning of the year was Rs. 610,000.
(vi) Accounting depreciation for the year is Rs. 580,450. However, no depreciation has been
provided on the following fixed assets purchased on 1 March 2024:
Rupees
Furniture 200,000
Used machinery imported from Germany 500,000
(vii) Tax depreciation for the year, prior to the adjustments mentioned in (vi) above, amounted
to Rs. 456,400.
(viii) Advance tax paid u/s 147 was Rs. 200,000.
(ix) The assessed business losses of tax year 2017 brought forward in year 2024 are Rs.
830,000. These include unabsorbed tax depreciation amounting to Rs. 705,000.
Other transaction of Mushtaq
On 1 June 2024, he sold 6,000 shares of a private company for Rs. 432,000 out of 15,000 shares
which he received on 1 May 2021, on the death of his father. The fair market value of shares on
the date of transfer to Mushtaq was Rs. 25 per share.
Required:
Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder, compute taxable
income and net tax payable by or refundable to Mushtaq for the year ended 30 June 2024. (16)
(Spring 2017 (Q1)
QUESTION NO. 11
On 1 July 2023, Tahir commenced business of manufacturing garments. Income statement of the
business for the year ended 30 June 2024 is as follows:
Notes Rs. in 000
Sales 49,330
Less: Cost of sales (i) (39,150)
Gross profit 10,180
Less: Administrative and selling expenses (ii) (9,140)
Financial charges (iii) (2,500)
Other charges (iv) (1,358)
(2,818)
Add: Other income 3,875
Profit before taxation 1,057
CHAPTER – 9 INCOME FROM BUSINESS (219)

Notes to the income statement:

(i) On 15 July 2023, used machinery was imported from China valuing Rs. 1,500,000.
Depreciation @ 15% was charged on machinery for the whole year and is included in cost
of sales.
(ii) Administrative and selling expenses include:
Rs. 975,000 paid for the purchase of computer software. The software is likely to be used
for twelve years.
Cost of preparation of a feasibility study amounting to Rs. 250,000 which was issued prior
to the commencement of business.
Salary of Rs. 50,000 per month was paid to Tahir’s brother who handles the financial
matters of the business.
(iii) Financial charges include Rs. 80,000 pertaining to a vehicle obtained on lease from a
leasing company. The cost of vehicle was Rs. 1,300,000. Depreciation of Rs. 260,000 has
been included in administrative and selling expenses. Lease rentals paid during the year
amounted to Rs. 300,000.
(iv) Other charges include:
Running and maintenance expenses of vehicle amounting to Rs. 295,450. Use of vehicle
for personal purposes was approximately 20%.
Provision for bad debts amounting to Rs. 25,000.
Other information:
(i) Tahir was working in UAE for the past five years and had come back to Pakistan in April
2022. He received an amount equivalent to Rs. 150,000 from his ex-employer as differential
amount on his final settlement in August 2023.
(ii) He sold a plot for Rs. 3,500,000 which was inherited from his father in 2015. Fair market
value of the plot at the time of inheritance was Rs. 1,500,000.
(iii) 5,000 shares were purchased for Rs. 600,000 from initial public offering of a new listed
company.
(iv) Premium of Rs. 300,000 was paid on Tahir’s life insurance policy.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income of Tahir for
the tax year 2024. Provide comments in respect of items which do not appear in your computation.
(18)
(Spring 2015 Q1)
CHAPTER – 9 INCOME FROM BUSINESS (220)

ANSWERS OF PRACTICE QUESTIONS

ANSWER NO 1
KE Enterprises
Computation of total income, taxable income and net tax payable/refundable
For tax year 2024
Rupees
Income from business
Profit before tax 12,707,000
Add: Inadmissible expenses / admissible income
Accounting depreciation 1,200,000
Salary paid in cash 40,000
Cost related to scientific research incurred in Pakistan -
Expenditure paid to Chinese company for research work 700,000
Instalment of industrial plot being capital payment in nature 650,000
Purchase of goats for Eid-ul-Azha 225,000
Donation to approved NPO 1,000,000
Health insurance premium 200,000
4,015,000
Less: Admissible expenses and inadmissible / FTR income
Tax refund received from Income tax department (720,000)
Tax depreciation (W-1) (1,606,890)
Loss on disposal of motor vehicle (W-2) (28,000)
Capital gain not to be taxed under business income (430,000+250,000) (680,000)
(3,034,890)
Income from business 13,687,110
Capital gain
Capital gain on sale of securities (430,000+250,000) 680,000
Income from other sources
Additional payment received on delayed tax refund 80,000
Total income for the year from all sources 14,447,110
Less:
Capital gain on disposal of investment in Himmat Limited as separate (250,000)
block of income
Taxable income under NTR 14,197,110
Tax liability
Tax on Rs. 4,000,000 765,000
Tax On balance (14,197,110–4,000,000)×35%) 3,568,989
Tax liability under normal tax regime 4,333,989
Tax credit on:
Donations 4,333,989 ÷14,197,110×*600,000) (183,164)
4,150,825
Capital gain under section 37A 250,000×12.5% 31,250
Tax payable by Abbas 4,182,075
W-1: Tax depreciation:
Opening balances:
Plant and machinery (6,860,000×15%) 1,029,000
Computer and related products (800,000×30%) 240,000
Motor vehicles 2,222,000[3,000,000–778,000(W-2)] ×15%×80% 266,640
1,535,640
New computer:
Initial allowance (150,000×25%) 37,500
Normal depreciation (150,000×75%×30%) 33,750
1,606,890
W-2: Computation of tax loss on sale of motor vehicle
Cost 1,000,000
Depreciation TY 2022 (1,000,000×15%) (150,000)
TY 2023 (850,000×15%) (127,500)
TY 2024 -
(277,500)
Tax WDV 722,500
Disallowed depreciation (277,500×20%) 55,500
778,000
Sale proceeds 750,000
Loss on disposal 28,000
CHAPTER – 9 INCOME FROM BUSINESS (221)

ANSWER NO 2

(a) turnover means,-

(a) the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty
or any trade discounts shown on invoices, or bills, derived from the sale of goods,
and also excluding any amount taken as deemed income and is assessed as final
discharge of the tax liability for which tax is already paid or payable;
(b) the gross fees for the rendering of services for giving benefits including
commissions; except covered by final discharge of tax liability for which tax is
separately paid or payable;
(c) the gross receipts from the execution of contracts; except covered by final discharge
of tax liability for which tax is separately paid or payable; and
(d) the company‘s share of the amounts stated above of any association of persons of
which the company is a member.
This section shall apply to a resident company,
an individual (having turnover of hundred million rupees or above in the tax year
2017 or in any subsequent tax year) and an association of persons (having turnover
of hundred million rupees or above in the tax year 2017 or in any subsequent tax
year)]
where, for any reason whatsoever allowed under this Ordinance, including any other
law for the time being in force—
(a) loss for the year;
(b) the setting off of a loss of an earlier year;
(c) exemption from tax;
(d) the application of credits or rebates; or
(e) the claiming of allowances or deductions (including depreciation and
amortization deductions) no tax is payable or paid by the person for a tax
year or the tax payable or paid by the person for a tax year is less than 1.5%
of the amount representing the person‘s turnover from all sources for that
year:
(b)
i) Income tax payable under NTR Rupees
Taxable income 6,100,000
Income tax on above (765,000+35%*2,100,000) 1,500,000
Income tax payable under Minimum tax
Gross sales (120,500,000*117/100) 102,991,453
Tax u/s 113 @1.25% 1,287,393
Tax liability of GC 1,287,393
So GC will pay normal tax liability as minimum tax is less than NTR tax
ii) Income tax payable under NTR
Taxable income 6,100,000
Income tax on above (765,000+35%*2,100,000) 1,500,000
Income tax payable under Minimum tax
Gross sales (110,000,000*117/100) 94,017,094
As the turnover of GC is less than 100 million, so minimum tax will not be
applicable.
Tax liability of GC 1,500,000
CHAPTER – 9 INCOME FROM BUSINESS (222)

ANSWER NO. 3
Asghar and company (AC)
Income tax calculation
For the tax year 20x4
Rs in '000'
Profit before tax 2,468.0
Add: Inadmissible
Raw material (7800*20%) 1,560.0
Accounting depreciation 2,100.0
Provision for slow moving 1,800.0
Eid Milan party N- -
1
Penalty to customer N- -
2
Donation N- 2,300.0
3
Marketing (paid in cash) 500.0
Dividend (174.0)
Gain on sale of shares (660.0)
plant and machinery 375.0
7,801.0
Less: Admissible
Tax depreciation 1,900.0
Pre commencement 680.0
Plant initial allowance & depreciation N- 1,042.0
4
3,622.0
6,647.0
Gain on sale of shares 660.0
Dividend income 240.0
Total income 7,547.0
Less zakat (30.0)
Gain on sale of shares (660.0)
Dividend income (240.0)
Taxable income 6,617.0
Tax on taxable income
upto 4,000,000 765.0
Tax on balance 916.0
Tax on dividend ((174+30) * 100/85)*15% 36.0
Tax on shares 82.5
1,799.5
Tax credit donation
A is the amount of tax assessed to the person for the tax year before 1,799.5
allowance of any tax credit
B is the person’s taxable income for the tax year; and 6,617.0
C is the lesser of:
a) the total amount of the person’s donations including the fair market 2,300.0
value of any property given; or
b) an individual or association of persons, 30% of the taxable income of 3,970.2
the person for the year; or
Tax credit donation (A/B*C) 625.5
Income tax payable after credit 1,174.0
Income tax paid
U/s 153 1,400.0
U/s 147 200.0
Dividend (174000+30000) * 100/85 36.0
Withholding plant 150.0
1,786.0
Refund (612.0)
CHAPTER – 9 INCOME FROM BUSINESS (223)

Note 1
The expenditure incurred on arranging Eid Milan party is in the nature of an amenity provided to
the employees. This helps the firm to maintain cordial and friendly relations with its employees
which is necessary for their motivation and increasing their productivity. Therefore, the
expenditure on Eid Milan party should be considered to be incurred wholly and exclusively for
the purpose of business.
Note 2
The damages paid to the customer is an expense connected and incidental to the carrying on of
firm’s business. The expenditure incurred is wholly and exclusively for the purpose of the
business.
Note 3
A person is 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:
any educational institution, hospital or relief fund established or run in Pakistan by Federal
Government or a Provincial Government or a local Government;
Tax Credit = (A/B) x C
A is the amount of tax assessed to the person for the tax year before allowance of any tax credit
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 including the fair market value of any property given;
or
b)where the person is:
-an individual or association of persons, 30% of the taxable income of the person for the year; or
-a company, 20% of the taxable income of the person for the year.
Note 4
Cost of pant 2500
Installation 375
2875
Initial allowance 25% 718.75
WDV 2,156
Depreciation (2156*15%) 323.4375
1,995
Note 5
As per definition of first year allowance it is available to industrial undertaking who are owned
and managed companies.
CHAPTER – 9 INCOME FROM BUSINESS (224)

ANSWER NO 4
Shahid
Computation of total income, taxable income and net tax
payable/refundable
For tax year 2024
Rupees
Computation of profit under accrual basis of accounting
Profit as given in the question - on cash basis 6,427,000
Adjustment on account of:
- closing stock under absorption cost method 3,200,000
- closing stock under prime cost method
(2,800,000)
400,000
Profit under accrual basis of accounting 6,827,000
Income from business
Profit before taxation 6,827,000
Add: Inadmissible expenses/admissible income
Purchases of packing material (440,000×20%) 88,000
Freight charges on goods - allowed expenditure -
Salary allowed as paid for business activities (brother) -
Penalty for late filing of income tax return 15,000
Expenditure on promotion of a product 950,000
1,053,000
Less: Admissible expenses/inadmissible income
Expenditure made for promotion of a product = 950,000/5 (190,000)
Tax depreciation (680,000)
Gain on sale of shares (45,000)
Agriculture income - Exempt income (980,000)
Profit on debt (450,000)

(2,345,000)
5,535,000
Less:
Unabsorbed tax depreciation - brought forward (568,000)
Total business income for the year 4,967,000
Capital gain
Gain on the sale of 20,000 shares 51,750
Income from other sources
Profit on fixed deposit account (FTR income) 450,000

Exempt income
Rent received for the agriculture land 980,000
Total income 6,448,750
Less:
Capital gain on sale of shares (Separate block of income) 51,750
Profit on fixed deposit account (FTR) 450,000
Rent received for the agriculture income (Exempt) 980,000
1,481,750
4,967,000
Less: Deductible allowance
Zakat paid / deducted (93,750)
Taxable income for the year 4,873,250
CHAPTER – 9 INCOME FROM BUSINESS (225)

Tax liability
Tax on Rs. 4,000,000 765,000
Tax on amount exceeding Rs. 4,000,000@ 35% 305,638
Tax on capital gain @ 15% (Rs. 51,750 @ 12.5%) 6,469
Tax on fixed deposit account @15% on Rs. 450,000 67,500
1,144,607
Less: Tax deducted
by customers 875,000
on capital gain 6,750
on fixed deposit account 45,000
926,750
Net tax payable 217,857

ANSWER NO 5
(a) Accounting revaluation of factory building has no bearing on tax written down value.
Consequently, depreciation will be allowed on tax written down values of building without
taking into account the effect of revaluation.
(b) Since Shahbaz has purchased the machinery with a loan repayable in USD and before full
and final repayment of the loan, if there is an increase or decrease in the loan liability, in
terms of rupee, due to exchange rate fluctuation, the amount by which the liability is
increased or reduced shall be added to or reduced from the cost of the asset, as the case
may be. However, difference if any, on account of foreign currency fluctuation, shall be
taken into account in the year of occurrence for the purposes of depreciation.

ANSWER NO 6
(i) [Link] 000
Consideration received (equal to the cost of the asset) 1,800
WDV at the time of disposal 600
Gain on disposal 1,200
(ii) The forward contract entered into by SL for the purchase of raw materials is in the nature
of a hedging contract which was entered into to guard against loss from future price
fluctuations. Such contracts have specifically been excluded from the definition of
speculative business. Therefore, Rs. 500,000 paid to settle the forward contract is an
expenditure incurred in the normal course of business and is a deductible expenditure.
CHAPTER – 9 INCOME FROM BUSINESS (226)

ANSWER NO.7
Saleem
Computation of taxable income for the year 2024
Rupees
Income from business
Accounting profit before adjustment 2,350,000
Add: Inadmissible expenses/admissible income
Rental charges - withholding tax deducted but not deposited 1,560,000
Depreciation on leased assets 600,000
Financial charges on leased assets 462,000
2,622,000
Less: Admissible expenses/inadmissible income
Accounting profit on sale of vehicle 200,000
Lease rental (857,000×70%) 599,900
Accounting gain on the sale of shares 50,000
Loss on disposal of a passenger transport vehicle 180,556
1,030,456
3,941,544
Income from capital gain
Gain on the sale of share of Sun (Private) Limited 500,000
Gain on the sale of securities
Moon Limited (700,000)
Planet Limited 250,000
The Loss will be Carried Forward for next 3 Years (450,000)

Total income 4,441,544

Computation of tax liability
Tax on 4,000,000 765,000
Tax on income exceeding 154,540
Tax payable under NTR 919,540
Advance tax collected at the time of vehicle purchased (85,000)
Income tax payable 834,540
CHAPTER – 9 INCOME FROM BUSINESS (227)

ANSWER NO. 8
Qateel Enterprises
Computation of income tax liability
For the tax year 2024 Rupees
Accounting profit before taxation 2,809,297
Add: Inadmissible expenses/admissible income
Fine paid – violation of the contract -
Vehicle tax – Govt. Dues -
Accounting depreciation 1,900,000
Renewal of license fee 450,000
Replacement of transformer (KESC) – security deposit 200,000
Advance tax collected (KESC) 300,000
Donation paid in cash 64,600
Electrical items purchased in cash 2,000,000
Penalty paid to CIR for late filing of return 25,000
Entertainment expenditures – foreign customer -
Finance charges on lease machinery 35,703
4,975,303
Less: Admissible expenses & inadmissible
Renewal of license fee [450,000/15] 30,000
Gain on sale of a private limited company shares 1,200,000
Tax depreciation as given 1,560,000
Tax depreciation on warehouse constructed N-1 104,000
Lease rental paid 270,000
Dividend income 580,000
Tax depreciation on leased machinery acquired by paying residual
value (1000,000 x 15%) 15,000
3,759,000
4,025,600
Capital Gain
Gain on sale of private company shares Rs 1,200,000. 1,200,000
Income from other source
Dividend from listed companies [(580,000+100,000)/85%] 800,000
Total income for the year 6,025,600
Less: Dividend from listed companies (800,000)
5,225,600
Zakat deducted on dividend (100,000)
Taxable income under NTR 5,125,600
CHAPTER – 9 INCOME FROM BUSINESS (228)

Computation of tax liability Rupees

Tax on Rs. 4,000,000 765,000
Tax on balance 393,960
Tax payable under NTR 1,158,960
Less: tax credit on donation to institutions mentioned in 13th schedule
Rs. 1,158,960 /5,125,600 x Rs.1,537,680 [[Link] of Rs.2m or 30%
(Rs.1,537,680) of taxable income] (347,688)
Tax liability under NTR 811,272
Tax on dividend – FTR (15%) (800,000 x 15%) 120,000
Total tax liability 931,272
Advance tax collected on electricity bill (300,000)
Advance tax paid (480,000)
Advance tax on dividend (120,000)
(900,000)
Income tax payable 31,272

N-1: Warehouse constructed 1,040,000

Tax depreciation (1,040,000 x 10%) [S.22 (2)] 104,000

ANSWER NO. 9
(a) For the purpose of minimum tax liability, turnover is defined as:
(i) The gross sales/gross receipts, exclusive of sales tax and federal excise duty or any
trade discounts shown on invoices or bills, derived from the sale of goods and also
excluding any income taken as deemed.
(ii) The gross fees for the rendering of services, including commissions.
(iii) The gross receipts from the execution of contracts.
(iv) The company’s share of the above stated amounts of an association of persons of
which the company is a member.
In case of (i), (ii) and (iii) above, it does not include any amount covered by final discharge
of tax liability for which tax is separately paid or payable.
(b) Following persons are required to pay minimum tax:
(i) a resident company
(ii) an individual having turnover of Rs. 100 million or above in the tax year 2017 or in
any subsequent tax year
(iii) an association of persons having turnover of Rs. 100 million or above in the tax year
2017 or in any subsequent tax year
CHAPTER – 9 INCOME FROM BUSINESS (229)

ANSWER NO. 10
Mushtaq Enterprises
Computation of total income, taxable income and net tax payable/refundable
For tax year 2024
Income from Business: Rupees
Profit before taxation 1,800,000
Add: Inadmissible expenses/admissible income
Entertainment expenditures -
Salary to employees (16000*5*12) -
Research expenditure incurred outside Pakistan 150,000
Accounting loss on the sale of patents 65,000
Amortization charged on patents for the year 25,000
Gain on sale of patents (524,000 – 430,000) 94,000
Bad debts recovered: Atif [700,000 – (800,000 – 550,000)] 450,000
Accounting depreciation 580,450
Transfer of furniture to Dubai (850,000–610,000) 240,000
Less: Admissible expenses/inadmissible income
Recovery Credited in accounts assumed taken as income (700,000 + 400,000) (1,100,000)
Bad debts recovered: Aslam [1,200,000–600,000–400,000] (200,000)
304,450
Less:
B/f business loss (125,000)
1,979,450
Tax Depreciation for the year
Unabsorbed tax depreciation – brought forward (705,000)
Normal tax depreciation on furniture [(200,000*15%)] (30,000)
Initial allowance on imported machinery (500,000*25%) (125,000)
Normal tax depreciation on machinery (500,000-125,000) of 15% (56,250)
Tax depreciation on other assets (456,400)
(1,372,650)
Total business income for the year 606,800
Capital Gain (Separate block income)
Gain on the sale of 6,000 shares [432,000 – (6,000 × 25)] 282,000
Taxable income for the year 888,800
Computation of net tax liability Assumed.
Tax on Rs. [Rs.15,000 + 15% (Rs.888,800-800,000) 28,320
Less: Advance Tax paid under section 147 (200,000)
Income tax payable / (refundable) (171,680)
CHAPTER – 9 INCOME FROM BUSINESS (230)

ANSWER NO. 11
Mr. Tahir (Non-salaried individuals)
Computation of taxable income and tax payable
For tax year 2024 Rupees
Income from business
Accounting profit before taxation 1,057,000
Add: Inadmissible expenses
Accounting depreciation on imported machinery (1,500,000 x 15%) 225,000
Intangible assets - Cost of software 975,000
Pre-commencement expenditures – Cost of feasibility 250,000
Lease financial charges 80,000
Depreciation on leased asset 260,000
Personal car expenses (Rs.295,450 x 20%) 59,090
Provision for bad debts 25,000
1,874,090
Less: Admissible expenses
Initial allowance on imported machinery (1,500,000 x 25%) 375,000
Tax depreciation on imported machinery (1,500,000–375,000) x [(15% of 1,125,000) 168,750
Pre-commencement expenditures (250,000 x 20%) 50,000
Lease rentals paid 300,000
Intangible assets - Cost of software (975,000 ÷ 12) 81,250
975,000
Income from business 1,956,090
Capital gain Exempt as holding period is more than 6 years
Taxable income 1,956,090

Explanations:
1 The amount received from employment in UAE is foreign source income and since Tahir is a
citizen of Pakistan and was not resident in last four tax years, such income is exempt from tax
in this and the next year.
2 Salary paid to Tahir's brother is an allowable expense as he is working as an employee in the
business.
3 The plot is covered in the definition of immovable property. Since holding period of property
is more than six years, the rate of tax would be zero.