CAF 02 Tax Practices Chapter 10 Income from Other Sources

Income from Other Sources [Sec. 39]

(1) Income of every kind received (only received not receivable) by a person in a tax year, if it is
not included in any other head, other than income exempt from tax under this Ordinance, shall
be chargeable to tax in that year under the heading “Income from Other Sources.
(2) income from other sources is chargeable to tax on ‘receipt basis (cash basis). If income from
other source is not received in a tax year it will not be the part of IFOS in that tax year in which
it is not received.
Income from other sources include the following namely:
(i) Dividend (if Dividend is received from Pakistani Company, it will fall under FTR with tax
rate of 15% as discussed in section 5 and if received from foreign company it will fall under
this head)
(ii) Royalty
(iii) Profit on debt (interest income received from bank received by a company will fall in this
head. If received by all other persons it will fall in FTR)
(iv) Additional payment on delayed refund under any tax law (e.g Mr. Ali Paid Rs. 1500,000 as
tax for tax year 2018. Later on, he came to know that he has over paid the tax of Rs.
500,000. He claimed the refund of over payment. Due to some reasons FBR delayed the
payment and paid Rs. 580,000 with late payment penalty to Mr. Ali in tax year 2022. The
excess amount of refund of Rs. 80,000 is income from other source)
(v) Ground rent (Mr. Kazim let out his open plot to Mr. Salman on rent for five years. The
terms of contract include that Mr. Salman will construct a building on this plot at his own
cost. The building will be demolished at the time of end of contract. In this scenario the
rent is not from the open plot so the rent received by Mr. Kazim will be Ground Rent).
(vi) Rent from the sub-lease of land or a building;
(vii) Income from the lease of any building together with plant or machinery;
(viii) Income from provision of amenities, utilities or any other service connected with renting
of building;
(ix) Any annuity or pension; (some time pension is received by a person without a relationship
of employer and employee like amount received from EOBI this falls under the head IFOS.
If it is received by an employee from his employer it will fall under the head income from
salary).
(x) Any prize bond, or winnings from a raffle, lottery, prize on winning a quiz or crossword
puzzle;
(xi) Any amount received as consideration for providing, use or exploitation of property,
including from the grant of a right to explore for, or exploit, natural resources;(e.g if Mr.
A is owner of land and his land having natural resources. He is owner of land not the
owner of those natural resources. So he will provide his land to Govt. for exploring the
natural resources. As a result, the Govt will pay to him. This will be his IFOS).
(xii) The fair market value of any benefit, whether convertible to money or not, received in
connection with the provision, use or exploitation of property;(in the above example if
Mr. A receives some kind then the FMV of these kinds will be IFOS. e.g share of gold etc)
(xiii) Any amount received by a person as consideration for vacating the possession of a
building or part thereof, reduced by any amount paid by the person to acquire possession
of such building or part thereof. This income shall be taxable in 10 years from the year of
1
CAF 02 Tax Practices Chapter 10 Income from Other Sources
receipt in equal proportion. (Mr. Bilal have shop in Cantt. He got the possession of this
shop by paying Rs. 500,000 in tax year 2016. Now in tax year 2022 he is handing over the
possession of this shop to Mr. Meesum and received from him Rs. 1200,000 for vacating
the possession. His income from other source will be= (1200,000-500,000)/10=Rs. 70,000.
(The reason for dividing by 10 is that IFOS falls under NTR if the whole amount will be
added to NTR its tax rate will change. That’s why law has given facility to add in 10 equal
instalments).
(xiv) Any amount received by a person from Approved Income Payment Plan or Approved
Annuity Plan under Voluntary Pension System Rules, 2005.
(xv) Income arising to the shareholders of company from the issue of bonus shares. (Bonus
shares are charged to tax at 10% as final tax regime income).
(xvi) any amount or fair market value of any property received without consideration or
received as gift, other than gift received from:
• an ancestor(‫)داجدا آباؤ‬, a descendent of any of grandparents, or
• an adopted child, of the individual or of a spouse of individual
• spouse of the individual or of any person specified above. (If received from the
above-mentioned relatives, it will be capital asset as defined in IFCG. If received
from other than these relatives, it will be income from other source. e.g antique
watch received as gift from friend having a FMV of Rs. 200,000 it will be IFOS).
[Note 1: Any gift received in cash even from above persons will be taxable under IFOS]
Tax Treatment of Gifts Under Various Income H
Gifts Received from an Employer
• Tax Treatment: Any gift received from your employer is considered part of your income and is taxable under the
head "Salary."
• Rationale: Since the gift is provided by the employer, it is viewed as a form of compensation or benefit related to
your employment, similar to a bonus or other fringe benefits. As such, it is added to your taxable salary and taxed
according to the applicable income tax rates.
Gifts in the Form of Assets Received from Relatives
• Tax Treatment: Gifts received in the form of assets (such as property, jewellery, or other valuables) from relatives
are exempt from tax.
• Rationale: Gifts from close family members are generally not considered taxable income. The tax law provides
this exemption to avoid the burden of taxation on transfers within families, recognizing these as personal, non-
commercial transactions.
Gifts Received from Relatives or Friends in the Form of Cash
• Tax Treatment: Gifts received in the form of CASH from relatives or friends are taxable under the head "Income
from Other Sources. The fair market value of ANY gift received from friends is taxable under the head "Income
from Other Sources
• Rationale: Cash gifts, unlike asset gifts from relatives, are considered a potential source of income. Therefore, to
prevent the misuse of cash gifts for tax evasion, they are taxed under "Income from Other Sources," unless
specifically exempt under certain conditions.
Gifts Received from a Tenant
• Tax Treatment: Gifts received from a tenant are taxable under the head "Income from Property."
• Rationale: A gift from a tenant is considered a form of rental income, possibly linked to the property rented out.
As such, it falls under "Income from Property" since it arises due to the landlord-tenant relationship and is related
to the rental income stream.
Gifts Received Under a Business Relationship
• Tax Treatment: Gifts received in the course of a business relationship are taxable under the head "Income from
Other Sources."
• Rationale: Gifts exchanged in a business context are viewed as income since they could be related to transactions,
services rendered, or other business dealings. To ensure fairness and prevent underreporting of business earnings,
such gifts are included as "Income from Other Sources."
Gifts Received from a Company as a Shareholder
2
CAF 02 Tax Practices Chapter 10 Income from Other Sources
• Tax Treatment: If a shareholder receives a gift from a company, it is treated as a dividend.
• Rationale: Gifts from a company to its shareholders are considered a distribution of profits, akin to dividends. The
tax law treats these gifts as dividends to prevent companies from disguising profit distributions as gifts to avoid
dividend taxation.

(3) Any amount received as a loan, advance, deposit for issuance of shares or gift by a person in a
tax year from another person (not being a banking company or financial institution) without a
crossed cheque drawn on a bank or without proper banking channel if a person holding no
National Tax Number, then only through cross cheque. However, advance for the sale of goods
or supply of services is outside the scope of this clause. If the amount is received for together
supply of goods and services then the amount received will be IFOS.
Explanation:
Amount obtained from banking company (not taxable means not IFOS)
Amount obtained from person through cross cheque (not taxable means not IFOS).
Amount obtained from person in cash (taxable means IFOS).
Amount obtained from person through banking channel having NTN (not taxable means not IFOS).
Amount obtained from person through banking channel having no NTN (taxable means IFOS).
Example 1:
Mr. Baqir has obtained following amounts which are examples of Income from Other Source:
i) Loan received from grandmother in cash.
ii) Loan received from uncle (not having NTN) through online transfer (banking channel).
iii) Gift received from mother in cash.
Example 2:
Mr. Rizwan received the following amounts:
• Loan of Rs. 200,000 is received in cash from his friend Mr. Ahmad (not having an
NTN). [taxable]
• Loan of Rs. 250,000 is received from his cousin Asghar (having NTN) in
cash.[taxable]
• Loan of Rs. 280,000 is received from class fellow Mr. Bamsey (having NTN) through
cross cheque.[not taxable]
• Cash gift of Rs. 330,000 from grandmother (having NTN) [taxable]
• Loan of Rs. 300,000 is received from a Mr. Rana (not having NTN) through online
transfer. [taxable]
There are three types of contracts:
1. Contract for sale of goods (e.g sale of mobile phone, chairs etc.)
2. Contract for rendering of services (e.g accounts or audit or legal etc.)
3. Contract for sale of goods and rendering of services (e.g a contract in which a seller
will create map (services) and will also provide construction material(goods))
Explanation:
In first two types of contracts if the seller is receiving advance, the payment can be
made by buyer through any mode of payment (means payment can either be made in cash
or in cheque)
In third type of contract if the contract relates to sale of goods and rendering of services
the buyer should make payment through modes mentioned in S. 39(3) otherwise it will be
treated as “Income from other source” in the hands of seller.
(4) Subsection 3 shall not apply to the advance received for selling of goods or providing of services

3
CAF 02 Tax Practices Chapter 10 Income from Other Sources
(4A) Where any profit on debt derived from National Savings Deposit Certificate including DSCs
(defense saving certificates) is paid to a person (means received by individual) in arrears and as a result
his income is chargeable to higher rate of tax than would have been applicable if the amount had been
paid in the tax year to which it relates, he may by a notice in writing to the Commissioner by the due
date (normally September 30) for furnishing persons return of income, elect (to choose) for the
amount to be taxed at the rates that would have been applicable if the amount had been paid in the
tax year to which it relates.
(5) this section shall not apply to any income which falls under any other head of income. (If an income
falls under any other head e.g on capital gain on sale of shares of private company shares etc. or an
income which falls under FTR e.g dividend from local company)
Important aspects of taxability
Income, which does not fall under any other head of income, would fall within this heading of income.
Therefore, the kinds of income elaborated above from (i) to (xvii) if fall within any other head of
income, then the same may not be included again under this head of income. For example, sole
business of the banks is earning profit on debt and it is therefore, classified as “income from business”
in their hands, hence, the said income cannot be classified as “Income from other sources” again.
Section 39(5) of the Ordinance therefore, specifically inserted to clarify this position and the said
section stipulates that:
Therefore, it is imperative to decide the classification of an income under a specific head of income
after considering the scope of activities of the taxpayer.
For example: The sole business of a company is to manage its investment in different subsidiaries of a
group. Then the ultimate income of the said company would be dividend income and capital gains from
sale of shares. The income of the company from dividends then would be chargeable to tax under the
head income from business and not under the head income from other sources. However, on the other
hand, in case a manufacturing company earns dividend income in addition to income arising from sale
of manufactured goods, then the said dividend income would be chargeable to tax under the head
income from other sources

Special provisions relating to different incomes covered under IFOS

Dividend
Dividend income is generally taxable under final tax regime in respect of all taxpayers including
companies. (Already discussed in chapter 4)

Profit on debt (Sec. 7B):

• any profit, yield, interest, discount, premium or other amount, owing under a debt, other than
a return of capital (repayment of original liability); or
• any service fee or other charge in respect of a debt, including any fee or charge incurred in
respect of a credit facility which has not been utilized

(1) Any profit on debt derived by a person where the person’s business is to derive such income
shall be chargeable to tax under the head “Income from Business” and not under the head
“Income from Other Sources”.

4
CAF 02 Tax Practices Chapter 10 Income from Other Sources
(2) Where a lessor, being a scheduled bank or an investment bank or a development finance
institution or a modaraba or a leasing company has leased out any asset, whether owned by it
or not, to another person, any amount paid or payable by the said person (lessee) in connection
with the leased asset shall be treated as the income of the said lessor and shall be chargeable
to tax under the head “Income from Business”.
(3) Any amount received by a banking company or a non-banking finance company, where such
amount represents distribution by a mutual fund or a Private Equity and Venture Capital Fund
out of its income from profit on debt, shall be chargeable to tax under the head “Income from
Business” and not under the head “Income from Other Sources”.
Taxation on Profit on Debt for Individuals and AOP’s

Profit on debt upto Rs. 5 million is taxable as separate block @ 15% under section 7B if received by
individual or AOP from prescribed persons mentioned in section 151(1) i.e. from banks, any
government, national saving scheme post office saving certificates etc.
Any profit on debt (received by individual or AOP) exceeding Rs. 5 million would be taxable under
normal tax regime under the head income from other source at applicable slab rates.
• The withholding agents shall deduct tax at the rate of 15% of the yield for non-corporate
taxpayers.
• Payment on account of interest on loan through loan agreement is not subject to tax deduction
and therefore the same is taxable under the normal tax regime in case of all persons (individual,
AOP, Company) under the head income from other source. (means if interest is earned through
loan agreement then is taxable under NTR for all the persons).
• Similarly, in case of individual, profit on debt on Behbood Saving Certificates/pensioners benefit
account is taxable under NTR with maximum tax rate @ 5%.
Profit on Debt Regime Tax Rates
Where profit does not exceed Rs. 5,000,000 SBI 15%
Where profit exceeds Rs. 5,000,000 NTR As per slabs

ADMISSIBLE DEDUCTIONS Sec. 40:

In computing the income under the head "Income from Other Sources", the following allowances and
deductions shall be made, namely:
(i) Any expenditure (e.g actual expenses paid amenities or utilities) paid for earning Income from Other
Sources other than expenditure of capital nature. It is important to note that as the basis of
chargeability of income from other sources is ‘receipt basis’, therefore the basis for allow ability of
deductions is paid bases.
(ii) In the case of profit on debt not falling under final tax regime, any Zakat paid (at the time of receipt
of profit) by the person under Zakat & Usher Ordinance, 1980.
(iii) In the case of income from sub-lease of land or a building or from lease of building together with
machinery or plant, deduction for depreciation on plant, machinery and building u/s 22 and initial
allowance on plant and machinery only u/s 23.

5
CAF 02 Tax Practices Chapter 10 Income from Other Sources

• No deduction is allowable to a person under this head to the extent that the expenditure is
deductible in computing the income of the person under another head of income (means if an
expense is allowed in other head, it will not be allowed as deduction in IFOS).
• The provisions of section 21 - Deductions not allowed shall apply in determining the deductions
allowed to a person under this head in the same manner as they apply in determining the
deductions allowed in computing the income of the person under the head "Income from
Business".
• Expenditure is of a capital nature if it has a normal useful life of more than one year.
PAST PAPER QUESTIONS:
Q#1: Mr. Mobeen declared the following particulars:
• Income from salary Rs. 1,750,000.
• Received a dividend warrant of Rs. 19,500 from a listed company. The amount is net of income tax @ 15%
and Zakat of Rs.500.
You are required to compute the taxable income and tax liability of Mr. Mobeen.

Q#2: Anjum paid tax amount to Rs. 28 million for tax year 2016. Later on, he realized that he has made
an excess payment of RS. 8 million therefore he filed refund application. Tax authorities agreed to
make refund. However, the refund was delayed by tax authorities and consequently Mr. Anjum
received Rs. 8.4 million (it includes Rs. 0.4 million as additional payment on delayed refund).

Q#3: Mr. Asif has let-out a shop on September 1, 2020 owned by him to Mr. Bilal. The shop comprises
of two rooms and for each room a monthly rental of Rs. 15,000 is agreed. On December 1, 2020 Mr.
Bilal decided to give one of the rooms to Mr. Amir against a monthly rent of Rs. 20,000.
Calculate the taxable income of Mr. Asir and Mr. Bilal for tax year 2021 under the relevant heads.

Q # 4. Mr. Faisal has provided you with following information for TY 20X6:
1. He received Rs 100,000 as advance (in cash) for the designing and construction of home of Mr. Anjum. The
advance is for sale of goods (i.e. material) and rendering of services (preparation of map).
2. He has hired a property on rent for which he pays Rs 15,000 per month starting from 1 August 20X5. The
property is sub-let to Mr. Furqan on 28 February 20X6 for Rs. 20,000 per month.
3. He received a factory in inheritance from his father in TY 20X6. In TY 20X6 he leased the factory with the
plant and machinery at annual rental Rs 1,200,000. The tax depreciation on machinery is Rs 20,000.
4, He owned some property in Chitral. He was informed by Natural Resource department that there are tons of copper and
gold underneath his property. He made an agreement with them that he will charge Rs 100,000+ 10% shares of gold and
copper extracted in TY 20X6 as consideration for providing the property. The fair value of resources extracted is Rs.
2,500,000.
5. Mr. Furqan paid Mr. Faisal a cash Rs. 50,000 as advance for purchase of some goods. He has an office in Islamabad. He
paid Rs 150,000 for getting its possession on 1 June 20X2. Ms. Shaumaila approached him and paid him Rs 250,000 for
vacating that property on 1 January 20X6.
6. He received Loan from Cadbury bank of Rs 400,000 in cash at start of year.
7. On his birthday, his father sent him cash gift of Rs. 25,000. His father does not have NTN He was need of an urgent money
at the end of year. For this purpose, he obtained a loan of Rs. 100,000 through online transfer from his friend. His friend
does not hold NTN. 10. He received an amount of Rs. 500,000 as gift from his uncle (who does not hold NTN) through a
cross cheque.
Required: Comment on the taxability of the above
Q # 5 On 13 September 2024, Azhar purchased a building which had been previously used as a factory in the Sundar
Industrial Estate for Rs. 5,000,000 and installed in the building an item of second- hand plant previously used in Pakistan,
6
CAF 02 Tax Practices Chapter 10 Income from Other Sources
costing Rs. 3,000,000. Azhar leased the Sundar property consisting of the building together with the plant on 1 January 2025
to Mr. Atif for a composite rent of Rs. 400,000 per month payable in advance.
Azhar is also the owner of a residential building in Gulberg which was let out to Beta Limited on 1 August 2024 for a monthly
rent of Rs. 250,000. Rent for the two years was received in advance on 1 August 2024 after deduction of tax at the prescribed
rate.
Following expenses were incurred by Azhar on the two properties during the tax year 2025:

Description Sundar Industries Gulberg

Repair to building 140,000 63,000

Repair to plant 50,000 -
Rent Collection charges 5,000 5,000
Insurance 48,000 20,000
Total 243,000 88,000
Required: Please calculate Mr. Azhar's taxable income for the tax year 2025, considering the relevant head of income, and
provide explanations regarding how both properties are treated for taxation?

MR. AZHAR
COMPUTATION OF TAXABLE
INCOME TAX YEAR: 2025
Head of income
Description Note Other Source Income from
Property
Rent (400,000x 6)/(250,000x11) 1&2 2,400,000 2,750,000
Less: Deductions
Repair to building/allowance 3 140,000 550,000
Repair to plant 50,000 -
Rent Collection Charges 5,000 5,000
Insurance 48,000 20,000

Depreciation: Plant 4 450,000

Building 500,000
1,193,000
Taxable income (3,382,000) 1,207,000 2,175,000

Notes: N-1: Rent received in advance: Rent is not chargeable to tax on receipt basis. Rent relating to a tax year, whether
received or receivable, is chargeable to tax in that tax year. Therefore, rent received in advance amounting to Rs.3,000,000
(250,000x 12) will be charged to tax in the tax year (TY 2026) to which in relates.
N-2: Income from lease of building with plant: A composite rent of Rs. 2,400,000 (400,000x6) was received as
consideration for the lease of the Sundar Industrial property consisting of building together with the plant installed in the
building. Such income after permissible deductions is chargeable to tax as "Income from Other Sources" of the Income Tax
Ordinance, 2001. Further all the Expenditure incurred in deriving such expense (along with depreciation and initial
allowance) will be allowed.
N-3: Repair expense/allowance: In case of income from other source, actual expense incurred will be allowed as deduction,
whereas in case of income from property, 1/5th repair allowance will be allowed.
N-4: Depreciation for full year computed as the assets are already in use and brought forward. (Dep. Building:
Rs.5,000,000x10% . Dep. Plant Rs. 3,000,000x15%.).