Transcript Slide 1

Income Tax Bar Association Karachi
WORKSHOP ON INCOME TAX
Hotel Sheraton, Karachi
29 – 30 August, 2005
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Philosophy of Taxation
and Core Concept
By
Shahid Jamal
Hotel Sheraton
29-30 August 2005
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INCOME-COMMENTS
Income Tax Bar
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 Inclusive Definition which in addition to generally
accepted meaning, includes certain items that
have specifically been declared to be income.
 Amounts subject to collection as well as deduction
under relevant sections included.
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 Finance Act 2003 deleted the word ‘Domestic’ &
Finance Act 2005 included the sections 150,
152(1), 156, 156A, 233, 233A in the scope of
Definition Clause
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INCOME-DEFINITION 2(29)
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 “Income includes any amount chargeable to tax
under this Ordinance, any amount subject to,
Collection or Deduction of tax u/s 148,150,152(1),
153, 154, 156, 156A, 233, 233A, 234(5), any
amount treated as income under any provisions of
the ordinance and any loss of income but doesn’t
include, in case of a shareholder of a company,
the amount representing the face value of any
bonus share or the amount of any bonus declared,
issued or paid by the company to shareholders
with a view to increasing the paid up share capital
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INCOME-CONCEPT
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 Regular and Definite Source:
– Periodical monetary return coming in with
some sort of regularity or expected regularity
from certain source.
– PIDC vs Federation[1992] 49 TAX 76
– Raghuvanshi Mills Ltd vs CIT 1952 22 ITR 484
SC
 Different Forms of Income:
– May be received in cash or kind- If in kind, its
valuation is to be made according to Presribed
Rules/Market Value.
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INCOME-CONCEPT
 Deemed Income:
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– Deemed incomes under the statute are at par
with real income.
– Ellahi Cotton Mills vs Federation 1997 SCC
1097
 Receipt vs Accrual:
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– Income arises either on receipt basis or on
accrual basis. It may accrue to person without
its actual recept
 Illegal Income:
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– The Income Tax Law doesn’t make distinction
between Legal and Illegal Income- Both
Taxable
 Minister of Finance Vs Smith [1927] AC
193 (PC)
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INCOME-CONCEPT
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 Disputed Title:
– I.Tax assessment can’t be held up or
postponed merely b/c of dispute over the title
of Income. The beneficiary of income will be
charged to tax
– Franklin vs IRC 15 TC 464
 Temporary & Permanent Income:
– There is no distinction b/w Permanent &
Temporary Income, even Temporary income is
taxable.
 Lump sum receipt:
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– Whether received in lump sum or in
installments, is liable to tax- eg. Arrears of
bonus/ salary is taxable
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INCOME-CONCEPT
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 Personal Gifts:
– Gifts of personal nature e.g birthday gifts,
marriage gifts is not income.
– Franklin vs IRC 15 TC 464
 Relief or Reimbursement of expenses:
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– Mere relief or reimbursement of expenses is
not treated as income eg. Reimbursement of
actual travelling expenses to an employee is
not an income.
 Income should be real & not fictional:
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– A person can not make a profit of trading with
himself Income doesn’t arise from transaction
b/w Head office and branch - ITO Mardan vs
Sanaullah [1971] 35 Tax 1 SC
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CHARGEABILITY OF TAX Sec. 4
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 Not different from Section 9 of Repealed
Ordinance- Characteristics are:
– Charge is subject to other provisions of Ord.
– Tax is payable for each Tax Year on the
Taxable Income of the person as per rates
given
– From the resulting amount of tax, tax credits
will be allowed.
– Subsection 6 has been inserted to authorize
deduction at source or collection and payment
in advance under the provisions of ordinance.
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CHARGEABILITY OF TAX Sec. 4
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 Charge of Income Tax Super Tax & Surcharge
– Section 9 & 10 have been amended to clarify
that whenever, by virtue of any amendment in
1st Schedule, the rates are altered, for the
purpose of future assessments, the rates
existing to the prior alteration shall continue to
apply in case of remaining assessment years
(8/1991 dt 30.06.91)
 Jurisdiction over Territorial Waters:
– In the sea, the territory of Pakistan would
include the seabed and subsoil of the
‘continental shelf’ adjoining the land territoryactivities like fishing & exploitation of natural
sources are taxable.
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TAXABLE &TOTAL INCOME [SECTION 9 & 10]
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 Total Income means a sum total of a person’s
income under each of the heads of income. The
concept is at par with section 2(44) in R.O
 Total Income= Gross receipts-allowable
deductions
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 Taxable Income is that portion which is chargeable
to tax after all deductible allowances have been
taken into account. This is net income on which
rate of tax is applicable for a particular tax year.
 In R.O, there was no concept of Taxable Income
and Total Income was chargeable to tax.
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HEADS OF INCOME [SECTION 11]
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 This section classifies income from various
sources into the heads like Salary, Income from
Property, Income from Business, Capital Gains
and Income from other Sources.
 The only departure from R.O is deletion of head
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“Interest on Securities”. This will now be taxed as
Income from Business or Income from Other
sources as the case may be.[ If a person derives
interest from securities held as stocks in tradeIncome will be chargeable to tax under head “
income from business”
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PERSON [Sec. 2(42) r/w Sec.80]

The definition includes:
 an individual [ for natural persons]
 a company or AOP incorporated, formed
organized or established in Pakistan or
elsewhere; and
 The Federal Government or Foreign
Government or Public International Organization

The A.O.P includes:
 Hindu undivided family[Persons lineally
descended]
 An Artificial Juridical Person[Devta,Devi,
Mazar,Socity]
 Any body of persons formed under foreign law

The Company includes:
 Company, Body Corporate, Trust, Foreign
association, Provincial Government or Local
Authority
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PERSON [COMPARISAN]
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 The definition has exhaustively enumerated the
types of persons whereas, in R.O the definition
was inclusive one which envisaged, any other
meaning which could possibly be assigned to the
word ‘person’ thus plugging the legal lacuna.
 The Artificial Juridical person has been mentioned
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as offshoot of A.O.P. Whereas, in R.O, anyone not
falling in the category of individual, firm, an AOP, a
company or a local authority fell in the ambit of
term “A.J.P”
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PERSON [CONCEPT]
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 Definition of person includes a dead man as alive
for certain purposes and a human being as a dead
as in the case of bankruptcy or insolvency
– Begum Nusrat Bhutto vs ITO [1980] 42 TAX
59 H.C Lhr
 AOP is separate & indep. entity for income which
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was taxed in the hands of members
– ITO vs Narayanganj Company [1971] 23 TAX
223 S.C Pak
 “Body of individuals” doesn’t include a provincial
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government or any other governmental
department
– [2004 PTD (Trib.) 1517= (2004) 89 TAX 89
Trib.
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Resident Individual [Sec.82]
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 Is present in Pak for period or periods aggregating
to 182 days in tax year will be resident individual
 The Section 2(40) of R.O described the concept of
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resident person in totality. The definition in new
ordinance is exactly the same with the only
exception that an employee or an official of the
Federal Government or a Provincial Government
posted abroad in the tax year has been included.
 Clause (b) has been omitted by Finance Act, 2003,
thus restricting the definition of resident only w.r.t
stay in Pakistan during the relevant tax year.
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Resident Company [Sec.83]
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 (a)Is incorporated or formed under any law in force
in Pakistan (b) the control and Management of the
affairs is situated wholly in Pakistan ( c ) is a
Provincial Govt or Local authority in Pakistan
 All the Pakistani incorporated bodies are ‘resident’
where there control and Management lies. For
other corporate bodies, the criterion is that to
qualify as resident “their control and management
should be wholly in Pakistan at any time in the
relevant tax year.
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
The words “almost wholly” have been omitted
through F.A 2003 to avoid ambiguity.
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Geographical Source of Income [Sec.101]
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 The section determines the geographical source of
various incomes similar to few provisions of
Section 12 of Repealed Ordinance (RO).
 Receipt vs Accrual
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– In some cases, income is to be declared to
Pakistan Source irrespective of its actual
accrual or receipt in Pakistan. Ramkola Sugar
Mills Ltd vs CIT [1960] 2 TAX (Supp-4)
– Receiving salaries from state exchequer is
taxable no matter where paid. 71 TAX 45 H.C
Quetta
 The section doesn’t contain the word ‘deemed to
accrue or arise in Pakistan’ as the case in R.O
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TAX YEAR [Sec.74 vs Sec.2 (26), R.O]
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 Three types of Tax year have been mentioned.
– Normal Tax year, also called financial year
starting from 1st July ending on 30th June.
– Special Tax year which may be allowed by CIT
to taxpayer if he applies in writing.
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– Transitional Tax year which is a period falling
b/w the change from Special to Normal Tax
year & v/v.
– The CIT can allow the shift from Special to
Normal Tax year subject to some conditions
and his decision is subject matter of appeal.
The CBR is now empowered to grant
permission for Special Tax year to certain
class through Notification in gazette.
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