Income from Business:

Admissible deduction s pehly wala slides s go through krna hay.

Admissible Deductions:

Admissible Deductions: Admissible deductions are those expenses that an individual is

allowed to subtract from his gross income to determine his taxable income. This reduces Tax
Liability.
Section 20 of ITO enumerates general provisions of admissible deductions and are as
followed:
1. Expenditure:
A deduction shall be allowed for any expenditure incurred by the person in the year
wholly and exclusively for the purposes of business.
2. Animal has died or become permanently useless:
If the animals have died or become permanently useless deduction allowed equal to
the difference of the amount of actual cost of animals used for the purposes of
business or profession and the amount realized in respect of carcasses or animals.
Special Provisions:
1. First year allowance
2. Accelerated depreciation to alternate energy projects.
3. Entertainment expenditures in the limits as prescribed.
4. Depreciation of tangible fixed assets where they have a useful life of more than one
year (sec 22):
Depreciation shall be allowed on the written down value (WDV) of the asset at the beginning
of the year at the rates specified in the Third Schedule. where a depreciable asset is used in
the person's business for the first time in a tax year, depreciation deduction shall be reduced
by 50%.
The total deductions allowed to a person on account of depreciation and initial allowance
during the period of ownership of a depreciable asset shall not exceed the cost of the asset.
5. Initial allowance on eligible depreciable assets (sec 23):
A person who places an eligible depreciable asset into service in Pakistan for the first time in
a tax year shall be allowed a deduction.
6. Amortization of intangibles where they have a useful life of more than one year (sec
24):
A person shall be allowed an amortization deduction in a tax year for the cost of the person's
intangibles:
1) That are wholly or partly used by the person in the tax year in deriving income from
business chargeable to tax; and
2) That has a normal useful life exceeding one year Pre-commencement expenditure
7. Pre commencement expenditure (sec 25):
The total deductions allowed in the current tax year and previous tax years for pre
commencement expenditure shall not exceed the cost of expenditure.
8. Scientific research expenditures (sec 26):
This expenditure includes any contribution to a scientific research institution to undertake
scientific research for the purposes of the person's business.
9. Employee training facilities expenditure (sec 27):
* Any educational institution or hospital in Pakistan established for the benefit of the person's
employees and their dependents.
* Any institute in Pakistan established for the training of industrial workers recognized,
aided, or run by the Federal Government or a Provincial Government or a Local Government;
or
* The training of any person, being a citizen of Pakistan, in connection with a scheme
approved by the Board for the purposes of this section.
10. Profit on debt if it is related to taxable business income (sec 28):
* Profit on debt if and to the extent the proceeds of debt are utilized for business purposes.
* Lease rentals of an asset to a scheduled bank, financial institution, an approved Modaraba
or leasing company or a Special Purpose Vehicle (SPV) on behalf of the Originator.
> Financial cost of securitization of receivables by an originator in respect of SPV.
* Share of profit under Musharika scheme to a bank.
11. Bad Debts (sec 29):
Bad debts written off in the accounts subject to fulfillment of certain conditions:
* The amount of the deduction allowed to a person for a tax year shall not exceed the amount
of the debt written off in the accounts of the person in the tax year.
* Where a deduction is allowed in a tax year for a bad debt written off and in a subsequent
tax year the person receives in cash or kind any amount in respect

Inadmissible Deductions:
Inadmissible deductions: In income tax, Inadmissible deduction is an expense that an
individual cannot subtract from his gross income.
Section 21 of Income Tax Ordinance enumerates Inadmissible deductions.
Certain expenses are charged on profit and loss account by the business entity, Nonetheless,
such expenses are not admissible for the purpose of taxation. Hence, such expenses are
reverted back to the net profit of the Business.
The following expenses are not admissible under the Income Tax Ordinance:
I. Amount paid or payable on account of cess, rate or tax levied on profit and loss of the
business or percentage assessed on basis of such profits and loss of the business.
Tax means the tax payable or paid in Pakistan or in foreign country. Furthermore,
Sales Tax given by a tax Payer who has not charged the same to his customers shall
be allowed as an admissible deduction.
II. Any amount which is deducted at source under Division III of Part V of Chapter X
under the ITO.
III. Any sum paid on account of salary, rent, profits on debts, brokerage, commission,
payment to non-resident, payment made for services or fee paid to such person if the
same has not been deducted at source.
IV. Any Expenditure on entertainment in excess of the limits or in violation of conditions
as prescribed.
The Limit of expenditure on Entertainment under Rule 10 is as follows:
If the expenditure is:
a. Incurred outside Pakistan on entertainment in connection with the business
b. Allocated as Head Office Expenditure
c. Incurred in Pakistan for entertainment of foreign customers and suppliers
d. Incurred on the Entertainment of Customers and Clients in a Person’s business
premises
e. Incurred on entertainment of the meeting held for shareholders. directors,
agents and employees
f. Incurred on entertainment for opening of a branch.
All the above mentioned persons entertained shall have a direct relation with the Person’s
Business.
V. Any contribution made to an Un-recognized provident Fund, Unapproved pensions or
superannuation of gratuity funds.
 VI. Any sum paid by an association of person to a member of association on account of
profit on debt, commission, salary, brokerage or any other remuneration.
VII. Any commission paid or payable in respect of supply of products listed in the Third
Schedule of STA 1990.
VIII. Any penalty or fine paid or payable in violation of any rule or regulations.
IX. Any personal expenditure incurred
X. Any salary paid exceeding Rs.25,000 per month other than a cross check or direct
transfer.
XI. Any expenditure paid or payable of a capital Nature.
XII. Any expenditure in respect of sale promotions, advertisements and publicity in excess
of 10 percent turnover.
XIII. Expenditure on account of utility bills exceeding the limits or violating conditions
prescribed.
XIV. Any expenditure attributable to sales made to persons that are required to be
registered but not registered under STA.

METHOD OF ACCOUNTING
A person's income chargeable to tax shall be computed in accordance with method of
accounting.
A company shall compute its business income on basis of accrual method of accounting.
Nonetheless, a person can compute his business income on cash or accrual based method of
accounting An application in writing shall be made to the commissioner by a person willing
to change his method of accounting and the commissioner shall by order writing if he is
satisfied that the change is necessary to reflect the income of person chargeable under the
head income from business. If a person's income is changed, he shall make adjustments to
his income, credit, deductions or any other items deducted.
CASH BASIS ACCOUNTING: Section 33
Cash basis accounting records revenue and expenses when cash related to those
transactions actually is received or dispensed. Income and expenditure is added when the
amount is incurred.
The cash basis is less complicated and expensive than accrual based accounting
ACCURAL BASE ACCOUNTING : Section. 34
Accrual accounting records revenue and expenses when transactions occur but before
money is received or dispensed.
• Income and Expenditure added to the books when the amount becomes payable.
Accrual accounting provides a more accurate view of a company's health by including
accounts payable and accounts receivable. The accrual method is the more commonly used
method by large companies, especially by publicly-traded companies, as it smooths out
earnings over time.
Where a person is allowed deductions for a tax liability and receives benefit in respect of that
tax liability then such benefit is chargeable to tax under head income from business.
Valuation of Stock in Trade: Section 35
The Stock in trade is computed by the following formula: (A+ B) -C
A- is the Opening value of the stock in trade of a tax year
B- is the Cost of the Stock acquired by the person in a tax year
C- is the Closing value of the stock in trade for the tax year.
Current year's closing value of the stock in trade is the opening value of the next
years’ stock. fair market value will be determined at the time the stock is ventured in
the business.

ABSORPTION COST METHOD AND PRIME COST METHOD DEFINITON

FROM SLIDES.