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Income from Business

09
CHAPTER

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Income from Business

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Business Defined
Section 18
o

Business includes any trade, commerce or manufacture, profession, vocation or any adventure or concern in the nature of trade, commerce or manufacture. However, it does not include employment. This definition is inclusive/ flexible, it means other meanings can also be added. The definition starts with the word includes is always general.

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Meaning of Business

Profit motive Rendering services Business cannot be carried on with oneself

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Meaning of Business --cont

Business includes trade It includes commerce and manufacture Business can be any adventure in the nature of trade, commerce or manufacture but does not include employment

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Income Chargeable under Business Section 18

Profits and gains of any business/profession o Income from the sale of Goods or provision of services by trade/professional or similar association. o Income from the hire or lease of tangible moveable property. o Fair Market Value of any benefit or perquisiteBusiness Relationship. o Any management fee derived - the management company. o Any profit on debt-the banks/financial institute
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Speculation Business
Section 19

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Speculation business means any business in which a contract for purchase and sale of any commodity (including stock and shares) is settled otherwise than by the actual delivery, but does not include a business in which:

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SPECULATION BUSINESS
Section 19
o

A contract for purchase of material is entered into, for the manufacture or merchandizing and to safeguard against the price fluctuations entered into another contract. (This contract will not be a speculative activity). A contract in respect of stocks and shares entered into by a dealer or investor to guard against the loss in the persons holding of stocks and shares through price fluctuation.

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Why to show Speculative income separately from Non-Speculative business income? An Analysis
o

Section 58 and 67 provides answer to this question. Section 58 --- set off and carry forward of losses. Section 67--- Apportionment of deductions on the basis of nature and size of the activities. Separate books of Accounts are maintained for speculative and nonspeculative businesses.

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Example - I
A B C Ltd, provided the following information about its income for the tax year 2010. Calculate total taxable income of the company. Income from normal business-A Rs 150,000 Income from normal business-B Income from speculative business 50,000 75,000

Answer: Total income chargeable to tax 2,75,000:

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Example - II
Continuing with the above example, suppose the ABC company Ltd, sustains a loss of Rs 75,000 from speculative business instead of profit.

Solution: Income chargeable to tax = Rs 200,000

Loss of Rs 75,000 will be carried forward to the next year to be adjusted against speculative profit.

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EXEMPTION ON BUSINESS INCOME Under Part 1 of the 2nd Schedule

Income from Text Book Board Income of University or Educational Institution established not for profit motive. Recognized Computer Training Institution. Recognized Vocational Institution. Recognized Sports Board Income of Mudaraba Company

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1- ADMISSIBLE DEDUCTIONS Section 20

Amalgamation Deprecation expenses and Expenses to incurred by amortization Derive a amalgamated Income on assets. company. Deduction on account of Financial costs.

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A. Expenses incurred in deriving income from business section 20(1) o o o o o o o o o o Examples. Cost of goods manufactured & sold Rent of premises used for business Any tax, cess or rate (other than income tax) Repair of business assets Bonus to employees. Bad Debts Expenditures an educational institute or hospitals for the benefit of employees and their dependents, Training of employees Annual subscription Expenditures on visits of trade delegations sponsored by the Federal Govt.

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B. Depreciation and Amortization

Section 20(2)
oDepreciable Assets oIntangibles and useful life is more than one year oPre-commencement expenditures Note: This topic will be discussed later on under sections 22 to 25 and the 3rd Schedule of the Income Tax Ordinance 2001.

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C. Amalgamation Expenses Section 20(3)

o.Legal expense. o. Financial advisory services o. Other administration costs relating to planning & implementation of amalgamation.

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D. Deduction on account of Financial costs Section 28(1) 1. Profit on debt paid 2. Lease rentals for a leased asset

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2 - DEDUCTIONS NOT ALLOWED Section 21 o o o o o o Non-Business/Personal Expenditure Capital Expenditure except depreciation/amortization. Entertainment Expenses over and above the prescribed limit. Personal Expenses of the trader. Taxes on Profit-Income Tax etc. Default of tax deductions on payment of: o Salary o Rent o Brokerage/commission o Profit on debt Profit on debt paid Lease rentals for a leased asset

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Deductions not allowed-Continued

o o o o o o o Any contribution to un-recognized fund. Fine or penalty for violation of Law/Rules. Payments to Member of an Association of Person. a) Profit on debt. b). Brokerage/commission c) Salary/other remunerations. Default of mode of payment Single Account exceeding Rs. 50,000 Salary Account exceeding Rs. 10,000