Class : B.Com II
College : Hi-Aims College of Commerce
Q 1: Explain the term Depreciation?
Q 1: Discuss those conditions which are laid down under the ordinance for depreciation allowance?
“A decrease in the value of asset through wear and tear is called depreciation”.
The income tax law allows the deduction of depreciation up to certain conditions which compute the taxable profit.
Following are the important conditions for the admissibility of the depreciation.
1-Entitled Assets for Depreciation:
Building, Machinery, Plan and furniture are eligible assets for depreciation.
It means a constructed structure and not a land. For example: the building of factory.
All kinds of machines which are used for the business purposes are called machinery.
All fittings are included in the furniture.
Vehicle aircraft or ship registered in Pakistan and surgical equipment which are used in business profession are also included in plant.
“Those books on which investment allowance not been given are also included in plant”
2-Use for Business Purposes:
Depreciation is allowed only on those assets which have been used completely for the business or profession purposes.
If one asset is being used for both the purposes (business and personal) then depreciation will be allowed according to the business proportion.
3-Use during Income year:
It is also necessary that such assets have been used only during the income year.
Intangible assets like goodwill are not entitled for depreciation. Only tangible assets like building, machinery are eligible for depreciation.
The income ordinance schedule III and rule two rates of depreciation had been prescribed.
6-Sale of Asset:
(i) No any depreciation is allowed if the asset is the sold of by the assessee in that income year.
(ii) At the tome of sale if the value of asset exceeds then the depreciated value the surplus
will be considered the income of an assessee.
(iii) If the sale proceeds is less than the depreciated value the deficit shall be deducted
from the income of a business of profession.
“If the above condition is fulfilled then depreciation will be proved”.
7-Should not exceed then the Cost:
The aggregate depreciation shall not exceed then the original cost of any asset.
8-Particulars of the Depreciable Asset:
Depreciable claim may be allowed if the assessee has provided all the particulars of the depreciated assets at the time of filling a return of total income.
9-Ownership of the Assets:
If the assessee is not the owner of the asset then he will not be allowed for the depreciation allowance.
Q 2: Explain the Various types of depreciation allowances?
Q 2: Explain the conditions and rates regarding the depreciation?
i) Initial Depreciation
ii) Normal Depreciation
Ans: INITIAL ALLOWNCE FOR DEPRECIATION:
One person can avail this allowance if he fulfills the following conditions
1- Eligible Assets:
The allowance is allowed only for those assets which are depreciated assets.
In respect of the following years initial allowance for depreciation is allowed.
i)The year in which first time in the business of profession.
ii)The year in which Commercial production was produced.
This allowance is allowed at the rate of 50% of the cost of asset.
5-Ownership of the Asset:
This allowance is allowed if the same asset is owned by the same person.
6-Allownce Not Allowed:
Initial allowance for depreciation is not allowed in the following assets.
I) Any Furniture or fitting.
ii) Already used Plant or Machinery.
iii) A road transport vehicle not lying for the hire.
iv)If any asset deduction is allowed under any other section of I.T ordinance 2001.
The above depreciation is calculated at the prescribed rate for various types of assets on the written down value of a depreciable asset. According to the following rate normal depreciation is allowed.
Sr No. Class of Depreciable Assets Rate in %age
1- Building (general) 5%
2- Factory, workshop, Hotel 10%
3- Quarters for Labour 10%
4- Furniture if Fitting 10%
5- Machinery or Plant 10%
6- Personal Computer hardware & allied items 30%
7- Technical & Professional Books 20%
8- Ships 5%
9- Motor Vehicles 20%
Q 3: Define the term Capital gains and Capital Assets? What is the procedure of computing the capital gains? Also explain the deduction and exemptions?
It is the fourth important source of income. Such income is chargeable under the head Capital Gains.
Any profits arising from the transfer of capital asset is called capital gain. Such income is also chargeable to tax.
Any kind of property held by the person is called Capital Asset. Such property may be connected with his business or not.
Shares of companies.
Patent and Copy rights
Term Finance Certificates.
Procedure of Computing the Capital Gains:
When the capital assets are disposed off by the persons, then capital gain is computed according the following procedure.
Capital asset is disposed off with in 12 months of its acquisition.
Formula: Consideration received on the disposed off the asset the cost of the Asset.
Balance = Gain/Loss
1-The asset fair market value on the date of its transfer is treated cost of the assets.
2-Expenditure on the disposal of assets is included in the cost.
Following Assets are not included in the cost of asset.
1-Expenses of a person which is allowed as deduction under any other provision of the
2-Expenses which are not spent on the disposal of assets.
Disposal after 12 months:
When the capital asset is disposed off after 12 month of the acquisition then 75% of the actual gain is taken for income.
Deduction of Capital Losses:
Under the head Capital Gains when we compute the income chargeable to tax the losses on the disposal of capital asset shall be treated as under.
1-Capital loss shall be deducted from the Capital Gain received on the disposal of any other asset.
2-If Capital gain is not chargeable to tax then no loss should be deducted on the disposal of the capital asset.
3-On the disposal of the following Capital Asset no loss should be recognized.
(i)Jewelry (ii)An Antique (iii)A coin (iv)A painting (v)A work of Art (vi)A postage
Stamp (vi)A rare book or manuscript
4-On disposal the disposal of any.
In the following cases capital gain is not included in taxable income
1-Income from the sale of Mudarba Certificates.
2-Shares of Public Company
3-PTC vouchers derived by any ending on of before 30-06-07 are exempt from tax.
4-If any foreign investor derives capital gain by selling the shares of public company which are approved by the Federal Government is exempt from tax.
5-Industrial undertaking set up in a special industrial zone declared by the Federal government is exempt from tax for 5 years.
6-Capital gain derived from an industrial under taking set up in export processing zone is exempt from tax.
Q 4: Define the term Assessment? Explain the procedure of filing the return under the income tax ordinance? Who should file the return and when it should be submitted?
Assessment means a complete scrutiny of the information provided by the taxpayer in his return.
So the word assessment has th following meanings in the income tax ordinance.
1-To compute the total income.
2-To compute the taxable income.
3-To compute the tax
4-To compute the refund.
5-To adjust the loss or to carry forward of loss.
Deputy Commissioner Income tax of that area where principle place of business is situated will make the assessment procedure.
There are several procedures in the assessment procedures.
A person files a return of his total income.
Assessment is made and tax payable is computed.
Taxpayer makes the payment.
If taxpayer is defaulter then recovery proceedings is taken against him.
If excess amount is paid by the taxpayer then excess tax is refunded.
How the Return is Furnished:
1-It is necessary for certain persons that they should inform the tax department about the total income which they have earned during the year.
2-They will also show that income which is exempt from tax.
3-All the information they will provide at the end of the year.
4-All those details they will provide on the prescribed form which is called return.
5-Businessmen also include the income statement, balance sheet and any other document required in the form.
6-This form return should be signed by the person or his representative.
7-When the form which is technically called return is duly completed and submitted to the income tax authorities, it is called furnishing the return of income.
Who should file the Return?
Following persons are required to submit the return according the income tax ordinance.
2-Any person, whose income is chargeable to tax.
3-Any person who has been charged tax in any of the four proceeding income years.
4-Any person who traveled abroad.
5-Any person who owns motor vehicle
6-Any person who is the owner of immovable property with land area 250 squares or more
7-Every person, who is subscriber of a telephone number.
Note: In the above cases (5,6,7),a widow, a disabled person, an orphan below 25 years are not required to file the return.
8-If a person is a member of any club where admission fee is more than 25 thousand or monthly fee is more than Rs. 500 will file the return.
Who one should file the Return sec (118):
According to the following schedule a taxpayer should file a return.
If the tax year of the company ends between,1st January to 30th June, then income return should be submitted up to 31st December of the same year.
All other taxpayers should submit the return up to 30th September next following end of their tax year.
If the business is discontinued by any person and commissioner had issued the notice to furnish the return then he will submit the return according the date of notice.
(i)Extension of Date Sec(119):
The period of filing the return can be extended up to 15 days by the commissioner income tax .But this time can be executed if reason of not submitting the return is genuine like sickness or absence from Pakistan.
In some exceptional cases it can be extended for a longer period.
How Return should be submitted:
A tax payer can submit the return in the following ways.
(i)It may be sent by registered post.
(ii)It may be delivered by hand.
Issuance of Notice:
The Commissioner income tax can issue the notice for the submission of return to any person within a specified period. Some times the commissioner finds that such person income was chargeable to tax but he has not submitted the return. So this action is taken by him. This notice can be issued in respect of last five years.
Change in Return:
In the following cases Return can be revised.
(i)The return of total can be revised by the tax payer before the submission.
(ii)After filling a return a taxpayer discovers any mistake or wrong statement it can be revised.
Q 5: Explain the various modes of deduction of tax at source under the income tax ordinance?
Ans: DEDUCTION OF TAX AT SOURCE:
It is very important source of collecting the tax. It is necessary for certain persons to deduct the amount of tax at specific stages and deposit this amount with the tax department.
While making the payment of taxable salary the employer should deduct the tax amount and deposit it every month with the commissioner.
While paying the dividend to any person all the resident companies should deduct the tax.
If dividend is exempt from tax then ir should not be deducted.
Rates of Tax:
Tax is deducted according to the following rates.
(i)When dividend is paid to the public company 5% or to insurance company.
(ii)When it is paid to any other company at 10% or an individual or association of persons.
3-PROFIT ON DEBT sec (151):
Any person who pays the profit in debt should deduct the tax out of such amount according the following rates.
(i)Tax should be deducted at the rate of 10% on Defense Saving Certificates.
(ii)At the rate of 10% on deposits by bank and financial institutions.
(iii)20% of profit on securities issued by Federal, Provincial or Local Government.
(iv)10% of profit on bond,certificate,debenture,security of financial institution, finance society and banking company.
4-PAYMENT TO NON-RESIDENTS sec(151):
According to the following rates every person should deduct the tax from the amount paid to non-resident person.
(i)On Prize, dividend and property income should be deducted at the rate of 30 %.
(ii)On royalty or fee for technical services the tax should be deducted at 15%.
5-PAYMENT FOR SUPPLY OF GOODS AND SERVICES:
While making the payment of an account of supply of goods and services every person should deduct the tax.
(i)In case of supply of goods if payment exceeds to Rs.25000 P.A, then tax must be deducted.
(ii)In the case of services if payment exceeds to Rs.1000 P.A, then tax must be deducted.
(iii)If payment is made on behalf of Government Company, joint venture, foreign contractor and association of persons then tax must be deducted.
Note: If payment is made on behalf of govt,of the individual then deduction of tax is not necessary.
6-PAYMENT OF BROKERAGE OR COMMISSION:
While making the payment of commission or brokerage every person should deduct 5% tax at source out of the payment. If payment is made on behalf of the government company, association of persons, foreign contractors or joint venture then deduction of tax is compulsory.
Note: Tax amount deducted will be treated as advance tax on behalf of the person to whom payment is made.
7-DEDUCTION FROM EPORTS:
At the time of realization of foreign Exchange proceeds on account of export of goods by an exporter every authorized dealer in foreign exchange should deduct tax.
(i)An authorized dealer should also deduct tax at the time of realization on account of the commission due to an inducting commission agent.
8-PAYMENT OF RENT OF HOUSE PROPERTY:
If any person pays the rent of the house the deduction of tax must be made keeping in view the following conditions
of profit on bond,certificate,debenture,security of financial institution, finance society and banking company.
(i)The rent is paid on behalf of the govt. a company, a non-profit organization, diplomatic mission or local authority.
(ii)Tax should be deducted if annual rent is more then three (3) lac rupees.
(iii)Tax should be deducted at the rate of 5 %.
9-PRIZES AND WINNINGS:
In case of prize on bonds tax will be deducted at the rate of 10% .Tax will be deducted at the rate of 20% on the prizes from lottery or puzzle, etc.The tax deducted will be a final tax.
Every person who is selling above product to a petrol pump operator should deduct from the amount of commission or discount allowed to operator
The rate of tax will be @10 % and it will be a final payment.
Q 6: Who pays the Advance Tax? How it is computed and where it is paid? Discuss the provision of Section 147?
Ans: ADVANCE TAX:
When the tax is paid before the assessment it is called advance tax. It is the second important mode of payment of tax. Following are its details.
According to Sec 147, Taxpayer pays the advance tax to the commissioner.
1-WHO SHOULD PAY ADVANCAE TAX?
(i)All the companies and registered firms are liable to pay advance tax if they have been already assessed in the previous year.
(ii)Individuals and association of persons can pay the advance tax if their total income is Rs.2 lac or more excluding salaries and capital gains.
2-HOW TO COMPUTE THE AMOUNT OF ADVANCE:
Tax is computed on the basis of the tax assessed for the last year.
Example: Mr. Akbar last year income was Rs.2 lakh and he has paid 10 thousand rupees as a tax. Now this year is still continuing but he is required to pay advance tax. Now keeping in view the last year tax he will pay ten thousand as advance tax.
3-WHEN AND WHERE TO PAY:
(i)Advance tax should be paid to the commissioner in each tax year.
(ii)Advance tax amount is paid in four equal installments.
(iii)It is paid according to the following schedule.
Period Paid on or
Before September Quarter 15th
September December Quarter 15th
December March Quarter 15th
March June Quarter 15th
4-FAILURE TO PAY ADVANCE TAX:
If any person fails to pay additional tax @12% per anum.
If any person pays the tax according to his own estimated income and it is 80% less then the actual tax, in this case he is liable to pay the additional tax @12% per anum.
6-ADVANCE TAX PAID TO A COLLECTION AGENT BY AN IMPORTER Sec(148):
Importers are also required to pay advance tax to the collector custom. Importers of goods pay the tax according the value of imported goods.
Rules of Payment:
1-The rate of advance tax is 6% of the value of imported goods.
2-If some goods are imported to re-export then such goods are not taxable.
3-Advbance tax is collected in the same manner as the custom duty is collected by the collector customs.
4-The rate of advance tax can be reduced by the commissioner subject to certain conditions.
5-The time period can be extended by the income tax commissioner for the payment if advance tax but not more then 15 days.
Q 7: Explain the penalties regarding the following cases?
Q 7: Discuss those conditions for imposing the penalties in the following cases?
Q 7: Different penalties are imposed regarding the different offences in the income tax
1-Penalties for failure to furnish the return of total income.
2-Failure to furnish statement.
3-Failure to prescribed Accounts.
Ans:Penalty for Failure to Furnish Return of Total Income:
If any person fails to furnish the return of his total income in a particular period without a reasonable cause the income tax commissioner may impose a penalty on that person
Penalty for Failure to Furnish Statement:
If any person obstructs any income tax authority in the discharge of his duty a penalty can be imposed on that person. Such penalty will be imposed by the commissioner income Tax. The amount of penalty should not exceed than Rs. ten thousand (1000) will be equal to one tenth (1/10)of one (1%) of total tax payable for each day of default. But the minimum amount of penalty must be Rs. 500 and 25% of taxable maximum.
Returns of income submitted.
(i) Annual return of income.
(ii) Return required by commissioner by notice.
(iii) Return required by commissioner for additional assessment.
(iv) Return income in case of discontinued business.
(v) Return in case person about to leave Pakistan.
Penalty for Failure to Furnish Statements.
The commissioner income tax may impose penalty if any person fails to furnish the required statement without any reasonable cause with in due time.
i) Initial penalty Rs. 2000.
ii) Further Rs. 200 per day during which the default continues.
Following are the statements which are submitted.
i)Statement regarding salary ,dividend, interest and income.
ii)Statement regarding receipts to income tax authorities.
iii)Statement regarding certain properties.
iv)Statement regarding certain contracts.
(4)Penalty for non-payment of tax.
The commissioner tax may impose penalty on such person who fails to pay the tax within specified time.
1-5% of tax for the 1st default.
2-5% of tax additional penalty for second default.
3-25% of tax additional penalty for the 3rd default.
4-50% of tax additional penalty for fourth and subsequent default.
5-Penalty for concealment of income:
If income tax authorities find during the course of proceeding that any tax payer has concealed his income or furnished wrong particulars of such income a penalty may be imposed.
Income tax authorities may impose penalty equal to amount of tax evaded by such person.
Ways of concealment:
1-Money not shown by the tax payer.
2-Investment made by the tax payer not shown.
3-Concealed the income chargeable to tax.
4-Valuable articles not shown by the tax payer.
5-Claiming any deduction for an expenditure not actually incurred.
6-Penalty for failure to maintain the accounts sec(185):
The commissioner tax may impose penalty on the person who fails to maintain the records without any reasonable cause.
1-Rs.2000 for the first failure.
2-Rs.5000 for the second failure.
3-Rs.10,000 for the third failure.
7-Penalty for non-compliance with notice:
If any person fails to comply the notice of the income tax commissioner without reasonable cause he can impose penalty.
1-Notice to produce wealth statement.
2-Notice to produce books of accounts.
1-Rs.2000 for the first failure.
2-Rs.5000 for the second failure.
3-Rs.10,000 for the third failure or subsequent.
Note: Penalty should be reduced by 75% if tax is assessed less then Rs.twenty thousand (20,000).
8-Failure to give notice of Discontinuous of Business or Profession:
Sometime one person discontinues the business but he does not issue notice. It is necessary that he should inform the commissioner income tax in this regard at least 15 days before.
The commissioner income tax may impose penalty which is equal to the tax payable for the income year in which the business is discontinuous.
9-Failure to give notice by Liquidator:
It the duty of liquidator of the private company that he should inform about his appointment to the commissioner. If he fails to give the notice then commissioner income tax can impose penalty not more then Rupees Ten thousand (Rs.10,000).
10-Penalty for Obstruction:
If any person creates problem for any income tax authority in discharge of his function then a penalty can be imposed. The commissioner income tax can impose the penalty on that person not more then Rs.10,000.
Conditions for Penalty:
1-Penalty will be imposed by the commissioner income tax.
2-A reasonable opportunity should be given to the taxpayer to explain his position then penalty should be imposed.
Subject : Income Tax
Composed By : Syed Kashif of (B II)