INCOME TAX NOTICES

2011

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INCOME TAX NOTICES

INCOME TAX NOTICES [

2011

INCOME TAX DEFINITIONS

(1). AGRICULTURAL INCOME: [Section 41]
The agricultural income means and includes; 1) Derived from land 2) Land is situated in Pakistan 3) Land is used for agricultural purposes

Explanation: thus, any income derived from land situated in Pakistan and used for agricultural
purposes is called agricultural income. However, it is necessary that some human efforts and labour must be employed on agricultural land. If a produce is grown without any human efforts and labour, it will not be treated as agricultural income. For example: income derived form trees of spontaneous growth is not an agricultural income because no human efforts are involved and if trees are grown on land by employing some human efforts than income derive from such trees will be an agricultural income.

Types of agricultural income

Agricultural has been classified into five categories: a) Rent or revenue derived form agricultural land b) Income derived from such land by agricultural c) Income derived from such land by sale of produce d) Income derived from building, which is used for agricultural purpose and is in the immediate vicinity of agricultural land.e.g. A dwelling house, a store room. e) Income derived from such land by performance of necessary process to make the produce fit for the market.e.g. Thrashing etc.

Examples of agricultural income

a) b) c) d) e) Rent received by lessor of agricultural land Income received by lessee of agricultural land by cultivation Income from cultivation of tobacco, wheat, sugarcane, rubber, etc Income from growing tea Income from building used for agricultural purposes

Examples of Non-agricultural income

a) b) c) d) e) Income from store quarries Income from fisheries and ferries Income from flour mill Income from cotton ginning factory Income from land used for market

Examples of partly agricultural and partly non agricultural income

a) Income from growing tea leaves and then manufactures it into tea b) Income from growing tobacco and manufacturing of cigarettes c) Income from growing sugar cane and manufacturing of sugar

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Explanation:

(2). ACCUMULATED PROFITS: [Section 2(1)]

The term accumulated profit mean; a) Any reserve maintained by a business out of its profits b) All profits of the company up to the date these are distributed c) In case of liquidation of a company or trust, all profits up to the date of its distribution

Explanation:
Many businesses prefer to set aside a portion of the earned profits for future use. It may be used for a specific purpose in future or may ultimate be distributed amongst the owners. Whenever such an amount is present in any business it will be known and treated as accumulated profits for the tax purposes.

(3). APPELLATE TRIBUNAL: [Section 2(2)]

Appellate tribunal means the appellate tribunal established under section 130 of the income tax ordinance 2001.

Explanation:
The federal government is the appointing authority of the appellate Tribunal. It is the second court of appeal. It consists of two types of members: (a) Judicial Members and (b) Accountant Members. If any dispute is raised between the tax payers and the income tax department then appeal is made to Appellate Tribunal. The decision of the Appellate Tribunal is final. However the matter may be referred o the high Court.

(4). APPROVED GRATUITY FUND: [Section 2(3)]

Approved gratuity fund means a fund approved by the Commissioner of income tax under PartIII of sixth Schedule.

Explanation:
Approved gratuity fund is maintained by the employer for the future benefit of their employees. The amount is this fund is continuously contributed by the employer. The accumulated amount of this fund is normally paid to the employees at the time of retirement and is case of death of an employee during service; the amount is paid to his family.

(5). APPROVED SUPERANNUATION FUND: [Section 2(4)]

Approved Superannuation fund means a fund approved by the Commissioner of income tax under Part-II of sixth Schedule.

Explanation:
Approved gratuity fund is also maintained by the employer for the future benefit of their employees. The amount is this fund is continuously contributed by the employer. These amounts

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In all the above cases, growing of crops (tea leaves, tobacco and sugarcane) is an agricultural process fulfilling all the conditions of agricultural income. The second, component of these incomes is a manufacturing process thus chargeable to tax under the head Income from Business and Profession.

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2011

(6). ASSESSMENT: [Section 2(5)]

Assessment includes re-assessment and amended assessment and the cognate expressions shall be expressed accordingly.

Explanation:
Assessment is the process where the total income, tax payable and refund of tax is calculated by the person himself or by the income tax department. Assessment is the responsibility of the Commissioner of Income Tax.

(7). ASSESSMENT YEAR: [Section 2(5A)]

The year in which income is taxed is called assessment year. Assessment year means a period of 12 months beginning on the firs t day of July next following the income year and includes any such period that is deemed under the provision of this ordinance, to be the assessment year in respect of a tax year.

Explanation:
The concept of assessment year was prevailing in our income tax law up to 2001. Up till that time any income earned by a person was assessed in the relevant year which is started on next 1st July. However this concept is no more applicable when tax under Income Tax Ordinance 2001, is assessed and paid.

(8). ASSOCIATION OF PERSONS: [Section 2(6)]

Association of persons includes; (a) A firm, (b) A Hindu undivided family, (c) Any Artificial person, (d) Any body of persons formed under foreign law. However the term association of persons does not include a company.

(9). BANKING COMPANY: [Section 2(7)]

Banking company means; (a) A company formed under the banking companies ordinance 1962; and (b) It includes any corporate; which transacts the business of banking in Pakistan.

(10). BUSINESS: [Section 2(9)]

Business includes any trade, manufacturing, profession, vacation, adventure or concern in the nature of trade, commerce, manufacturing, profession or vacation but it does not include employment.

Explanation:
Trade: Any dealing between two or more persons for the purchase and sale of commodities to earn profit is called trade.

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are normally paid to the employees after retirement as a pension or at the time of disable before retirement or to their families in case of death. Now a days pension of widows and orphans of the deceased employees is also paid out of this fund.

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2011

(11). CAPITAL ASSET: [Section 2(10) or 37(5)]

Property of any kind held by a person is called capital assets. It is immaterial whether the property is connected with his business or not. Excluded from capital asset: Any stock in trade (not being stocks and shares). Consumable stores or raw materials held for the purpose of business. E.g. (a) the medicines kept by a drugstore for the purpose of sales stock not the capital assets. (b) Shares possessed by the dealer of shares/broker for the purpose of sale are capital assets. Any depreciable assets e.g. a car being used for business purposes is not treated to be capital assets. Any intangible assets on which amortization are allowed u/s 24 e.g. a trademark purchased and being used in business is not treated to be capital asset. Any immoveable property e.g. land, building etc. Any moveable property e.g. wearing apparel, jewellary, furniture etc

Explanation:
Modarba certificates, Musharika Certificates, Term Finance Certificates, Participation Term Certificates, Shares of companies, Vouchers of Pakistan Telecommunication Corporation etc.

(12). BOARD: [Section 2(11)]

Up till 30th June 2006, the Board means the Central Board of Revenue established under the Central Board of Revenue Act 1924. On the commencement of Federal Board of Revenue Act 2007, Board means the Federal Board of Revenue.

(13). CHARITABLE PURPOSE: [Section 2(11A)]

Charitable purposes includes relief of poor, education, medical relief and the advancement of any other object of general public utility.

Explanation:
The amount so spent for charitable purpose is called charitable donation and relief in tax is provided on this charitable donation under the Income Tax Ordinance, 2001.

(14). COMPANY: [Section 2(12) or 80]

According to Income Tax Ordinance 200 I, company means: a) A company as defined in the Companies Ordinance 1984; b) A body corporate formed by or under any law in force in Pakistan;

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Commerce: it includes not only trade but also those activities which facilitate to trade. For example: transportation, insurance, warehousing, marketing, banking etc. Manufacture: the term manufacture simply means transforming inputs such as raw material into a form which has greater value to a consumer. Profession: profession means an ability of a person to do some particular work generally by the application of intellectual skills. E.g. Professor, Doctor, Lawyer etc. Vocation: vocation means an ability of a person to do some particular work generally by the application of manual skills. E.g. Carpenter, Singer, Dancer etc.

INCOME TAX NOTICES [ c) d) e) f) g) h) A Modarba; A local authority in Pakistan; A small company; A provincial government; A trust, a cooperative society or a finance society established under law; A foreign association whether incorporated or not, which the Board 'has declared to be a company; i) A body incorporated by or under the law of a country outside Pakistan relating to j) The incorporation of companies.

2011

(15). CO-OERATIVE SOCIETY: [Section 2(14)]

Co-operative society means a co-operative society registered under the-e co-operative Societys act 1925 or under any other law for the time being in force in Pakistan for the registration of cooperative societies.

(16). DEBT: [Section 2(15)]

Debt means any payable amount and includes: a) Accounts payable; and b) Any amount payable under (I) P/N (ii) B/E (iii) Debenture (iv) Securities (v) Bonds (VI) any other financial instruments.

Explanation:
Any amount payable by the person is called debt whether such amount is: a) Long term or short term b) Interest bearing or interest free c) Trade debt or any other debt.

(17). DEPRICIABLE ASSET: [Section 2(17)]

Depreciable assets means a depreciable asset as defined in section 22 of Income Tax Ordinance 2001

Explanation:
Depreciable asset includes any tangible asset that: (a) has a normal useful life exceeding one year; (b) is likely to lose value as a result of wear and tear; (c) is used wholly or partly by the person in deriving income chargeable to tax

(18). DIVIDEND: [Section 2(19)]

After paying tax, the part of the remaining profit which is distributed among the mernber is called dividend. It is distributed among the members of a company in proportion to the number of shares held by them. Dividend includes: a) Any distribution of accumulated profits by a company to its shareholders: b) Any distribution of profits to shareholders by issue of debentures; c) Any after tax profit of a branch of foreign company operating in Pakistan; d) Any distribution of profits to shareholders at the time of liquidation of company; e) Any distribution of profits to. Shareholders on the reduction of capital;

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INCOME TAX NOTICES [ f) Any payment by Pvt.co. or trust to shareholders by way of advance or loan. But docs not include: a) Any dividend paid by a company which is set of against the whole or any part any sum previously paid by it and treated as dividend. b) Any loan made to shareholder during ordinary course of business, where lending of money is a substantial part of business;

2011

(19). EMPLOYMENT: [Section 2(22)]

According to Income Tax Ordinance 200 1, employment includes: c) A directorship or any other office involved in the management of a company; d) A position due to which the holder is entitled to a fixed or ascertainable remuneration e) The holding or acting in any public office.

Explanation:
The relationship between employer and employee is called employment. In other word employment means providing of services by an employee for his employer against so remuneration

(20). FINANCE SOCIETY: [Section 2(25)]

According to Income Tax Ordinance 200 I, a Finance society includes a co-operative society which receives deposits from general public, advances loans and mal investments in various businesses.

(21). FIRM: [Section 2(26)]

According to Income Tax Ordinance 2001, firm means the relation b/w persons who have agreed to share the profit of business carried on by all or any of them acting for all

(22). FOREIGN SOURCE OF INCOM: [Section 2(27)]

According to Income Tax Ordinance 2001, any amount which is not Pakistani source income is a foreign source income.

(23). INCOME: [Section 2(29)]

Income includes; (a). Any income, profits or gains chargeable to tax under the Income Tax Ordinance 2001. The income chargeable to tax may be classified under any of the following heads: o Salary; o Income from property; o Income from business; o Capital gains; o Income from other sources. (b). Any amount subject to collection or deduction or tax at source on: o Import Section [Section 148]; o Payment of supply of goods or services rendered [Section 153] o Exports [Section I54]

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2011

(24). INDUSTRIAL UNDERTAKING: [Section 2(29C)]

An organization fulfilling the following conditions will be known as industrial undertaking: Organization is set up in Pakistan; It uses electrical energy or any other form of mechanical energy and employs ten or more persons; or If it does not use electrical or any other form of energy than it: Employs twenty or more persons; Is engaged in manufacturing process; Is engaged in ship building; Is engaged in working of mine, oil well or any other mineral deposits, Is engaged in generation, conversion, transmission or distribution of electric energy or the supply of hydraulic power.

(25). INTANGIBLE: [Section 2(30)]

Intangible means any patent, invention, design or model, secret formula or process, copyright, other properties or right (e.g. trade marks) and any other expenditure that provides benefit for a period of more than one year. But it does not include depreciable asset or unimproved land.

(26). NON-PROFIT ORGANIZATION: [Section 2(36)]

Non-profit organization means any person other than an individual, which is: a). Established for religious, educational, charitable, welfare or development purposes or for the promotion or an amateur sport b). Formed and registered under any law as a non-profit organization. c). Approved by the Commissioner for a specified period. d). Assets and properties cannot be applied for the private benefits or any other person

(27). PAKISTANI SOURCE INCOME: [Section 2(40)]

Pakistan-source income means an income which is earned in Pakistan, irrespective of the fact that where it is actually received.

Explanation:
Such income may be from salary, 'business or property situated in Pakistan. Some examples of this income are as follows: Salary received by virtue of employment in Pakistan, wherever paid. Salary paid anywhere in the world by or on behalf of the Federal Government, Provincial Government or a local authority in Pakistan Income derived from any business carried on in Pakistan. Any dividend paid by a resident company. Rental income derived from the lease of an immovable property in Pakistan.

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o Prizes and winnings [Section I56]; o Transporters in respect of vehicles owned by them [Section 234(5)] (c).Any amount treated as income under any provision of the income Tax Ordinance 2001. (d). Any loss of income.

INCOME TAX NOTICES [ Any pension or annuity paid by a resident. Any gain arising on the disposal of shares in the resident company.

2011

(28). PERMANENT ESTABLISHMENT: [Section 2(41)]

It means the place of a business through which the business of a person is wholly or partly carried on and includes: A place of management, branch, office, factory or workshop, other than a liaison office except where the office engages in the negotiation of contracts (other than contracts of purchase) Any place of extraction of natural resources such as mine, oil and gas etc. A building site or a project of construction, assembling or installation Furnishing of any consultancy or other services connected to the above-mentioned projects if such services continue for a period of more than 90 days in a year. An agent who has authority to conclude contracts on behalf of the other person Any substantial equipment, asset or property capable of activity giving rise to income

(29). PERSON: [Section 2(42) or 80]

Under the Income Tax Ordinance 200 I, a person includes the following: An individual; A company; An association of person; The Federal Government; A foreign Government; A political subdivision of a foreign Government A public international organization

Explanation:
Generally, the word person only represents individual but it is different under the Income Tax Ordinance, 2001. Individual is a part of person. So, the term person has broad concept under this Ordinance.

(30). PRICIPAL OFFICER: [Section 2(44A)]

Principal Officer includes: A director, a manager, secretary, agent, accountant or any similar officer, and Any person connected with. the management or administration of the com and received a notice from Commissioner to act as principal officer.

Explanation:
It is very difficult for income tax department to contact every employee of the com in large businesses to get correct information for assessment. So, tax authorities a responsible official of that organization to act as principal officer and gather necessary information on behalf of tax department.

(31). PUBLIC COMPANY: [Section 2(47)]

Public company means:

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2011

(32). SMALL COMPANY: [Section 2(59A)]

Small company means a company that fulfills the following conditions: It is registered on or after 151 July 2005 under the Companies Ordinance 1984; Paid up capital plus undistributed reserves should not exceed 25 million rupee Annual turnover should not exceed 200 million rupees; and The company is not .formed by reconstituting or splitting up an already existing business. Total employees are not more than 250 at any time during the year.

(33). TAX: [Section 2(63)]

Tax means any tax imposed under the Income Tax Ordinance, 2001. It also includes: (i) Any penalty, (ii) Fee, (iii) Any other charges, (iv) Income tax, (v) Additional Tax

(34). TAX PAYER: [Section 2(66)]

Taxpayer means: A person who derives an amount chargeable to tax; Representative of such person; A person who is required to deduct or collect tax at source and deposit it with government under the provision of Income Tax Ordinance 2001 Any person who is required to furnish a return of total income; Any person who is required to pay tax under Income Tax Ordinance 2001

Explanation:
It is required for the following persons to furnish the return of income: Every person whose total income during the tax year exceeds the prescribed limit: Every company irrespective of its income Any non-profit organization Any approved welfare institution. Any person who has been charged to tax for any of the two tax years immediately preceding the previous tax year Any person who owns immovable property, with land area of 250 square yards or more located within the municipal corporation, a cantonment board or the Islamabad territory or owns any flat.

(35). TAX YEAR: [Section 2(68) or 74]

Tax year is a period of time for which tax' is to be calculated regarding a person. The tax year may of three types:

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A company in which at least 50% of the shares are held by the Federal Government or Provincial Government A company in which at least 50% of the shares are held by Foreign Government A company whose shares arc traded on registered stock exchange in Pakistan any time in the tax year. A unit trust whose units are widely available to the public and any other public trust A foreign company owned by a foreign government.

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1- Normal Tax Year:

2- Special Tax Year:

Special tax year is a period of twelve months, which is different from normal tax year. A person is allowed to have a special tax year under the following cases: Where a person had an income year different from normal tax year Where the CIT has allowed a person to use a Special Tax Year Board has declared the following special tax year by keeping in view the nature of businesses Classes of Tax payers Companies manufacturing jute good Companies manufacturing sugar or cotton textiles All persons exporting rice All insurance companies All persons manufacturing or dealing in Shawls All persons carrying on business of cotton Ginning, Rice husking and oil milling. Starting date 1st July st 1 October 1st January 1st January 1st April st 1 September Ending date 30th June th 30 September 31st December 31st December 31st march 31st August

3- Transitional Tax Year:

Whenever a person changes his tax year from normal tax year to special tax year or vice versa, then he is allowed to use the period between the end of the last tax year prior to the change and the date on which the changed tax year commences shall be treated as a Transitional Tax Year. For Example: Normal Tax Year (Previously in Practice) . 1st July 2007 to so" June 2008. Special Tax Year (As approved by Commissioner) 1st October 2008 to so" Septembcr2009 Transitional Tax Year (Only for the purpose or change) 1st July 2008 to 30lh September 2008.

(36). RESIDENT OR NON RESIDENT PERSONS: [Section (81-84)]

According to Income Tax Ordinance 200 I, Residential status of any person is not decided upon his nationality or on his purpose of stay in Pakistan. It is strictly connected with the period of stay in Pakistan in a certain income year. So, due to difference in the period of stay in two different income years, the residential status of a person may be different. For the purpose of Income Tax, all the persons are grouped under two categories: Resident Non-Resident

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It is a period of twelve months ending on so" June and is known by the Calendar year in which the ending date falls. Such a tax year is known as normal tax year. For example: period starting on 1.07.2001 and ending on 30.06.2002 is a normal tax year and will be known as tax year 2002.Tax years of most .of the persons fall under this category.

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Resident Individual [Section 82]

Explanation:
An individual will become a resident of Pakistan, if he stays 183 days or more in a particular tax year. It is not necessary that the stay should be continuous. However, the purpose of stay and the place of stay in Pakistan may be different and is immaterial. For Example: a) Mr. Rashid Pervez stayed in Pakistan for 80 days and went abroad in 2008. He again came on October 10, 2008 and stayed for 15 days. So, his period of stay is 95 days, he will be Non-Resident (less than 183 days in Pakistan) b) Dr. Akram Tariq is an employee in foreign ministry. He is posted in USA during tax year 2008. He did not come to Pakistan. (He is an employee of official of the Government posted abroad in the tax year. So, he will be treated as resident.)

Resident Company [Section 83]

A company will be considered a resident company in a particular tax year if it fulfills any one of the following conditions: It is incorporated or formed 'by or under any law in Pakistan The control and management of the company is situated wholly in Pakistan at any time in the year. It is a Provincial Government or local authority in Pakistan

Explanation:
In case a company is incorporated in Pakistan, it will always be a resident in Pakistan and in case of other companies; they will be resident of Pakistan only if their control and management is wholly situated in Pakistan. Partial control is not sufficient for this purpose.

Resident AOP [Section 84]

An association of persons shall. be resident for any tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year.

Explanation:
In case of AOP even partial control is sufficient to become a resident for tax purpose and it is not necessary that the control should be exercised for the whole year. It means that an AOP will not be a resident if its control and management is completely outside Pakistan through the year.

RESIDENT PERSONS: [Section 2(52)]

A person shall be a resident person for a tax year if the person is: A resident individual, resident company or resident AOP for the year The Federal Government

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An individual will be considered a resident or Pakistan in a particular tax year if he fulfills anyone of the following conditions: He is in Pakistan for a period or periods of 183 days or more. He is an employee or official of the Government posted abroad in the tax year.

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NON RESIDENT PERSONS; [Section 2(37)]

NON RESIDENT TAXPAYERS: [Section 2(38)]

A non-resident taxpayer means a taxpayer who is a non-resident person. There arc two basic reasons due to which it is necessary to determine whether a person is a resident or non-resident during the tax year:

a) Incident of Taxation
The income of a resident person is calculated by taking into account both the Pakistansource income and the foreign-source income, while the income of a non-resident person is calculated by taking into account only those amounts, which are Pakistan-source income

b) Rates of Tax
There is a difference in rates of tax for residents and non-residents persons

(37). ELIGIBLE PERSON: [Section 2(19A)]

Any Pakistani individual who holds either a valid National Tax Number or Computerized National Identity Card or a National Identity Card in case of overseas Pakistani will be known as 'Eligible Person'.

(38). PROFIT ON DEBT: [Section 2(46)]

Profit on debt whether payable or receivable means: Any profit, yield, interest, discount, premium or other amount payable on debt However, it does not include the return of capital Any service fee or other charge in respect of a debt including any fee or other charge in respect of credit facility, which has not been utilized

(39). ROYALTIES: [Section 2(54)]

Royalty means any amount paid or payable as consideration for: The use of any patent, invention, design or model, secret formula or process trademark or any other property or right of this property; The use of or right to use any copyright of a literary, artistic or scientific work including films or videotapes; The supply of any technical, industrial, commercial or scientific knowledge, experience or skill; The use of or right to use, any industrial, commercial or scientific equipment; The supply of any assistance that is subsidiary to any property or right mentioned above; The disposal of any property or right referred above.

(40). SPECULATION BUSINESS: [Section 2(61)]

A speculation business means a business in which purchase and sale of any commodity (Including stock and shares) is made: Without actual delivery to the buyer; or

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Under the Income Tax Ordinance 2001, a person shall be a non-resident person for a tax year if the person is not resident person for that year.

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Without transfer of the commodity to the buyer However, it does not include a business in which: A contract for raw material or merchandise to guard against loss through future price fluctuations.