Updated: Thursday January 14, 2010/AlKhamis Muharram 29, 1431/Bruhaspathivara Pausa 24, 1931, at 07:12:08 PM
1. The Income Tax Ordinance, 1979 (as amended upto date).
Synopsis of Taxes in
2. Income Tax Ordinance, 1979 (XXXI of 1979) by S. A. Abid.
In ancient times when people were living in caves they were unprotected from natural and unnatural calamities. There was self-protection system. When development took place then they made houses and formed society and also made social contract. Collective protection system arose. Family formed a tribe with collaboration of others. When more tribes gathered in a place then quarrel between them started. Then the need of one leader arose who may protect them in consideration of money, which they pay him. A social contract formed among them. It was between government and the people. One of the senior among them was delegated power to protect them. Later he took the shape of ruler or king. He was responsible to protect people in consideration of money. Then also idea of state emerged. Rulers were also responsible of protection from external aggression as well as maintenance of peace and order internally. It was prehistoric era. Now-a-days government imposes taxes to its people and grant them peace and order and protection from external fear through standing army.
Taxation according to a person’s ability to pay is universally accepted principle, and is considered as satisfactory though not a sufficient index of such ability to pay. Income Tax therefore, generally recognized as a highly equitable form of taxation. It also provides elastic source of revenue to government.
Income Tax is a direct tax on the quantum of income earned by a taxpayer during year. Tax rates and method of calculating taxable income varies with fiscal status of the person. Amount upto Rs. 50,000/- is exempt from income tax.
In older time person who collected huge amount of tax was appointed as governor.
Purpose of tax: Following are the purposes of tax:
1. To collect revenue: It is distribution of wealth from one group of society to another.
2. Equitable distribution of wealth: It is function of Islam who collects amount from one and distributes another who is needy.
3. Used as instrument of fiscal and economic policies: Where there are no taxes there is not progress and growth.
4. New trend of development: Government either may collect taxes from its people for progress and development or may borrow it from IMF or World Bank.
History of Income Tax legislation: This legislation has passes several stages from which it came in present shape. Its stages can be summarized as follows:
tax legislation is product of 1860. Income Tax law applicable in
License Tax Act, 1867: After failure of legislation of 1860, this Act was made and was remained in force for one year. Under this Act, income tax was imposed on income more than Rs. 200/-. Income upto Rs. 200/- was exempted from income tax. Rate of tax was fixed 2% p. a. Nomenclature of the Act denotes that a license was issued to taxpayers being the proof of the payment of tax. Agriculture income was totally exempted. This was the effect of the pressure of landlords.
Certificate Act, 1868: Very next year new Act was passed in which ceiling limit upto Rs. 500/- was imposed. Income exceeding to Rs. 500/- was liable to tax. Agricultural tax was exempted from the payment of tax. Rate of income tax was 1.60% p. a. Nomenclature of this Act signifies that certificate was issued to those who had paid their due taxes.
Income Tax Act II, 1869: After a year this Act was passed with the same rate of tax on same income with an exception. This exception was re-imposed of agricultural tax. Now agricultural income was taxed.
Annual Legislation: Taxes were insufficient to fulfill the requirement of government. All the former legislation remained fail to fulfill the objectives of the government. Phase from 1870 to 1877 was filled in by the annual legislation as per requirement.
License Act, 1877: Again License Act was passed and first time tax was proposed on trade and land income.
Income Tax Act, 1886: Very first time in the history of income tax income derived from agricultural was defined. Either it was subject of income tax or not but was defined. Different schedules were provided for the purpose of taxation according to income. It results were so successful and fruitful. No major amendment could take place for thirty-two year till 1918.
Income Tax Act, 1918: It was pet procedure to collect income tax and arrears. In 1921 a committee was constituted to put their recommendation for new structure of taxes.
Income Tax Act, 1922: It was enforced till 1979. Only seventy-one amendments could take place. Major amendment was rescheduling of financial year. It was started from first April to 31 March. Now it was rearranged from first July to 30 June. Another major amendment was introduction of self-assessment scheme.
There are five components of Income Tax Ordinance, 1979, on which it is based, such as:
1. Income Tax Ordinance: This is only law among all the enactment, which changes very rapidly. It deals with six matters alongwith other matters. They are as follows:
(1) Payment of Income Tax.
(2) Collection of Income Tax.
(3) Penalties upon commission of default in payment of Income Tax.
(4) Assessment of Income Tax.
(5) Refund in case of excess payment of Income Tax.
(6) Appeals upon disputes of Income Tax.
Also it contains 14 Chapters, 167 Section, and 08 Schedules. Finance Act or Finance Ordinance, which is also, called Budget changes it as required. Normally budget is presented each year.
2. Income Tax Rules: The important enactment, which mobilizes the law, is rules & regulations and facilitates in implementation. Central Board of Revenue is the highest authority at federal level responsible for framing rules and regulations. These rules and regulations are published in official gazette. S. 165 of the Income Tax Ordinance, 1979, gives authority to Central Board of Revenue for framing rules and regulations for the implementation of Income Tax Ordinance, 1979. Ordinance does not provide how the tax is computed or calculated. It provides mere rate of deduction as income tax. Also it provides mere rebate on depreciation but how? It is provided in rules and regulations. Mere study of Act or Ordinance is insufficient as it provides just structure or principles. It does not provide as to how it is to be implemented. Rules and regulations determine its implementation.
3. Notification, instructions, and orders: Central government is empowered by the Section 148 of the Income Tax Ordinance, 1979, to issue such things. Government can extend the last date for submission of Income Tax Returns, may modify the rate of income tax, and also can modify rules and regulations. Income Tax practitioner must keep into consideration such things as they adversely effect the enactment.
4. Income Tax Case Law or Precedents: Decisions of Income Tax Tribunals or other courts gains the status of law while given in interpretation. It is general understanding that decisions of judiciary are termed as precedent and give then status of law. Its up-to-date knowledge helps in remedial action.
5. Finance Act or Ordinance (Budget): It is presented and passed each year. It is part or parcel of Act or Ordinance. It effects all the former four components. Government passes it each year.
Applicability of Ordinance: As far as
applicability of this Ordinance is concerned, it extends whole of
Federally Administrated Tribal Area (FATA): Following areas are included in this exemption:
Tribal areas of
Agencies of Malakand, Mahmand, Khyber, Kurram,
and North &
Provincially Administrated Northern Area (PANA): Following areas are included in this exemption:
1. Chitral, Dir, Sawat, Kalam, and Malakand.
2. Tribal areas adjoining to Hazara, District Zohb, Loralai except Dukki, Chaghi, Murri, and Bukti.
These are such areas where Act of Parliament is also not applicable.
Agricultural income: Agriculture income derives:
1. From the land (which is exclusively used for the purpose of agricultural);
Land situated in
3. Land is used for agricultural purpose.
Whether the agricultural income is subject of tax or not, it does not matter but for the purpose of its definition it has been cleared that what is agricultural income. Its taxability has been subject since the ancient time. Reason behind it is that membership of the parliament consists on landlords mostly. They do not want to impose tax on agricultural income. If due to reason uncertain tax is imposed on agricultural income they get themselves exempted from the payment of tax. There may be other tax on the income derived from agricultural but not income tax.
This tax is chargeable only on the land, which is exclusively used for the purpose of agricultural.
Direct relations with land.
Human efforts are utilized.
Process of seeding or cultivation.
Relationship of human and land should be direct and not indirect because every person directly or indirectly is related with land. Nothing can be done without utilization of land. Human effort must be utilized in the land to obtain income from it. If spontaneous produce is grown, its income shall be liable to tax.
Agricultural land must be
Land must be used for the purpose of agricultural and for any other purpose. Where spontaneous produce comes out is not agricultural income because there human efforts are not utilized.
Where a person cultivates forest and sells its produce comes under the agricultural income, but a person who cuts trees and earns profits does not come under the agricultural income because he has not direct relation with land. Neither his relation is with respect to human efforts nor with respect to the process of seeding. By this reason landlord is not liable to pay tax due to direct agricultural relation with land even he earns billion or trillion of rupees and common person is liable to pay tax because he has not such relationship with land even his income is so limited.
Every landowner either former or industrialist has to declare his income under different heads including agricultural and other than agricultural. Agricultural income remains non-chargeable with tax whereas other income is liable to pay income tax.
Land, which has been used for the purpose of agricultural but now its status has been changed is liable to pay income tax.
Income of the absent landlord comes under the agricultural income thus liable to pay agricultural income tax. Even he receives fixed amount as rent, his income shall be considered as agricultural income. Income of tenant is also income of agricultural income.
Where landlord engages a person to manage his land in consideration of fixed salary, salary though comes from the proceeds of agricultural income, but this salary does not come under agricultural income thus not liable to pay agricultural income tax. Law considers his relationship as principal and agent. In short tenancy is subject of agricultural income while agency not. Relationship is important in determination of the agricultural income.
Where bees spontaneously make honey, income derives from proceed of such honey shall not come under agricultural income.
Assessee: Assessee may be is a person both either natural or legal person. Every person is not assessee. He follows some terms and conditions. Any person even he does not pay any amount, as income tax may be fall within the definition of assessee. Any person who comes under the definition of assessee, Income Tax Ordinance applies to him. His definition requires minute details.
1. Any person who pays sum of money as per requirement of Income Tax Ordinance, 1979, comes under definition of assessee. As and when he pays money to Income Tax Department makes him assessee.
2. If proceedings have been started against a person and even he has paid nothing, he is assessee. Issuance of notice for the payment of tax considering him assessee or making clarification being not assessee makes person assessee until he proves reverse. Imposition of liability or consideration of anybody as assessee makes an individual assessee.
3. Dues of refund make a person assessee until department refund or adjust claim. Refund cannot be remitted. It is either made actually or adjusted. Until refund is made actually person remains assessee.
4. Dues under penalty, fine, or interest payable is part and parcel of income tax thus it creates liability as assessee.
5. Any person who is required to submit return and even he has not filed return is considered assessee under the Ordinance. Person whose income exceeds Rs. 50,000/- he either pays or not income tax is supposed assessee. Proceedings can be started when he is required to submit return. Mere start of proceedings against him makes him assessee.
(1) U/s 55 company when incorporated and got registered becomes assessee regardless income derived from the business.
(2) Income exceeding to Rs. 50,000/- makes a person assessee.
(3) U/s 72 person who has been submitting return for four years is assessee even his business has been extinguished or wounded up.
(4) Person who has taken the liability as agent is assessee.
(6) Successor in interest is also assessee upto the extent of property he succeeds.
(7) Legal heirs are also assessee. Liability of tax does not extinct even after death.
Appeal u/s 129: Appeal can be made to higher authority against the order of Deputy Commissioner.
Appellate authority: Appellate authority is Appellate Additional Commissioner.
Limitation period: Appeal can be made within thirty days of the date of decision made by the Deputy Commissioner.
Commencement of limitation: Limitation period for appeal commences as follows:
1. From demand notice: Limitation period commences from the date of demand notice where appeal relates to assessment or penalty.
2. Intimation of order: In all cases other than assessment or penalty, limitation period commences on the date of intimation of order.
Exception of limitation: There is one exception to the rule of limitation. Where appellate authority is satisfied that there is sufficient cause to prevent the appeal within thirty days, appeal can be admitted after the expiry of limitation period.
Procedure in appeal: Following procedure is adopted where appeal is admitted:
1. Notice: Appellate authority serves the notice against which order, appeal is preferred. Notice is issued to the following parties:
a) Appellant: Notice is sent to appellant for hearing on the day fixed against the order against which appeal is preferred.
b) Deputy Commissioner: Notice is also sent to Deputy Commissioner against whose order appeal is preferred.
2. Adjournment: Appellate authority also reserves the right to adjourn the hearing of appeal, time to time, as thinks fit.
3. Amendment in appeal: Before hearing of appeal Appellate Additional Commissioner permits to appellant to file new ground of appeal, if any, which appellant has omitted. This omission should not be willful and unreasonable.
4. Call of particulars: Before disposing of appeal, appellate authority may call particulars necessary arising in appeal.
5. Further inquiry: Appellate authority may require Deputy Commissioner to make further inquiry.
6. Admission of evidence: Appellate authority does not admit any documentary material or evidence, which was not produced before Deputy Commissioner at the time of hearing.
Exception: There is an exception to rule as to admit the document or evidence which could not be produced while the proceeding before Deputy Commissioner. There should be sufficient reason to believe that prevention was existing to produce such document or evidence.
Decision in appeal: Appellate authority may dispose of appeal in the following manner:
1. Set aside: Where appeal is made against the order of Deputy Commissioner regarding assessment or penalty, appellate authority may set aside appeal. Where appeal is set aside, further inquiry is ordered. Deputy Commissioner holds fresh inquiry.
2. Confirmation: Appellate authority may confirm the decision passes by the Deputy Commissioner.
3. Reduction: Appellate authority may reduce the assessment or penalty.
4. Enhancement: Appellate authority has also authority to enhance the assessment or penalty previously passed by the Deputy Commissioner.
5. Annulment: Where appellate authority thinks fit that there is reason to believe that assessment passed by Deputy Commissioner is unfair, it can be annulled at all.
Hearing before adverse inference: Appellate authority is bound by law to give reasonable opportunity of hearing to appellant before giving decision against the interest of appellant.
Effect of decision on associations: Where appellate authority makes any change in result of appeal, Deputy Commissioner is authorized to make amendments accordingly in the assessment of the parties so associated with appellant.
Communication decision: Where appellate authority disposes of an appeal, it is communicated both to whom notices were issued, i.e., appellant and Deputy Commissioner concerned.
Delay in decision: Appellate authority is bound by law to decide appeal within prescribed time period. Failure of appellate authority to do so, it results admission of the claim sought under appeal. It is presumed that relief has been accepted and granted for which appeal was preferred. All provisions of the Income Tax Ordinance, 1979, becomes then applicable accordingly.
Exclusion of adjournment: Where appeal is adjourned on the request of appellant, it makes no difference if decision takes long time beyond statutory provisions. Such period of adjournment is excluded from limitation for decision.
Stay of recovery: Where appeal is admitted, appellate authority grants stay for the recovery of tax upto eighty five percent till final decision.
Registration of firm u/s 68: Following is criteria to get a firm registered according to Income Tax Ordinance, 1979.
Application: Application is made to Deputy Commissioner.
Registration after the end of income year: Under the following cases, application can be made after completion of income year.
1. Partnership firm: Firm, which is constituted under partnership deed.
2. Specification of shares: Where shares have been specified among the partners.
3. Registration under Partnership Act: Firm, which has been registered or application for such registration has been made.
Form of application: Application shall be made on the form containing all relevant documents which are verified in the manner on or before date, prescribed for the purpose.
Registration criteria: Following procedure is adopted to issue registration certificate:
1. Enquiry: Deputy Commissioner may hold enquiry about particular provided under application of registration.
2. Evidence: Deputy Commissioner may require evidence to prove particulars of application.
3. Assurance of genuine firm: Deputy Commissioner ensures by enquiry and evidence that genuine firm exists as provided under deed of partnership.
4. Approval within three months: Where return of total income is filed u/s 55, registration certificate is issued within three months.
5. Approval within six months: Where return of total income is filed at the end of income year, registration certificate is issued within six months.
Refusal of registration: Where Deputy Commissioner is dissatisfied as to the genuineness of the particulars provided in application, he may refuse the registration of firm, within three or six months as stated earlier during which period he was liable to register the firm.
Failure of Deputy Commissioner in written order: Where Deputy Commissioner remains fail to pass order of registration within period specified, it is presumed that firm has been registered.
Application of Income Tax Ordinance, 1979: When registration certificate is issued within three or six months or where written refusal is not made and firm is treated as registered, Income Tax Ordinance, 1979, becomes applicable on firm.
Cancellation of registration: Where after registration of firm or where firm has been treated as registered, Deputy Commissioner can cancel the registration of firm in certain cases such as:
1. Fake firm: Where it is revealed that genuine firm does not exist in such income year as shown in partnership deed.
2. Non fulfillment of certain formalities: Where the provisions of sub sections 2 and 3 of Income Tax Ordinance, 1979, have not been fulfilled.
Notice of hearing: Before cancellation of registration of firm, Deputy Commissioner serves a notice to party and gives reasonable opportunity to hear party. It is based on well-established maxim “audi alteram partem” means no once can be condemned being unheard.
Company and its liability for Income Tax u/s 77: Following is meant for Company and its liability for the payment of Income Tax:
1. Company as defined in the Company Ordinance, 1984:
2. Body under any law:
3. Trust under any law:
4. Body incorporated outside
5. Modaraba under Ordinance:
6. Provincial Government:
7. Foreign association declared by CBR as Company:
8. Liability for the payment of tax:
a) Liability of Directors:
b) Shareholders possessing at least 10% shares:
c) Right of recovery:
d) Joint liability:
e) Severally liability:
f) From Firm of its members:
g) Firm can recover:
Capital assets: Following are the Capital Assets:
1. Property of any kind held by assessee:
2. May be connected with business:
3. May be connected with profession:
4. May not connected with both:
5. Agricultural land:
6. Exceptions: Following are exceptions of Capital Assets:
a) Stock in trade for business:
b) Consumable stores for business:
c) Raw material for business:
d) Personal effects: For example:
i) Moveable property:
ii) Wearing apparels:
Capital Gain: Following constitutes Capital Gain:
1. Profits arising from transfer of assets:
2. Exception: Following are exceptions to this rule:
a) Where depreciation allowance is allowed:
b) Any immovable property:
3. What is transfer: Following is termed as transfer:
4. Exception: Following are exceptions:
a) Compulsory acquisition:
b) Transfer under gift:
c) Transfer under bequest:
d) Distribution of assets upon liquidation:
e) Distribution of Capital Assets upon dissolution:
Allowances for the payment of income tax u/ss 39 to 47: Following are allowances:
1. Insurance for life:
2. Allowances for contribution for provident fund:
3. Allowances for investment in Defence Saving Certificates:
4. Allowances for investment in NIT Units:
7. Allowances for investment in shares: They should be 10% of total investment or Rs. 100,000/- whichever is less.
8. Allowances for purchasing books:
9. Investment in share capital:
10. Donation to approved institutions:
11. Allowances for mark up paid:
12. Contribution in Benevolent Fund and Group Insurance:
13. Allowances for donations for charitable purposes:
Classes of Income Tax Authorities: Following are the Income Tax Authorities:
1. Authorities: Following are the authorities:
a) Central Board of Revenue:
b) Regional Commissioner of Income Tax:
c) Director General of Training and Research:
d) Director General Investment and Intelligence:
e) Director General of Tax Withholding:
f) Commissioner of Income Tax:
g) Additional Commissioner of Income Tax:
h) Income Tax Panel:
i) Deputy Commissioner of Income Tax:
j) Inspectors of Income Tax:
2. Appointment: As many as maybe necessary. It is upto Central Board of Revenue.
3. Rules making: Central Board of Revenue is responsible for the constitution, procedure, and working of Income Tax Panels.
4. With the approval of CBR: Any other authority can appoint subordinates with prior approval of Central Board of Revenue.
5. Appointment of qualified person: Central Board of Revenue can appoint any qualified person to act as valuers. Fixation of remuneration is also upto Central Board of Revenue.
6. Law applicable: Law applicable on the appointment of qualified person is law of the Public Service.
7. Private authority: Central Board of Revenue may also appoint and Firm of Chartered Accountants for the purpose of audit.
8. Appointment of private authority: Central Board of Revenue may also appoint any private authority for the purpose of audit.
Income: Following constitutes income u/s 15 of Income Tax Ordinance, 1979:
1. Salary: Following includes under the head of salary:
b) Any annuity, pension, or gratuity:
c) Any fees, commissions, allowances, perquisites, or profits in lieu, or in addition to salary or wages:
i) Perquisite includes:
(1) The value of rent free accommodation
(2) The value of any concession in the matter of rent respecting any accommodation:
(3) Any sum payable by the employer, whether directly or indirectly to effect an insurance on the life of, or to effect a contract for any annuity for the benefit of the assessee, or his spouse of any dependent child:
(4) The value of any benefit provided free of cost or at a confessional rate:
(5) Any sum paid by an employer in respect of any obligation of an employee:
ii) Profits in lieu of salary: It includes:
(1) The amount of any compensation due to, or received by, an assessee from his employer at, or in connection with, the termination of or the modification of any terms or conditions relating to, his employment:
(2) Any payment due to, or received by, as assessee from provident or other fund to the extent to which it does not consist of contributions by the assessee and the interest on such contribution:
2. Interest from house property: It includes following:
a) Interest on any securities of the Federal Government or a Provincial Government receivable by an assessee in any income year:
b) Interest on debentures or other securities for money issued by, or on behalf of, a local authority or a Pakistani company receivable by an assessee in any income year:
3. Income from house property: Following is the income from house property:
a) Any property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, but does not include any such property (or any portion thereof) which is occupied by the assessee for purposes of any business or profession carried on by him the profits whereof are chargeable to tax under this ordinance:
b) “Annual value” of any property shall be deemed to be the sum for which the property might reasonable be expected to let from year to year:
4. Income from business or profession: Following is the income from business or profession:
a) Profits and gains of any business or professions carried on, or deemed to be carried on, by the assessee at any time during the income year:
b) Income derived by any trade, profession and similar association from specific services performed for its members: s
c) Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession:
5. Capital gains: Any profits or gains arising from the transfer of a capital asset is termed as capital gain.
6. Income from other sources: Income of every kind, which may be included in the total income of an assessee under this ordinance, shall be chargeable under the head of “income from other sources”. It also includes:
b) Interest, royalties, and fees for technical services:
c) Ground rent:
d) Income from the hire of machinery, plant or furniture belonging to the assessee and also of buildings belonging to him if the letting of the building is inseparable from the letting of the said machinery, plant or furniture:
7. Any loss of such income, profit, or gains:
8. Any sum deemed to be income:
9. Any income which is deemed to accrue,
arise, or receive in
Powers of settlement Commission: Following are powers of Settlement Commission u/s 138 – C:
1. To regulate its procedure:
2. To regulate its benches:
3. Places of benches to sit:
4. Decision of dispute of benches: By majority.
5. Chairman where equally:
6. Any other power:
Functions of settlement Commission: Following are functions of Settlement Commission u/s 138 – C:
1. Process the applications of assessors where income is not shown:
2. Decide the applications of assessors where income is not shown:
3. Process applications regarding dispute of assessment:
4. Decide applications regarding dispute of assessment:
5. Process departmental disputes:
6. Any other function: Any other function which federal government prescribes.