Income Tax Ordinance, 1979
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:
Present
income tax legislation is product of 1860. Income Tax law applicable in
Pakistan was drafted and applied in 1860. It was the mere little amendment,
which was applicable in UK. By that time
amount equal or less than Rs. 600/- rental value of agricultural land was
exempted from the payment of income tax. It remained in force till five years.
Second legislation was made in 1867. Period of two years was remained without
legislation and taxation.
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 Pakistan but following areas of Pakistan shall be exempted
from the operation of this law:
Federally Administrated Tribal Area (FATA): Following areas are included in this exemption:
1.
Tribal areas of Peshawar, Kohat,
Bannu, and Dera Ismail Khan.
2.
Agencies of Malakand, Mahmand,
Khyber, Kurram, and North & South Wazirstan.
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);
2.
Land situated in Pakistan only; and
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.
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Direct relations with land.
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Human efforts are utilized.
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Process of seeding or cultivation.
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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 situated
in Pakistan. Income coming from outside Pakistan even derived from agricultural
is not agricultural income. If a Pakistani goes to England and cultivates on
acquired land, he puts his efforts directly in land. But his income, which
comes in Pakistan, is not considered agricultural income for the purpose of
this law. Certain other taxes can be imposed on it but not agricultural tax.
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.
(5)
Assessee leaving Pakistan is
assessee until he obtains clearance from Income Tax Department.
(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 Pakistan under Pakistani law:
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:
iii) Jewelry:
iv) Furniture:
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:
a) Sale:
b) Dispossession:
c) Exchange:
d) Relinquishment:
e) Extinction:
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:
5. Shares:
6. Debentures:
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:
a) Wages:
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:
a) Dividend:
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 Pakistan:
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.
