Important Provisions of Law which a Taxpayer Should Know

Important Provisions of Law which a Taxpayer Should Know

Important Points to know as per Income Tax Ordinance, 2001

Inadmissible deductions against income chargeable to tax:

Payment for purchases or of salary, rent, brokerage or commission, profit on debt, payment to non-resident, payment for services or fee from which tax is required to be deducted and paid to state but is not deducted or paid.

Fine or penalty paid for the violation of any law, rule or regulation;

Personal expenditures like residential expenses, education, etc.

Salary paid exceeding Rs.15,000 per month other than by a crossed cheque or direct transfer of funds to the employee’s bank account;

Expenditure of a capital nature on Depreciable Asset except depreciation and amortization on certain specified tangible Depreciable Assets and intangible assets;

Expenditure exceeding Rs. 10,000 incurred and paid otherwise 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, this does not apply to the following:

– Where expenditures under a single account head in aggregate does not exceed Rs.50,000;

– Expenditures on account of –

• Utility bills;
• Freight charges;
• Travel fare;
• Postage;
• Payment of taxes, duties, fee, fines or any other statutory obligation; and
• Purchase of agricultural produce directly from the growers of such produce.

Crossed banking instrument includes online transfer of payment from the business account of the payer to the business account of payee as well as payments through credit card, subject to the condition that such transactions are verifiable from the bank statements of the respective payer and the payee.

Apportionment of expenditures – Where expenditure relates to –

The derivation of income from more than one heads of income;

Derivation of income comprising of taxable income and/or income subject to separate charge and/or income subject to final tax and/or separate block of income; or

The derivation of income chargeable to tax under a head of income and to some other purpose, the expenditure has to apportioned on any reasonable basis taking account the relative nature and size of the activities to which the amount relates. Rule 13 of the Income Tax Rules, 2002 specifies how to apportion such common expenditures.

Loan, advance, deposit or gift received from another person otherwise than:

• By a crossed cheque drawn on a bank; or
• Through a banking transaction from a person holding a National Tax Number Certificate; is treated as income chargeable to tax under the head “income from other sources”.

The purpose is to document the transactions of loan, advance, deposit or gift reflected in the books of account, wealth statement or reconciliation of wealth. The following transactions, however, are excluded:

Loan, advance or deposit received from a banking company or an institution notified under the Companies Ordinance, 1984 by the Federal Government in the official gazette as a „financial institution‟; or

Advance payment for the sale of goods or supply of services.

Self-hiring – When an employee gives on rent any building (house/flat/apartment etc.) owned by him or any of his/her family members to the employer and the employer provides the same against the employee’s entitlement for a rent-free accommodation or housing, it results into:

Provision of a perquisite (rent free accommodation or housing) by the employer to the employee chargeable as income from “salary”; and

Receipt of rent of land or building by the employee or any of his/her family members, as the case may be, chargeable as income from “property” in the hands of the owner.

Recouped expenditure or loss is the income of the tax year in which it is received in cash or in kind and chargeable under the head of income where deduction for such expenditure or loss was allowed in computing the chargeable income of an earlier year.

Double derivations and double deductions-
Any amount chargeable to tax on the basis of being receivable shall not be again chargeable on the basis that it is received or vice versa. Similarly any expenditure deductible on the basis of being payable shall not be again deductible on the basis that it is paid or vice versa.