Post # 29: Capital Gains - Basis of Charge?

Q. What is the basis of charge of 'Capital Gains'?

Ans. Gain arising on disposal of a capital asset is chargeable to tax in the year in which disposal is made. Following core points must be noted:

- Asset must be capital asset
- There must be disposal of capital asset
- Gain is chargeable in the year of disposal

The gain is computed as follows:

Consideration Received  on Disposal

L: Cost of the Capital Asset

Gain Chargeable under Capital Gain

Capital gain is chargeable on 'Accrual Basis'. The term 'Consideration Recieved' is used above as a single phrase having meaning assigned to it by Section 77 (entitled 'Consderation Recieved'), wherein it is provided that consideration recieved by a person on disposal of an asset shall be the consideration recieved or the fair market value of thereof which ever is higher. Thus, if actual consideration received is less than fair market value then 'consideration recieved' is to be taken equal to fair market value. From this it is clear that 'consideration recieved' is not necessarily tantamount to 'actually recieved'.

Thus, capital gain is to be charged to tax in the year in which capital asset has been disposed whether the consideration has been recieved in full, in part or has not yet been actually recieved.

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[Note: Moduce C students ignore the following reference. It is only for Module F students]

Case Law:

Capital gain is attracted, the moment the assessee [i.e. taxpayer] has acquired the right to recieve the price. It is not necessary that the consideration should have been actually received. What the parties did subsequenlty will not hav any bearing on the liability of the asseessee to the tax of the year in which the right to recieve arises.

[T.V. Sundaram Iyengar & Sons Ltd vs. CIT, 37 ITR 26 (Mad)]

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Post # 28: Benevolent Fund and Its Taxation

Q. What is Benevolent Fund? What is its tax treatment?

Ans. For the relief of government employees and their families, the Govt has set up the Benevolent Fund. The purposes of the Benevolent Fund are as under:

i) giving financial assistance to the families of deceased government servants

ii) giving financial assistance to government servants who are disabled and have to quit service because of the disability

iii) making special grants to government servants in exceptional cases

Any grant paid from Govt Benevolent Fund to an employee or members of his family is fully exempt if it is paid in accordance with the provisions of Central Employee Benevolent Fund and Group Insurance Act, 1969.

Any grant recieved from a benevolent fund formed by a private sector employer for benefit of his/its employees or their  family is fully taxable.

(Note: However, benevolent funds don't exist in private sector.)

Post # 27: Income from Property of AOP - Why Table for Tax Rates is Given?

Q. Sir, as per Section 66 read with Section 15, co-ownership is not AOP for purposes of Income from Property .... If that is so, then why tax rates for AOP are provided in respect of its Income from Property?

A. Section 66 of ITO-2001, provides that:

- if a property is jointly owned by two or more persons, and

- the respective shares of the co-owners are 'definite' or 'ascertainable'

then, the persons shall not be assessed as AOP in respect of the income produced by the property, and their respective share of in that income will be chargeable to tax in the hands of the co-owners individually. (But, this provision will not apply if the jointly-owned property produces 'Income from Business'.)

In the context of your question, Income from property will not be charged to tax in the hands of AOP if BOTH the aforementioned conditions are fulfilled i.e. property is jointly owned and respective shares of the co-owners are definite and ascertainable. In case a property producing Income from Property is jointly owned but the respective shares of the co-owners are neither 'definite' nor 'ascertainable', the income from property shall be charged to tax in the hands of the AOP. It is for this situation that tax rates for Income from Property of AOP are provided in the ITO-2001.

Post # 26: Medical Allowance Not Provided in the Terms of Employment

Q. If medical allowance is given to an employee, despite the fact that it is not provided in his terms of employment, will it be taxable or exempt?

A. Medical allowance will be exmept upto 10% of basic salary in that case, too, but subject to the following condition:

- free medical treatment or hospitalization or reimbursement of medical or hospitalization charges are not provided in the terms of employment.

Exemption of medical allowance is not dependant upon 'terms of employment'. Thus, medical allowance is exmept whether or not it is given as per terms of employment, subject to the condition noted above.

As against this, the benefit of free medical treament, hospitalization, or reimbursment provided by employer is fully exempt if (i) provided in terms of employment (ii) NTN of hospital/clinic is given, (iii) employer certifies and attest the medical bills.

Thus, condition of  'as per terms of employment'  is relevant for exemption of free medical treament, hospitalization, or reimbursment  and not for medical allowance.

Post # 25: Receipt of More than One Gratuity

Q. What if an employee receives more than one gratutity. Will it be exempt or taxable?

A. Rules relating to exemption of gratuity are stated as follows: 

(i) Gratuity receivable by employee of the Govt, local Govt, statutory body or corporation formed by any law is fully exempt if given in accordance with rules & conditions of employee's service.

(ii) Gratuity receivable from approved gratuity fund is fully exempt,

(iii) Gratuity receivable  from approved gratuity scheme is exempt upto Rs. 200,000,

(iv) In any other situation (Unapproved Gratuity Fund, Unapproved Gratuity Scheme etc), gratuity receivable upto 50% of the amount receivable or Rs. 75,000/- which ever is less is exempt.

But this exemption under the fourth category is not available to the following:

- person recieving gratuity outside Pakistan

- gratuity recieved from a company by a director who is not a regular employee of the company

- gratuity recieved by non-resident employee

- gratuity received by an employee who already has received gratuity from the same or any other employer.

Note that the above exclusions have been made only from fourth category and not from all categories of the gratuity.

More than one gratuity:

- Govt employee:  Ordinarily, it is not usual for an employee to recieve more than one gratuity from Govt, but, theoratically speaking,  even if a Govt employee receives more than one gratuity, such gratuities will be fully exmept if given as per the terms of employement. But, if the second gratuity is given not as per rules just as a reward for excellant performance in the past, it will be fully chargeable.

- Approved Gratutiy Fund:  Here too ordinarily, it is not usual for an employee to recieve more than one gratuity from Approved Gratuty Fund, but, theoratically speaking,  even if a a person does receive more than one gratuity, such gratuities will be fully exmept. But, if the second gratuity is recieved from the employer and not from the Approved Gratuity Fund as a reward for excellant performance in the past, it will be fully chargeable.

- Approved Gratutiy Scheme:  Gratutiy is exempt upto Rs. 200,000 if received from approved gratuity scheme, regardless of wether it is recieved once or twice provided it does not exceed the above limit. In case, the first or the second gratuity exceeds the aforesaid amount, the excess shall be charged to tax. 

- Others (Unapproved Gratutiy Fund/Scheme etc):  Here two situations may occur: (a) If a person has already recieved a gratutiy under the first three categories stated above and is recieving gratuity again under this fourth category, the second gratuity shall be fully chargeable to tax. (b) If a person has already received gratuty under this fourth categore, and is receiving it again under this same categorey, the second shall be fully taxable.

Post # 24: Conditions for Rebate of 75% in Tax Payable of Full Time Teachers & Researchers

Q. Sir, full time teachers ko 75% rebate milta he...Can u tell me d conditons which have to be fulfilled to claim the rebate?

Ans. This rebate/reduction is available subject to the following condiotns:

(1) Taxpayer must be a FULL TIME TEACHER, or FULL TIME RESEARCHER.

(2) Full time teacher or  researcher must be employed at one of the following:

(i) Non-profit education or research institution duly recognized by Higher Educaion Commission,

(ii) Board of Education,

(iii) A University recognized by the Higher Education Commission,

(iv) Government Training & Research institution.

(3) 75% reducion is to be made only from Tax Payable on income from Salary.

Illustration: X, a Professor at a university recognized by HEC, derived taxable income amounting to Rs. 780,000/- for Tax Year 200X, which included IFOS amounting to Rs. 58,000/-. His tax payable at assumed tax rate of 10% is 78,000/-. In this instance, rebate of 75% will be allowed as follows:

Tax Payable for the Tax Year	78,000/-
Tax Payable On Salary (W-1)	72,200
Rebate of 75%	54,150
Net Tax Payable (78,000 - 54,150)	23,850

W-1
78,000 x	722,000	=	72,200
	780,000

Post # 23: Payment of Exenditure by Crossed Banking Instruments - Deductions not Allowed (DNA) Section 21(l)

Q. Income tax..Sec 21(I) : EXPEnditure -. . . . .in aggregate exceeds Rs.50,000. . . . . -provided that ths clause shal nt apply in da case of expenditure nt exceedng Rs.10,000. . . . . . . It means tht aggregate 50,000 hna chahye bt individuly it should b m0re thn 10,000 ?or wht?

Ans. Section 21(l) of ITO-2001 aims to encourage documentation of economy, by making payment of expenditure by banking channel so that expenditures of the payers and incomes of the payee may be verified easily.

Deduction is not allowed for an expendiute that is paid otherwise than by a crossed banking instrument (such as paid in cash) if an expenditure:

(i) is under a single account head, such as fuel, advertisement, repair, etc

(2) has sum total exceeding Rs. 50,000/-  in the year, and

(3) Individual expenses incurred under the head exceed Rs. 10,000/-.

To understand this provisions, take the following example of a 'ledger account' of an expenditure 'Fuel', with following details. 

FUEL
Sr.	Date	Amount in Rs
1	01.01.200X	20,000
2	05.01.200X	8,000
3	16.01.200X	10,000
4	20.01.200X	42,000
	Total	80,000

Since, sum total under this account head is exceeding Rs. 50,000/-, hence, the individual expenses of Rs. 20,000/-, and Rs. 42,000 are required to be paid vide crossed banking instrument. If paid in cash, these amounts will not be allowed as deduction. The remaining individual expenses of Rs. 8,000/- and Rs. 10,000, being not exceeding Rs. 10,000, may be paid in cash or vide crossed cheque etc or in whatever mode of payment the taxpayer wishes.

Post # 22: Amendments of Finance Act 2012 Not to Apply on September 2012 Exam

Dear Students,

I have been recieving numerous queries from students regarding amendments in Income Tax Ordinance, 2001, and Sales Tax Act, 1990, vide Finance Act 2012. It is clarified that as per ICAP policy these changes will not apply to the upcoming attempt of September 2012. So, simply disregard them and don't waste time on reading about those changes.

Regards,
TT

Post # 21: Personal Status of ICAP under ITO-2001

Q. What is the personal status of ICAP under ITO-2001?

Ans. ICAP is a body corporate being formed by a law i.e. Chartered Accountants Ordinance, 1961, hence, as per provision of Section 80(2) (c) (ii) ICAP is a COMPANY for the purposes of Income Tax Ordinance, 2001.

Post #20: Employee Share Scheme - Disposal before Free Right

Q. If shares are issued with restriction under an Employee Share Scheme (ESS) and employee disposes off the shares before the date of free right, what impact will it have?

A. If shares are issued with restriction on their transfer by employer, following provision of law shall apply

a) The amount to be charged to tax under Salary of the employee shall be computed as follows:

FMV of Shares on the Date of disposal
Les: Consideration paid by employee for option, right or shares
Amount Chargeable to Salary
[Section 14(3)]

b) Since there has been disposal of shares, hence, capital gains u/s 37 or 37A on their sale need to be computed as follows:

Consideration Recieved
Less:Cost
C.Gain/Loss

In this case consideration recieved shall be taken equal to the FMV of the shares on the date of disposal and cost equal to sum of consideration paid for option, right, or shares and the amount charged under Salary for shares [Section 14(4)]. Thus, in this situation gain will be zero. But, computation thereof must be shown in the paper.

Treatment of Input Tax on Fixed Assets

Q: What is the treatment of input tax paid on fixed assest?
Ans: All the amount of the input tax paid on fixed assets used or to be used in making a taxable supply is claimed fully in the same month. Also, the restriction on input tax upto 90% of the outtax is not applicable on the input tax on fixed assets. (Previously input tax on fixed assets was allowed credit from output tax in 12 equal instalments over a period of 12 months).