CAF 06 – PRINCIPLES OF TAXATION

NOTES BY UMAR TARIQ

Updated for Spring 2019 Attempt
 LOSSES AND DEDUCTIBLE ALLOWANCES

TABLE OF CONTENTS

1. LOSSES
a. Set Off of Losses [Section - 56, 58 & 59]
b. Carry forward of Losses [Section - 57, 58 & 59]
c. Limitation on Setoff & Carry forward of Losses [Section - 59A]

2. DEDUCTIBLE ALLOWANCES
a. Zakat [Section – 60]
b. Workers’ Welfare Fund [Section – 60A]
c. Workers’ Participation Fund [Section – 60B]
d. Profit on Debt [Section – 60C]
e. Education Expenses [Section – 60D]
f. Other Deductible Allowances under 2nd Schedule

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 LOSSES AND DEDUCTIBLE ALLOWANCES
1. LOSSES

a. SET OFF OF LOSSES [S – 56, 58 & 59]

SET OFF AGAINST

BUSINESS CAPITAL GAINS
LOSS ARISING FROM OTHER
SALARY PROPERTY NON
SPECULATION SECURITIES IMMOVABLAE OTHERS SOURCES
SPECULATION

SALARY LOSS NOT POSSIBLE

PROPERTY (Company Only) ✓ ✓   ✓ ✓

SPECULATION ✓     
BUSINESS
NON
SPECULATION NOT ALLOWED UNDER ✓ ✓   ✓ ✓
SECTION 56 (1)
SECURITIES   ✓   
CAPITAL
GAINS
IMMOVABLE    ✓  
OTHERS     ✓ 
OTHER SOURCES ✓ ✓   ✓ ✓

• Incase of losses from multiple heads of income, the loss from Business shall be set off last [ S – 56 (3)]
• Losses from income which is exempt from tax shall not be treated
• Losses not set off shall be carried forward only against same head of income

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 LOSSES AND DEDUCTIBLE ALLOWANCES

b. CARRY FORWARD OF LOSSES [S – 57, 58 & 59]

LOSS ARISING FROM CARRY FORWARD PROVISIONS OF TAX LAW

SALARY • Loss not possible

PROPERTY (Company
Only) • Carry forward not allowed
• Carry forward allowed up-to 6 subsequent tax years
SPECULATION
• Loss from earliest tax year shall be set off first
• Carry forward allowed upto6 subsequent tax years
• Loss from earliest tax year shall be set off first
BUSINESS
NON • Un-absorbed depreciation could be carried forward to unlimited time;
SPECULATION ✓ Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of
business income of subsequent year
✓ Above limit shall not apply if taxable income is less than Rs 10 million
• Un-absorbed depreciation shall be considered in last
SECURITIES • Carry forward not allowed
CAPITAL IMMOVABLE • Carry forward not allowed
GAINS • Carry forward allowed up-to 6 subsequent tax years
OTHERS
• Loss from earliest tax year shall be set off first
OTHER SOURCES • Carry forward not allowed

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 LOSSES AND DEDUCTIBLE ALLOWANCES

c. LIMITATIONS ON SET OFF & CARRY FORWARD OF LOSSES [ S – 59 A ]

1. In case of AOP, the loss shall be set off and carry forward only against income of AOP and in no case be utilized by its Member against their
taxable income.

2. In case of business loss, it shall be available to successor only by way of inheritance and shall not be available to any other successor.

3. Loss due to depreciation, initial allowance and amortization etc. shall be carried forward to unlimited periods.
• Adjustment of un-absorbed depreciation in subsequent tax years shall be limited to 50% of business income of subsequent year.
• Above limit shall not apply if taxable income is less than Rs. 10 million.

4. Business loss, speculation loss and capital loss cannot be carried forward unless determined by an order made under sections 120, 121 or
122. (To be discussed in Chapter of Assessments)

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 LOSSES AND DEDUCTIBLE ALLOWANCES
2. DEDUCTIBLE ALLOWANCES
Deductible allowances are expenses which do not relate to any specific heads of income but are expenses which are given leverage
(can be deducted from Total Income to arrive at Taxable income) to promote certain activities. These are straight deductions from
the Total income to arrive at Taxable Income. But the point to remember here is that it can only be deducted from Normal Tax
Regimes. (We have already studied the rules to arrive at Normal Tax Regime).
The following are deductible allowances under Income Tax Ordinance, 2001.
a. Zakat paid under Zakat and Usher Ordinance 1980 [S – 60]
Tutor Notes: As Zakat and Usher Ordinance 1980 is not part of the syllabus, but Income Tax Ordinance, 2001 has made a
reference to it, we just need to grasp the idea that Zakat paid to relatives, or otherwise than a banking channel, is not allowed
to be deducted from Total Income.

ZAKAT under Zakat and Usher Ordinance 1980

PROFIT ON DEBT ANY OTHER PAID

Allowed as a deduction from Allowed as deductible allowance

“INCOME FROM OTHER SOURCE”
(Already discussed**)
Tutor Notes:
* If total income is less than the amount of Zakat then no refund, carry forward / back is allowed.
** Although in section 60, theoretically speaking, Zakat is allowed as a deduction while computing Taxable income in case of Profit on debt,
but practically this is not possible. Because we have studied in the Head of Income: Income of Other Sources: Profit on debt, in conjunction
with Separate Taxation [S – 8] that, Zakat was allowed as an expense to be deducted while computing Total Income and income taken here in
total income was after deducting zakat, and so it will not be again allowed as a deductible allowance and hence no tax benefit is availed
because tax has already been imposed at gross profit on debt and taken in Separate Taxation.
However, contrary to the case above, Zakat deducted on dividends is an allowable deduction because it was not an allowable expense when
computing the Total Income, and will be deducted from Total Incomes to arrive at Taxable Income.

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 LOSSES AND DEDUCTIBLE ALLOWANCES
b. Workers’ Welfare Fund [S – 60A]
✓ Amount paid under "Workers' Welfare Fund Ordinance 1971" will be allowed as deductible allowance
✓ If accrual basis of accounting is followed for "Income from Business" then deductible allowance will be allowed for this payable
expense.

c. Workers’ Profit Participation Fund [S – 60B]

✓ Amount paid under "Companies' Profit (Workers' Participation) Act 1968" will be allowed as deductible allowance

d. Profit on Debt [S – 60C]

Allowed to Individual
Purpose Deductible Allowance for Profit on Debt on loan utilized for construction of new house or acquisition of house. (construction
or acquisition of industrial / commercial immovable property is not deductible from total income.)

Salient 1. Straight deduction as deductible allowance shall be allowed for

Features a. profit on debt
b. share in rent and share in appreciation for value of house

2. Paid by individual on a loan by

a. scheduled bank or NBFI regulated by SECP, or
b. Government, Local Government, Provincial Government, statutory body or listed company

3. Deductible allowance shall not exceed lower of following:

a. 50% of taxable income *
b. Rs2,000,000/-
c. actual profit / markup paid including share in rent and share in appreciation for value of house

4. Deductible allowance, if not utilized fully against taxable income shall not be carried forward to subsequent tax year.

_____________________________________________________________________________________________________
Tutor Notes:
* We are currently on deductible allowances so how can we know 50% of Taxable Income? Because the general computation
is Total Income – Deductible Allowances = Taxable Income. Now here what we have to do is follow the sequence of
deductible allowances. See example below

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 LOSSES AND DEDUCTIBLE ALLOWANCES

CALCULATION OF TAXABLE INCOME AT DEDUCTIBLE ALLOWANCE STAGE

TOTAL INCOME TAXABLE INCOME
100,000 100,000
Less ; Deductible Allowances
Zakat 10,000
Workers’ Welfare Fund 10,000
Workers’ Profit Participation Fund 10,000 (30,000)
Taxable Income for the purpose of determining
70,000
Taxable income for Profit on Debt Case

e. Education Expenses [S – 60D]

Allowed to All conditions should be met for deductible allowance;
✓ Individual having taxable income less than Rs. 1,500,000/-
✓ Allowed only to one of the parents in respect of fees of their children
✓ Parent have to provide NTN or Name of educational institution
Purpose Deductible Allowance for Tuition Fees paid in a Tax Year
1. Deductible allowance shall not exceed lower of following:
Salient a. 5% of the tuition fee paid by the individual
Features b. 25% of the taxable income (Same rule applies for calculation, keep in mind the sequence)
c. Rs. 60,000 X Number of children

2. Deductible allowance, if not utilized fully against taxable income shall not be carried forward to subsequent tax year.

3. Employer is not allowed to deduct these expenses while withholding tax from salary under section 149.

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 LOSSES AND DEDUCTIBLE ALLOWANCES
f. Other Deductible Allowances [2nd Schedule, Part I]
Donations to certain institutions specified in 2nd Schedule Part I , have the following tax implications;
Mentioned in
Examples of Institutions
Clause of Part 1 Prescribed Limits
(You don’t need to memorize names of institutions, just remember the clause for exam purposes)
of 2nd Schedule
• Any Sports Board or institution recognized by Federal Government for promoting any sport
• The Citizens Foundation Individual & AOP:
• Fund for promotion of Science and Technology in Pakistan 30% of Taxable
• Fatimid Foundation, Karachi Income
61
• Al – Shifa Trust
• Citizens Police Liaison Committee, Karachi Company: 20 % of
• Iqbal Memorial Fund Taxable Income
• Shaukat Khanam Memorial Trust, Lahore
64 A • Prime Minister’s Special Fund for victims of terrorism
64 B • Chief Minister’s (Punjab) Relief Fund for Internally Displaced Persons (IDP’s) of NWFP
No Limits
• Prime Minister’s Flood Relief Fund 2010 & Provincial Chief Ministers’ Relief Funds, for victims
64 C
of flood 2010

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