What is the difference between capital receipts and revenue receipts and discuss those test which are applied

From the income tax point of view it is necessary to know the difference between capital and revenue receipts. Because only revenue receipts are taxed according to income tax ordinance. While capital receipts are not taxed. When it become very difficult for the assessee to differentiate the capital and revenue receipts. These are brought into the courts. However following tests may be used to distinguish between capital and revenue receipts.

(1). Sale On Asset :-

Any amount which is received by selling the fixed asset like building, land machinery etc. and kept to earn profit. It will be called the capital receipt on the other hand if floating asset like stock in trade is sold, such receipt will be called revenue receipt.

Example 1 : Suppose a company sells the building, the amount received will be called capital receipts.

Example 2 : If a company sells the stock in trade, the amount received will be called revenue receipts.

(2). Substitution Source Of Income :-

Income received by the assessee from the employer is called revenue receipt. While the amount from the new or substituted source is called capital receipt.

Example  : Mr. Alfa is manager in the factory. He receives Ten thousand Rupees as a salary. It is a revenue receipt.

Example  : Mr. Alfa has been retired by the company. The company had also paid him 1 million Rupees to establish a new source. It is capital receipt.

(3). Sale Of Right :-

If any person surrenders his right permanently the amount he receives will be treated as capital receipt. On the other hand if any person surrenders his right for the particular period the amount he receives will be called revenue receipt.

Example : Poet Gulzar has wrote the book. He surrenders his right of publishing in favor of the publisher permanently and receives 1 million Rupees. Such amount will be treated as capital receipt on the other hand if he surrenders his right only one edition and receives 1 Lakh rupees. It will be a revenue receipt.

(4). Test Motive Behind :-

The motive behind the transaction must be tested while distinguish the capital and revenue receipt. Motive will declare that amount is a capital receipt or revenue receipt.

Example : Mr. Saif purchases the shares of a company to resell at profit. The amount received by the sale is a revenue receipt.

Example : If Mr. Saif purchases the shares to earn profit but after some time he is in need of money. So he sells the shares fulfill the need the amount received by him will be treated as capital receipt.

(5). Period Of Receipt :-

Period of receipt is not considered while distinguishing the capital and revenue receipts.

Example : Mr. Vikram sold his land on installments. The amount received monthly or annually will be also treated as capital receipt. Because he has completely surrendered his right.

Example : Mr. Shukla received 2 years advance salary in lump sum. It is revenue receipt.

(6). Receipt Judgment :-

While making the judgment of receipt one should know that payment is made due to the services of recipient for the employer. If so, then it should be considered as revenue receipt.

Example 1 : Mr. Shan received a fee and drafted a business deal. His income will be a revenue receipt.

Example 2 : If any person receives bonus from his employer, it is also a revenue receipt.

Example 3: Mr. Sam is a property dealer and earns commission. His income will be also treated as revenue receipt.

Example 4 : Mr. Singh was an army officer. He was injured in the war and was declared disable. He received 1 million Rupees. It will be treated as capital receipt.

Example 5 : Mr. Tony was insured person who died. His family received half million Rupees from insurance company. Such receipt is capital receipt.

Example 6 : Mr. Sameer received the 3 years rent of his building in advance from sony. It is a capital receipt.

Why the distinction between capital and revenue is considered to be vital importance or Difference between capital and revenue expenditure

IMPORTANCE OF DISTINCTION BETWEEN CAPITAL AND REVENUE :-

While calculating the taxable income one must know the difference the revenue and capital. If he does not know then he cannot calculate the real taxable income due to the following reasons :

1.      Income tax is imposed on revenue receipts.

2.      Income tax is not levied on capital receipts.

3.      When we want to determine the profits of a business or profession it is the revenue expenditure, which is deducted from the trading receipts.

4.      Deduction from capital receipts is not allowed. Keeping in view the above reasons one person must be capable to distinguish between revenue and capital expenditure and the he should determine the profits of the business. Sometimes it becomes very difficult to know that the particular receipt is a capital receipt or revenue receipt. However some tests are applied for this purpose which may guide to know the facts.

Following are the important tests which may be applied to know the difference.

1.      Purchase Of Fixed Asset or Floating Asset Purchase :-

When money is paid to purchase in asset, we have to decide that it is a fixed asset or floating asset. If the money is paid on the purchase of fixed asset, it is an expenditure of capital revenue.

Example 1 : Miss. Sophie purchases the building and machinery for sugar factory. It is an expenditure of capital nature, because building and machinery is a fixed asset. On the other hand money is spent on floating nature it will be called revenue expenditure.

Example 2 : Miss. Sophie purchases the sugar-cane raw material for her factory. It is revenue expenditure and it will be deducted from the sale of business.

2.      Expenditure On Opening Business :-

While establishing the new business all the expenses are called capital expenditure.

Example :

1.      Purchase of land

2.      Construction of building

3.      purchase of machinery

4.      Fee paid the manager

5.      Govt. fee paid to the obtain the license etc.

Note : When the fee is paid for the renewal of license it will be treated as revenue expenditure.

Any how the initial expenditures are included in the capital expenditure.

3.      Business Extension :-

If a businessman spends money to expand the volume of business, such expenditure will be called capital expenditure.

Example : National bank limited opens new branches to extend the volume of business, it will be considered as the capital expenditure. On the other hand National bank spends the money on the repair of buildings, it will be a revenue expenditure.

4.      Period Of Benefit :-

When we want to determine the nature of expenditure we also calculate the period of benefit.

a) If expenditure gives a continuous benefit to the business. It will be called capital expenditure.

b) On the other hand if the period of benefit is less then one year it will be treated as revenue expenditure.

Example : Sun-silk Shampoo company introduces the sun-silk paste and fixes the advertising boards. Such expenditure will benefit the company through out the life of the product. On the other hand if once it is advertised on the T.V. Such expenditure will be included in the day to day expenditure.

5.      Earning Capacity Principle :-

If the earning capacity increases due to increase in expenditure, it will be called capital expenditure. On the other hand it increase in expenditure only maintains the earning capacity, it will be called revenue expenditure.

Example : Royal textile company replaces the part of machine and spends twenty thousand. It is a revenue expenditure because it only maintains the earning capacity.

Example : Royal textile company installs two new weaving machines. The production of the company becomes double. Now such such expenditure will be called capital expenditure because it has increased the earning capacity of this company.

Example Of Capital Expenditure :

1.      Cost of issuing shares and debentures.

2.      Cost of experiments.

3.      Purchase of machinery and building etc.

Example Of Revenue Expenditure :

1.      Payment made for rented machinery.

2.      Pension paid.

3.      Repair of machinery.

4.      Distribution of samples.

5.      Expenses on display exhibition.

 

Explain the term income from house property and how you will compute the rent of the house property also explain the deductions allowed in the income tax law

INCOME FROM HOUSE PROPERTY :-

Under the head of income from property rent is the second important source of income. The rent received or receivable is chargeable to tax.

Explanation :

RENT :-

The amount received or receivable by the owner of land or building for its use. The amount of rent shall not be less than the fair market rent.

LAND :-

It means plot used for storing materials or temporary huts.

BUILDING :-

It is made of stone or bricks which is covered by roof.

PROPERTY :-

Any land or building which is constructed is called property.

FAIR MARKET RENT :-

It is the amount of rent which is determined on the basis of a rent fetched  by similar property in the similar locality.

Procedure For Computing The Rent :-

I)       Any amount which owned of the land or building receives or is receivable for its use or right to use is called rent.

II)     Under the contract of sale for land or building forfeited deposit is also included in the rent.

III)  Any advance which is received by the owner from tenant, its 1/10 is taken as rent.

IV)  Any obligation of the owner like property tax paid by the tenant is also taken as rent.

Exemptions :-

Following are not included in the head of “income from property”.

a) Income from vacant plot.

b) If plant and machinery is in the building then rented income will be not included in the income from property.

c)      If tenant sublets the land or building then such rented income is not included in this head. 

d)      If owner of property receives amount regarding the utilities provided are not taxable in this head.

Deductions :-

While calculating the income under above head following deductions and allowances are allowed :

1.      Local Taxes :-

The amount of taxes paid to any local authority of govt. are also deduct able from the income of the property owner.

2.      Repairing Expenses :-

If property is given on rent and the owner of the building bears the repair charges. AS a repair allowance one fifth of the annual letting value can be deducted as a repair charges. This amount is fixed whether actual expenses are more or less.

3.      Interest On Loan :-

If any person borrows the capital and purchases or constructs or repairs the building. The amount of interest paid such on capital can be deducted.

4.      Interest On Mortgage :-

The amount of interest paid on the property which is mortgage or under any other capital charge is allowable deduction.

5.      Ground Rent :-

If the property is subject to ground rent only then the amount of rent paid is allowable deduction.

6.      Insurance Premium :-

If the property is insured against the rise of damage or destruction the amount paid as a premium  to insurance company is deductible.

7.      Vacancy Allowance :-

For some period if property remains vacant the value of that particular period can be deducted as vacancy allowance.

8.      Collection Charges :-

A landlord spends some money in collecting the rent from the tenant such expenditure or 6% of annual value after deducting the other allowances which ever is less is deductible.

9.      Rent Unrecovered :-

If the owner of the house has failed to recover the rent from the tenant then it is deductible in the following cases.

a) It is necessary that tenancy must be real.

b) The defaulter has vacated the property.

c)      The owner has taken steps to compel the tenant to vacate the property. 

d)      Such defaulter has not occupied any other property of the assessee.

e) For the recovery of unpaid rent, owner has taken all the steps for legal proceedings.

10.  Rent Share

If any scheduled bank has contributed the capital for the construction or purchase of any property then the amount of any share of rental income paid to such institution  is also deductible.

11.  Legal Expenses :-

Expenses paid or payable by a person in the tax year for legal services to defined the property or any suit in the court can be deducted from the rent chargeable to tax.

Define provident fund and explain various kinds and their working system

Provident Fund :-

This fund is maintained by a govt. and private organizations for the benefit of the employees. This fund is consists upon the following :

I)       Contribution of the employee

II)     Contribution of the employer

III)  The interest credited

Every month a particular amount is deducted from the employees salary. Generally employer also contributes the same amount in this fund.

Provident fund is invested in profitable business. So the amount of interest is credited in this fund. At the time of retirement the whole amount paid to the employee.

KINDS :

1.      Govt. Provident Funds :-

It is maintained by Govt. and sami govt. organizations :

Example : I) Federal Govt. ii) Provincial Govt.

a) Employees contribution to this fund is chargeable to tax.

b) Employer contribution is not included in salary and not chargeable to tax.

c)      Interest on provident fund is not included in salary and not chargeable to tax. 
d)      The amount paid to the employee at the time of retirement is not taxable.

2.      Recognized Provident Funds :-

This fund is maintained by a private organizations after completing the conditions prescribed by law.

For the recognition of this fund application is submitted to the income tax commissioner. If the grants recognition to such funds then it is called recognized provident fund. This fund is beneficial for the both the employer and employees.

Treatment :-

I)       Employers contribution is not included in the salary and it is taxable.

II)     Employees contribution is included in the salary and it is taxable.

III)  Interest credited to this fund is not included in salary and the rate of interest is exempt up to 16% or 1/3 of the salary.

IV)  The amount of fund received by the employee is tax free.

3.      Unrecognized Provident Fund :-

If the private organization maintains such fund without the recognition of the income tax commissioner, it is called unrecognized provident fund.

Treatment :-

I)       Employees contribution is included in the salary and not taxable.

II)     Employers contribution is not included in the salary and also not taxable.

III)   Interest credited is also not taxable.

At the3 time of retirement such amount received is taxable to the extent of employers contribution is taxable and interest there on.

Write a note on the Medical, Hospital charges or Allowance

1. Employee Case :-

a) If an employee receives free medical treatment or hospitalization from the employer, such benefit will be exempt from tax.

b) If an employee receives re-reimbursement of medical expenses under the terms of employment such expenses will be exempt  from tax.

c)   If medical allowances are given then 10% of the basic salary is exempt from tax. Other than employee.

In this case personal expenditure on medical service is exempt up to 10% of the basic salary.

Conditions :

·        Name of the practitioner and address

·        National tax number of the clinic or hospital should be given on the bill.

·        Bills should be certified by the employer.

2. Entertainment Allowance :-

Following are the important rules regarding the above allowance :

a) If an employee spends the amount on entertainment and this amount is re-imbrued by the employer then such amount is not taxable.

b) If entertainment like tea and coffee provided to the employee at the office during the working hours is not taxable.

c)    Except the above cases entertainment allowance is taxable.

3.      Special Allowance :-

While performing the official duties some allowance are provided to the employee to meet such expenses. These expenses are called special allowances. These allowances are not taxable.

4.      Loan To Employee :-

If any receives the loan from his employer without profit or at the lower rate than the benchmark rate then following rules shall be applied :

a) No Profit :  In this case profit will be calculated according the benchmark rate and it is included in the salary.

b) Profit rate paid is less : If profit is paid less than the benchmark rate then this difference will be included in the salary head.

5.      Utilities Allowance or Fee Provision Of Utilities :-

Following items are included in the utilities :

·        Electricity

·        Gas

·        Water

To meet above expenses employer pays some amount to the employee which is called utilities allowance. Such amount is not taxable up to 10% of the minimum time scale.

Explain the term Salary and write the allowances and deductions which are given under this head or discuss the main features of Salary

SALARY :-

It is the first source which is given in the heads of income. It is chargeable to tax. The term “Salary” is used in the wider sense. It includes the following receipts :

1.      Salary and wages.

2.      Profits in lieu of or in addition to salary or wages.

3.      Fees commission or allowance.

4.      Annuity, pension or gratuity.

5.      Prerequisites.

ESSENTIALS OF SALARY INCOME :-

Following are the important features of salary income :

1.      Existence Of Relationship :-

It is necessary that the relationship between employer and employee must exist. The amount must be paid by the employer to the employee. The employer may be present or past, there is no difference under this head the income can not be taxed without this relationship.

2.      Earned Salary :-

Whether received or not salary earned is taxable.

3.      Income Paid In Own Country :-

Income paid by foreign government is not taxable under the salary head. Income paid by the government or the company or by any employer in own country is considered salary.

4.      Salary Of Service :-

Amount received without any service will be not considered salary. It is necessary that salary or reward must be for some past, present or future services.

5.      Employee :-

In case of company managing director, directors and agent of a company is also included in employees.

6.      Pension :-

It is also included in the salary head. Because it is the income which is due to employee for his past services.

7.      Salary Received Is Taxable Whether Earned or Not :-

(a) Minimum time scale

It means the amount from where the salary scale of the employee starts.

(b) Basic salary

It means the pay and allowances payable monthly but following does not include :

·        Dearness allowance

·        Contribution of employer in provident fund

·        Interest on provident fund

·        Medical, conveyance and special allowance

·        Utilities and entertainment allowance

ACCOMMODATION :-

House Rent Allowance : Amount received by a salaried person as a house rent allowance is exempted  from tax up to 45% of the basic salary or minimum time scale. ON the other hand if an assessee has been provided an accommodation the allowance shall be made according the rules.

Discuss the various kinds of income or Sources of income or Why the classification of income is necessary

Heads Of Income :-

There are different sources of income. Income of a person may be divided under the following six heads when we want to calculate the income tax. It is necessary to classify the income under various heads. Because every source of income has separate rules for exemption. Such policy is adopted to provide justice. Other benefit is that all types of income under this head may create difficulties for assessment.

These are six heads of income which are given below :

1.      Salary

2.      Income from house property.

3.      Income from business or profession.

4.      Capital gains.

5.      Income from other sources.

Now if any person who earns the income will fall in any one of the above head. There is also one general head which is called other sources it is very important. If the income of any person does not fall in the first four heads then it will be included the last one.

 

Define the following terms in the income tax ordinance Royalties, Speculation business, Tax payer

ROYALTIES :-
According the income tax ordinance it means any amount paid or payable for :

a. The use of any patent, invention, design, model, trademark, secret formula etc.

b. Any amount paid or payable for the use of copyright artistic or scientific work, or video tapes for T.V. Or radio.

c.    Any amount paid or payable for the right to receive any sounds or visual images through satellite cable or similar technology for T.V. And Internet.

Example :- Some time private companies pay the royalty to show the cricket match through satellite cable in our country played in any part in the world.

d.    Any amount which is received to supply any technical or commercial knowledge or experience or skill is also called royalty.

e. The right to use any industrial, commercial or scientific equipment.

f. The disposed of any property right referred above.

Explanation :-
In the above cases royalty means any amount paid or payable as considered for the transfer of rights to use the assets.



SPECULATION BUSINESS :-
It means any business in which contract for the purchase and sale of any commodity (including stock and shares) is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity. Following are not included in business :

a). A contract by person during the manufacturing or mercantile business to guard against loss through future price fluctuations for the purpose of fulfilling the other contracts for the actual delivery of the goods.

b). IN case of stocks and shares a contract by a dealer or investor to guard against loss in his holding through price fluctuation.

c).    A member of stock exchange or forward entered in to a contract in the course of transaction to guard against any loss which may arise in the ordinary course of the persons business.



TAX PAYER :-
Under income tax ordinance tax payer means;
a). A person who receives income which is chargeable to tax.

b). Representative of a person

c).    A person responsible to collect, deduct and deposit it with the govt.

d).    A person required to furnish a return and pay tax.

Explanation :-
Following persons are required to file the return,
1.    Every company.
2.    If total income of any person exceeds than specific amount in a tax year.
3.    Any person who owns a motor vehicle.
4.    Any person who travel abroad except Hajj or Umrah.
5.    Subscriber of a telephone or mobile.
6.    Member any club who pays admission fee more than specific amount.
7.    If the income of the person has been charged to tax in any of the proceeding years.

Exemptions :-
Following persons are exempted to file the return of their total income,

a) A disable person
b) An orphan below 25 years of age.
c)    A widow.
d) A non-resident in respect of immoveable property.

Define the following terms in the income tax ordinance Permanent establishment, Principal officer, Profit on debt

PERMANENT ESTABLISHMENT :-
According to income tax law ordinance it means a place of business through which the business of a person is wholly or partly carried on.

Following are included in this term :
1.    Place Management :-
A place of management means office, branch, factory or workshop.

2.    Place Of Extraction :-
Place of extraction of natural resources like a mine, oil or gas well.

3.    Building Site :-
A building site or a project of construction, installation or assembly.

4.    Place Of Supervisory :-
Activities connected with the site.

5.    Furnishing Of Consultancy :-
Connected with that project or other services  and such services should be more than 90 days in year.
Any property, asset or substantial equipment which is capable to rise the income.

6.    An Authorized Agent :-
Who has power to conclude the contracts on behalf of the other person.

An agent who has independent status



PRINCIPAL OFFICER :-
According to income tax ordinance principal officer means a person who deals with tax department regarding the accountability of his employers business is called principal officer.
With reference to a company or association of persons the principal officer means ;
a. A director
b. A manager
c. Secretary
d. Agent
e. Accountant
f. Treasure
g. Any other person whom the commissioner has declared him a principal officer.

Explanation :-
Regarding the tax requirements it is very difficult for the tax department to contact with every owner or shareholders for obtaining the details or documents of the business. The persons are required by law to submit the income tax return. For this purpose few responsible persons are declared as a principal officer.



PROFIT ON DEBT :-
According to income tax ordinance profit on debt means ;
·    Any profit, yield, interest, discount, premium or the amount payable on debt. But it does not include in the return of capital.
·    Any service fee or other charge in respect of debt.
·    Any fee or charge incurred in respect of a credit facility will also be treated as profit even this profit is utilized or not.

Define the following terms in the income tax ordinance Depreciable Asset, Firm, Intangible, Non profit organization

DEPRECIABLE ASSET :-
Income tax ordinance has defined this in these words “ Depreciable asset implies any tangible moveable and immoveable property owned by a person :

1.    Who has a normal life more than one year.
2.    It is likely to lose value as a result of normal wear and tear.
3.    Property is used wholly or partly by the person in driving income from business chargeable to tax.



FIRM :-
Under income tax ordinance the firm has been defined in the following way. “Firm means the relation between persons who have agreed to share the profits of a business. The business may be carried by all or any one of them.



INTANGIBLE :-
According to income tax law ordinance intangible means ;
·    Any patent
·    Invention
·    Copyright
·    Design
·    Model
·    Contractual rights
·    Secret formula of process
·    Any other business expenditure which provides benefits for more than one year.

Note : Depreciable asset and UN-improved land is not included in it.



NON PROFIT ORGANIZATION :-
According to income tax law non profit organization means any person other than individual which is :
·    Established for religious, educational, charitable, welfare or development purposes.
·    Established for the promotion of an amateur sport.
·    It should be registered as non profit organization.
·    Commissioner income tax has declared it for the specific period.
·    It assets can not be used for private persons benefit.

Define the term of Dividend in the income tax ordinance

DIVIDEND :-

The profit which is distributed among the shareholders or modarba certificate holders after paying the tax is called dividend.

Payment Included In Dividend :-

Following payments made by the company to its shareholders are treated as dividend.

1. Payment Out Of Profit :-

Any payment made by a company out of accumulated profits to the shareholders.

2. Current Year Profit :-

Distribution of cash out of current year profit to the shareholders.

3. Payment Of Liquidation :-

The profits which are paid on the liquidation of a company to the shareholders and modarba certificate holders are also included in the dividend.

4. Capital Reduction :-

Distribution of profit on the reduction of capital to the extent to which the company possessed the accumulated profit.

5. Premium On Shares :-

Distribution of cash made by the company out of share premium to the shareholders is also included in dividend.

6. Bonus Shares :-

If profit is distributed among the shareholders in the shape of bonus shares these are also included in dividend.

7. Debentures :-

If profit is distributed among the shareholders and modarba certificate holders in the shape of debentures, these are also included in dividends.

8. Deposit Certificate :-

Profit distributed among the shareholders in the way of deposit certificates is also included in dividend.

Not Included In Dividends :-

Following amounts are not included in the dividend :

• Loan : A loan which is advanced by the company to the shareholders.
• Full consideration : Distribution at the time of liquidation or reduction of capital in respect of any share for full consideration is not included in the dividend.

Define the following terms in the income tax ordinance Capital asset and Charitable purpose

CAPITAL ASSET :-

Any property held by any tax payer  is called capital asset, it may be connected with the business or not. However following items may not be included in the capital asset.

Exclude items :

1. Any stock in trade : The car available in show room for the purpose of sale stock in trade and not included in capital asset.

2. Shares for sale : If shares are in the hand of shares dealer for the sale purpose these are also stock in trade and not included in capital asset.

3. Consumable store : If any manufacturing concern keeps some spare parts in his store for the use of his own machinery is called consumable store. So it is excluded from the capital asset.

4. Raw material held : If any Jute mill holds a raw material for its business purposes, it will be not included in capital asset.

5. Depreciate asset : If a tax payer is allowed a depreciation deduction on any asset which is used for the business purpose is not included in capital asset.

 Example :-

• car, motor cycle, van used for the business purpose can not be included in capital asset.
• Trademark purchased and used in the business is also not included in capital asset.

6. Movable property : Car, jewelery, furniture, T.V. Etc. held for personal use are not included in capital asset.

7. Immovable property : It is also not included in capital asset.

CHARITABLE PURPOSE :-

Relief for education, relief for medical, relief for the poor and the advancement of any other object of general public utility includes in the charitable purposes.

Explanation :

Suppose Mr. Amir a taxpayer gives 100,000 rupees scholarship to the poor students during the tax year. This amount will be called charitable donation and this amount relief will be provided to Mr. Amir (taxpayer).