Q1:

Section 20 talks about allowable deductions allowed in generating income from

business and Section 21 talks about Deductions which are not allowed in generating

income from business.

The Income tax Ordinance, 2001 views Section 21 that states deductions which are not

allowed in computing taxable income for the head of income from business.

Clause (a):

Any tax paid by a person cannot be treated as an expense associated to the particular

business, it is a duty of levied by the government on the taxpayer and it has to be paid

to the government therefore any cess or tax paid by the taxpayer in Pakistan or in a

foreign country on profits from the business is not an allowable deduction from the

taxable income generated by a particular business. For example, a businessman who

owns a restaurant and his profit from the business is suppose 1 million and he pay

200,000 of tax, so his taxable income would not be reduce by the amount and would

remain 1 million.

Clause (d):

Any entertainment expenditure in excess of such limits or in violation of such conditions

as may be prescribed; Deductions on entertainment are whether allowed or not has

been qualified in terms of ‘socio cultural propriety’ in Section 21(d) with Rule 10 of

Income Tax Rule 2002. So according to sub-rule 3 of Rule 10 of the Income Tax Rule

2002, the word “Entertainment” means the provision of meals, refreshments, and

reasonable leisure facilities in accordance with the tradition of business and subject to
overall norms of custom of business in Pakistan. Expressions like “reasonable leisure

facilities, “tradition of business,” and “over all norms and custom of business in

Pakistan” are summed up as the expressions denoting “socio- cultural propriety”.

Rule 10 of Income Tax Rule 2002 also tells that entertainment expenditure is allowable

only when it is directly related to the business of an individual. And any personal

expenditure would not be come under this head.

For example, limit on expenditure laid down by the terms and condition defined by the

law is 500,000 or any condition being violated by the AOP. Then the exceeding amount

would not be an allowable deduction and in case of violation of conditions the

expenditure would not be an allowable deduction.

Clause (j):

Clause j talks about expenditures which is incurred by an association of persons and

those amounts of expenditure which are paid to any members of the associations. Any

profit on debt brokerage, commission, salary or any other remuneration paid by the

association of persons to a member of association is not an allowable deduction to the

income generated by the AOP. For example, revenue of an AOP is 2 million rupees and

salary paid to partner A is 500,000 so while calculating net profit we will not deduct

salary paid to the partner from the revenue generated by the AOP.

Clause (l):

In order of having the trend on cash economy, the Income Tax law introduced the

provisions of Section 21(1) and (m).

Section 21(l) stipulates that any expenditure under a single account head which, in

aggregate, exceeds 50,000 rupees must be paid by a banking channel. The scope of

banking channel is sufficiently wide and large. It includes any payment under any single

head of expenditure exceeding 50,000 rupees by crossed bank draft, crossed cheque,

crossed pay order, any other crossed banking instrument showing transfer of amount

between the parties concerned, on line transfer of payment, and payment by credit card.

There are two exceptions in this provision under which this clause shall not apply;

Firstly, any expenditure under a single account head which does not exceed 10,000

rupees can be paid in cash.

Secondly, Expenditure on account of utility bills, freight charges, travel fare, fee,

fines, payment of taxes and duties that can be paid in cash.

Clause (m):

The m clause talks about salary payment expense that can be treated as an allowable

expense while being paid in cash however the limit on the salary expense paid by cash

is 15000 rupees and any salary payments exceeding this amount to be treated as an

allowable expense then the employer is obliged to make payment by a crossed cheque

or transfer it to an employee’s bank account. If a payment of salary to an employee has

been made for 16,000 through cash, then the whole expense of 16,000 would be

considered as a disallowable expense.