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Wednesday, November 30, 2011

ASSESSMENT PROCEDURE UNDER INCOME TAX IN PAKISTAN



Briefly explain the provisions governing the filing of return of total income under income tax law.

Assessment Procedure
Assessment is the act through which the taxable income, the tax liability or the amount of refund is determined.

The whole process which enables the tax department to finalize an assessment is termed as Assessment Procedure. this procedure involves the following steps;
1-filing of return of total income,
2-examining the return  and documents in order to form an opinion,
3-issuance of assessment order
4-payment of the amount of tax payable, if any.


What is return
                              All the details of income , total income, taxable income and tax liability are provided  to tax department in a prescribed form. this form is technically known as a return of income or simply return.


Who should file a return





The following persons are required to furnish a return of income for a tax year, namely:–
1 .every company;
2. every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year;
3.  any non-profit organization as defined in clause (36) of section
4. any welfare institution approved under clause (58) of Part I of the Second Schedule;]
5. any person  has been charged to tax in respect of any of the two preceding tax years.
6. any person who claims a loss carried forward under this Ordinance for a tax year;
7. any person who owns immovable property with a land area of two hundred and fifty square yards or more or owns any flat located in areas falling within the municipal limits existing immediately before the commencement of Local Government laws in the provinces; or areas in a Cantonment; or the Islamabad Capital Territory.
8.any person who  owns immovable property with a land area of five hundred square yards or more located in a rating area;]

9.any person who  owns a flat having covered area of two thousand square feet or more located in a rating area;]
10.any person who owns a motor vehicle having engine capacity above 1000 CC;
11.any person who has obtained National Tax Number
12.any person who is the holder of commercial or industrial connection of connection of electricity where the amount of annual bill exceeds rupees one million.]

13. Every individual whose income under the head ‗Income from business‘ exceeds rupees three hundred thousand but does not exceed rupees three hundred and fifty thousand in a tax year is also required to furnish return of income from the tax year.]
                                         
. Persons not required to furnish a return of income.
(1) Where the entire income of a taxpayer in a tax year consists of income chargeable under the head ―Salary, Annual Statement of Deduction of Income Tax  from Salary, filed by the employer of such taxpayer, in prescribed form, the same shall, for the purposes of this Ordinance, be treated as a return of income furnished by the taxpayer under section 114:
1
[Provided that where salary income, for the tax year is five
hundred thousand rupees or more, the taxpayer shall file return of
income electronically in the prescribed form and it shall be
accompanied by the proof of deduction or payment of tax and wealth
statement as required under section 116.] ]



1[120. Assessments.- (1) Where a taxpayer has furnished a complete return of income (other than a revised return under sub-section (6) of section 114) for a tax year ending on or after the 1st day of July, 2002,- 1 (a) the Commissioner shall be taken to have made an assessment of taxable income for that tax year, and the tax due thereon, equal to those respective amounts specified in the return; and
(b) the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished.
2
(2) A return of income shall be taken to be complete if it is in accordance with the provisions of sub-section (2) of section 114.
(3) Where the return of income furnished is not complete, the Commissioner shall issue a notice to the taxpayer informing him of the deficiencies (other than incorrect amount of tax payable on taxable income, as specified in the return, or short payment of tax payable) and directing him to provide such information, particulars, statement or documents by such date specified in the notice.
[(1A) Notwithstanding the provisions of sub-section (1), the Commissioner may 3[conduct audit of the income tax affairs of a person] under section 177 and all the provisions of that section shall apply accordingly.]

Sunday, November 20, 2011

DEDUCTIONS ALLOWED UNDER THE HEAD INCOME FROM BUSINESS AND PROFESSION

WHAT DEDUCTIONS ARE ALLOWED UNDER THE INCOME FROM BUSINESS WHILE COMPUTING INCOME CHARGEABLE TO TAX.

 Deductions in computing income chargeable under the head Income from Business and profession: sec.20
(1) Expenses Incurred for the Purpose of Business. sec.20(1)
                                                                                         In computing the income of a person chargeable to tax under the head ―Income from Business- for a tax year, a deduction shall be allowed for any expenditure incurred by the person in the year wholly and exclusively for the purposes of business.
examples: Rent of premises, local rates and taxes, current repairs, insurance premium, interest paid, bonus or commission to employees etc.

(2) Depreciation and Amortization on Assets:20(2)
                                                                      A person is allowed a deduction on account of depreciation or amortization in respect of followings:
  1. Depreciable assets,
  2. Intangibles with useful life more than one year, and 
  3. Pre- commencement expenditure.
The depreciation or amortization is allowed according to the provisions laid down in sections 22 through 25 and the Third Schedule of the income tax ordinance.
(3) Amalgamation Expenses:20(3)
                                                   An amalgamated company is allowed a deduction in respect of any amalgamation expenditure connected with the amalgamation. These expenses may be:
  1. Legal expenses,
  2. Financial advisory services, and 
  3. administration cost relating to planning and implementation of amalgamation.
(4)  Pre-commencement expenditure:( 25)
(1) A person shall be allowed a deduction for any pre-commencement expenditure incurred wholly and exclusively for the purpose of business

(2) Pre-commencement expenditure shall be amortized on a straight-line basis at the rate specified in Part III of the Third Schedule.
(3) The total deductions allowed under this section in the current tax year and all previous tax years in respect of an amount of pre-commencement expenditure shall not exceed the actual amount of the expenditure.
  
(5)Scientific research expenditure. 26
(1) A person shall be allowed a deduction for scientific research expenditure incurred in Pakistan in a tax year wholly and exclusively for the purpose of deriving income from business chargeable to tax.
  Scientific research expenditure means any expenditure incurred by
a person on scientific research [undertaken in Pakistan] for the
purposes of developing the person‘s business, including any
contribution to a scientific research institution to undertake scientific
research for the purposes of the person‘s business, other than
expenditure incurred,
(a)in the acquisition of any depreciable asset or intangible;
(b) in the acquisition of immovable property; or
(c) for the purpose of ascertaining the existence, location, extent
   or quality of a natural deposit.

(6)Employee training and facilities.—
A person shall be allowed a deduction for any expenditure (other than capital expenditure) incurred in a tax year in respect of—
(a) any educational institution or hospital in Pakistan established
   for the benefit of the person‘s employees and their dependents;
(b) 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
 (c) the training of any person, being a citizen of Pakistan, in
     connection with a scheme approved by the Board.

(7) Deduction on account of financial costs. 
 A person deriving income under the head income from business and profession shall be allowed a deduction on account of the following financial costs;
1-Any expenditure  in the nature of profit on debt ,if debt has been utilized for the purpose of business.
2-Lease rentals for the leased assets acquired for the business. The lease amounts should have been paid to
scheduled banks, financial institutions, modaraba companies, leasing companies,
3-Interest on capital borrowed for business.
4-Any payment made by a scheduled bank on a profit and loss sharing account.
5-Any payment made by HBFC, NDLC,SME BANK to SBP as a share in profit for investments made by SBP in such institutions.
6-Any payment made by Musharika to its certificate holders or to a bank as a share in the profits of the Musharika.

(7) Bad Debts
A person shall be allowed a deduction on account of bad debts if the following conditions are fulfilled;
1-The debt was previously included in income.
2-The amount of debt is written off during the tax year, and
3-There are reasonable grounds to believe that the debt can not be recovered.
4-The amount of deduction should not be more than actual bad debts.
NOTE :If the amount of bad debts is recovered in subsequent periods, it will be included in the of taxpayer.

(8) Consumer Loans by Banking Companies etc.
    The legal provisions in this regard are discussed below:
1-A non-banking finance company or HBFC shall be allowed a deduction for a reserve created to set off the  bad debts arising out of the consumer loans.
2-Maximum deduction on account of reserve shall be 3%.
3-Actual bad debts shall not be allowed as deduction, rather it shall be set-off against the reserve so created.
4-If the amount of bad debts is more than the reserve, shall be carried forward to following years for setting it off against the reserve for those years.

(9) Profit on non performing loans.(MAQSOOD AHMED ,CAREER ACADEMY ,03333424200)

     Any profit accruing on a non performing loan credited to suspense account by a banking company , DFI, NBFC or Modaraba in accordance with Prudential Regulations for banks ,NBFC, DFI and Modaraba, issued by the state bank of pakistan or SECP, shall be allowed as deduction.

(10) Transfer to participatory reserve.
        Any amount transferred by a company to a "Participatory Reserve"created under section 120 of the companies ordinance 1984 shall be allowed as deduction in the tax year in which it is transferred.

Friday, November 4, 2011

when object and consideration are unlawful

Unlawful Consideration and Object - 1
 DEFINITION

Literally

The word ‘Legality’ means ‘the state of being legal’   ‘Object’ means ‘purpose’   and ‘Consideration’ means ‘reason’.
So the meaning of legality of object and consideration is the state of being any reason or purpose legal.

Traditionally

1.    An agreement will not be enforced by the court if its object or the consideration is unlawful. By the expression “Object of an Agreement” is meant its purpose on design. The object and the consideration must both be lawful, otherwise the agreement is void.   

2.    The object or consideration of an agreement must be lawful. In order to make the agreement, a valid contract, for, Section 10 lays down that all agreements are contracts if made for lawful consideration and with a lawful object. Section 23 declares what kinds of consideration and objects are not lawful. If the object or consideration is unlawful for one or the other of the reasons mentioned in Section 23, the agreement is illegal and therefore void (Section 23).


UNLAWFUL CONSIDERATION AND OBJECT

1.    If it is forbidden by law-
If the consideration or the object of a contract were forbidden by law, it would be unlawful and hence unenforceable.

Example-

a)    A promises to pay B Rs.1000 at the end of six months, if C, who owes that sum of B, fails to pay it. B promises to grant time to C accordingly. Here the promise of each party is a consideration for the promise of the other party, and they are lawful considerations.

b)    Promises for a certain sum paid to him by B, to make good to be the value of his ship wrecked on a certain voyage. Here A’s promise is the consideration for B’s payment and B’s payment is consideration for A’s promise. These are lawful consideration.

Case-
a)    An agreement to sublet a license to sell grass issued under the Madras Abkari Act 1886 would not be enforceable, because the object of the Act is the protection of the public as well as the revenue. Thithi Pkurudsu vs Bheemudu, (1902) 26 Mad. 930.

b)    Where a license to cut grass was given by the Forest Dept. and one of the terms of the license was that the licensee should not assign his interest on the license without the permission of the Forest Officer, and a fine was prescribed for a breach of this condition, it was held that there being nothing in the Forest Act to make it obligatory upon the parties to observe the conditions of the license the assignment would be binding upon the parties, though it was competent to the Forest Officer to revoke the license if he thought fit to do so. It was so held because the Act did not forbid the transaction but merely imposed a condition for administrative purpose. Nazarali v. Baba Miya (1916) 40 Bom. 64.

2.      If it were permitted, it would defeat the provisions of any law
The consideration of an agreement would be unlawful if it is of such nature that if permitted, would defeat the provisions of any law. (Section 23)

Case-
a)    P let a flat to R of $1200 a year. To reduce the municipal tax he entered into two agreements with R. One, by which the rent was stated to be $450 only and the other by which R agreed to pay $750 for services in connection with the flat. In a suit filed against R to recover $750, it was held that the agreement was made to defraud the municipal authority and was void and A cannot recover the money. Alexander v. Rayson.

b)    A trading partnership consisted of more than 20 persons and it was not registered rendering it an illegal association. A suit was brought for its dissolution. It was held that the suit would not lie for it would defeat the provisions of the Companies Act. Mewa Ram v. Ram Gopal, (1926) 48 all, 735.

c)    An agreement buy the debtor not to rise the plea of limitation, should a suit have to be filed,is void as tending to limit the provisions of the Limitation Act (Rama Murthy vs Gopayya).


3.      If it is fraudulent
An agreement, whose object or consideration is to fraud others, is unlawful and hence void.

Example-
a)    A being agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain from B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment by A on his principal to obtain for B a lease of land belonging to his principal.

Case-
a)    A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful. [Illustration (e) to section 23].

b)    Where the object of an agreement between A and B was to obtain a contract from the commissariat department for the benefit of court , which could not be obtained for both of them without practicing fraud on the department, it was held that the object of the agreement was fraudulent, and that the agreement was therefore void. Shaib Ram Vs Nagar Mel, (1884
Consideration and Object - 2
4.     If it involves or implies injury to the person or property of another
An agreement, the consideration of which is the causing of an injury to a person or property of another, is void.[Section-23] Injury means criminal or wrongful harm.

Case-
a)    An agreement by the proprietor of newspaper to indemnify the printers against claims arising from libel printed in the newspaper is void. W.H. Smith & Sons v. Clinton

b)    A bond, which compels the executant to daily attendance and manual labor until a certain sum is repaid in a certain month and penalizes default with overwhelming interest, is unlawful and void. Ram sarup v. Bansi Mudar , (1915) 42 Cal 742

5.     If the court regard  it as immoral
An agreement, the consideration of which is immoral, is void. (Section 23). The scope of the word immoral here extend to the following:

i)     Sexual immorality e.g. illicit cohabitation or concubinage or prostitution.

Case-
a)    A agrees to let her daughter to hire to B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code [illustration (k)to section 23]

b)    A gift deed executed in consideration of illicit has been held void, as its object is immoral. Ghumma v. Ram Chandra (1926), 47 All. 619. 

      ii)    Furtherance of sexual immorality.
           
Case-
A man who knowing lets out his house for prostitution cannot recover the rent, it being an act for furtherance of sexual immorality (Choga Lal v. Piyasi)  . The landlord may, however, recover if he did not know the purpose.

      iii)    Interference with marital relation      

Case-
Money advanced to a married woman to enable her to procure and to marry the plaintiff could not be recovered back as the object of the agreement was held immoral(Bai Vijli v. Nansa Nagar). 

iv)    Such acts which are against good public morals.

Case-
a)    An agreement for future marriage, after death of first wife is against good public morals and hence would be void. Wilson v. Cornley (1908), 1 K.B. 729

b)    A, who is B’s mukhtar, promises to exercise his influence, as such with B in favor of C and C promises to pay Rs.1000 to A. The agreement is void because it is immoral.[ illustration (j)to section 23] 

6.    If the court regards it as ‘opposed to public policy
If the court regards the object or consideration of an agreement as opposed to public policy, the agreement is void (Section 23).

The following agreements are considered to be against the public policy.

i)    Trading with an alien enemy:
All trades with public enemies without a license from the government are unlawful. It is now fully established that trading with an alien enemy (i.e. a citizen of the other country at war with the state) is against public policy in so far as it tends to aid the economy of the enemy country. Such agreement is illegal.

ii)   Agreements for stifling criminal prosecution:
It is well-settled law that if a person has committed a crime, he must be punished. Hence any agreement, which seeks to prevent the prosecution of a guilty party is opposed to public policy and is void, for ‘no one can be allowed to make a trade of felony’. Agreement for stifling prosecution cannot be enforced.
    
Example-
Where the offence is non-compoundable as where the charge is one of criminal breach of trust and the offence is compounded by the accused passing a bond to the complaint, the latter cannot recover the amount of the bond.
           
Case-
Where A agreed to execute a kabala of certain lands in favor of B in consideration of B abstaining A with respect to an offence of simple assault which is compoundable, it was held that the contract was not against public policy and could be enforced. Amir Khan v. Amir Jan (1898) 3 C. W. N.  5. 
   

iii)        Agreement interfering with the course of justice:
An agreement for the purpose of using improper influence with judges is void.

Example-
An agreement not to disclose misconduct to the other interested party or an agreement to influence a judge to induce him to decide the case in a party’s favor, is obviously opposed to the public policy and is void.

Case-
An agreement to pay a fee to a holy man for prayers for the success of a suit is not an interference with the course of justice. Balasundra Mudaliar v. Mohamed Ossman, (1930) 53 Mad. 29; 57 Mad.L.J. 154. 

    
iv)    Champerty and maintenance:
Maintenance is an agreement made by a disinterested party for litigation. It is a valid agreement. Champerty is an agreement made by a person to help a party to litigation, provided that the party receiving help promises to share the fruits of the litigation in the event of a favorable decision obtained by him in the suit.

Case
A contract to assist litigant so as to delay the execution of a decree against him is opposed to public policy and cannot be enforced. Nand Kishor vs Kunz Behari, (1933) All. L. J. 85. 

v)         Traffic in Public Offices:
Agreements for sale or transfer of Public Offices or for appointments for Public Offices in consideration of money are illegal, being opposed to public policy. Such agreements, if enforced, would lead to inefficiency and corruption in public life.

Case-
a)    An agreement to procure Knighthood made to a charity is void. Parkinson v. College of Ambulance Ltd.(1925) 
b)    The priests of a public temple agreed to share the offerings made to the deity. It was held that their arrangement was not against public policy. Kallu v. Rajinder(1922). 
c)    If A pays money to B who promises to use his influence and to secure A’s son and appointment in the public service, A cannot recover the money if his son does secure the appointment. Ledu v. Hira Lal, (1916) 43 Calcutta 115.
 vi)         Agreements creating an interest opposed to duty:
If a person enters into a contract with a public servant, which to knowledge might cast upon the public service obligations inconsistent with the public duty, the agreement is void.

Case-
a)    An agreement is not to report in newspaper the activities of a public personality is a void agreement. Similarly, if a lawyer wants to create an interest, which will encourage him to perform his duties indifferently, the agreement shall be void. Nevile v. Dominion of Canada News Co(1915)

b)    An agreement by an agent with a third party whereby he would be enabled to make secret profits is illegal and void, as it tends to create a conflict between interest and duty.

vii)    Agreement opposed to parental duty:
The authority of a father over children and a guardian of a ward is to be exercised in the interest of the children and the ward respectively. The authority of a father cannot be alienated irrevocably and any agreement purporting to do so is void.

Case-
a)    Where the adopting father promises money to the natural father in return for adoption of the latter’s son, such promise is void. Sitaram v.Harihur(1915)  .

b)    The father of two minor sons agreed to transfer their guardianship to Mrs. Annie Besant, on an irrevocable basis. Subsequently he wanted to rescind the agreement. Held their guardianship cannot be permanently alienated. So he got back their custody. Giddu Narayanish vs Mrs. Annie Besant.

viii)    Marriage brokerage agreement:
According to English Law an agreement to pay brokerage to a person for negotiating a marriage, is void because it is against public policy. The principal underlying this rule is that marriages should take place according to the free choice of parties and such choice should not be interfered with by third parties acting as brokers.

Bakshi vs Nadu Das (1902).. (i) Gifts made to the groom or the bride are valid transactions. (ii) Gifts made can be claimed back if the match fails.(iii) A promise to give a marriage in ret6urn for money is a void promise. (iv) A promise to remunerate the broker is void.

Case
a)    An agreement to pay money to the parent or guardian of a minor in consideration of his consenting to give the minor in marriage is void as being opposed to the public policy. Dholidas vs Furchand, (1897) 22 Bom. 658.
b)    An agreement to pay a penalty in case a minor daughter is not given in marriage to a particular person is void. Devarayan vs Muthuvaman, (1914) 37 Mad. 393.

ix)    Agreement tending to create monopolies in trade:
Agreements having for their object, the creation of monopolies are void as opposed to the public policy. Somu Pillai vs MC Mayaveran, (1905) 28 Mad. 520.  


x)    Agreement to defraud revenue authority:
Agreements to defraud revenue authorities are void and illegal.

Case
An agreement by which an employee was to get, in addition to salary, an expense allowance grossly in excess of the expenses actually incurred by him, was held illegal because the provision as to expenses was contrary to public policy being merely a device to defraud the Income Tax authorities. Napeier vs National Business Agency Ltd. (1951). 2 All. ER. 264.

xi)    Agreement to give evidence:
Agreements whereby money is given to induce persons to give evidences in a civil port are void because everyone is expected to perform his legal duty. Adhiraja Shatty vs Vittil Bhatta AIR (1914). Mad. 366

xii)    Agreement against personal freedom:
Agreement which unduly restrict personal freedom have been held to be void and illegal as being against public policy.
          
Case
When a debtor promises not to change his residence till repayment of a loan is complete, such promise is void.  Harwood vs Millers Timber & Trading Co. (1917), 1KB 305. 

xiii)    Agreement opposed to marital duties:
Agreement, which interferes with the performance of marital duties, is void as being against public policy.
      
Case
a)    An agreement to pay money so that a party to a marriage may be helped in obtaining a divorce shall be against public policy and void. Roshan vs Mohammed (1887)

b)    An agreement that the husband will always stay at the mother in law’s house and that the wife would never leave her parental house is void. Tikyat vs Monohar 28 Cal. 751.
CONSIDERATION UNLAWFUL IN PART
If the consideration or object is partially unlawful, the following rules will be applicable in such cases:

1.    If any part of a single consideration for one or more objects, or any one or any part of any one or several considerations for a single object, is unlawful, the agreement is void.

Example-
A promises to superintend, on behalf of B, a legal manufacture of indigo; and an illegal traffic in other articles. B promises to pay A salary of 10000 rupees a year. The agreement is void, the object of A’s promise and the consideration for B’s promise is in part unlawful. (Illustration to section 24).
    
Case-
A agrees to serve B as his housekeeper and also to leave the adultery with him at a fixed salary. The whole agreement is unlawful and void. A cannot sue even for service rendered as housekeeper because it cannot be ascertained as to what was due on account of adulterous intercourse and what was due for housekeeping. Alice Mary Hill v. William Clarke,(1905), 27 All. 266 


2.    Where there reciprocal promise to do things legal and also other things illegal, and the legal part can be separated from the illegal part (i.e. there is a separate consideration for different promises), the legal part is a contract and the illegal part is avoid agreement. (Section 57).

Example-
A and B agree that A shall sell B a house for Rs.10000 but if B uses it as a gambling house, he shall pay a Rs. 50000 for it. The first part of the agreement is valid and the second part is invalid.

3.    In the case of alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. (Section 58)

Example-
A and B agree that, A shall pay Rs.1000 for which B shall afterwards deliver to A, either rice or smuggled opium. This is a valid contract to deliver rice and a void agreement as to opium.
 
Every agreement, by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent is void. (Section 27).

Exception-
One who sells goodwill of business may agree with the buyer to refrain from carrying on a small business, within specific local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein; Provided that such limit appear to the Court reasonable, regard being had to the nature of the business. (Section 27).
The words ‘restraint from exercising a lawful profession, trade or business’ do not mean an absolute restriction, and intended to apply to a partial restriction. Madhub Chunder v. Rajcoomer Dass, (1874) 14 B.L.R. 76.

Exception of the rule –

1.    A seller in business and its goodwill may be restrained reasonably from carrying on any business that similar to the one sold (Section 27).

2.    A partner may be restrained by the others from carrying any business similar to that of the firm [Section 11(2) of the Partnership Act, 1932]. 

3.    An outgoing partner may be reasonably restrained by the remaining partners from carrying any business similar to that of the firm[Section 36(2) of Partnership Act, 1932] 

4.    On the dissolution of the firm, the partners may reasonably restrain each other from carrying any business similar to that of the dissolved firm (Section 54 of the Partnership Act, 1932).

In all these cases, the restraint must be reasonable. Other exceptions from Sri Gopal Paper Mills v. S. Malhotra are discussed below.

Other exception- 

Trade combination: In spite of section 27 in spite of any restraint that might be imposed upon a party to an agreement seeking to establish an economic combination, such combinations will be valid if  (a) they are not against the interests of any of the contracting parties, and (b) they are not against public interest.

Fraser & Co. V. Bombay Ice manufacturing Co. (1904): An agreement between different ice manufacturing companies not to sell at a price below the agreed one and to share profits in a certain proportion is a valid one.

Nordenfelt  v. Maxim Nordentfelt Co.(1894): A negative restraint in a service contract is valid if it is reasonable in point of period of time and area of operation, and void if unreasonable.

Oakes & Co. V. Jackson (1876): The plaintiff agreed with the defendant that that after termination of services, the defendant would not take up similar employment within 800 miles of Madras. Held restraint was void.

Wednesday, October 19, 2011

Q- Explian various types of depreciation allowances. whatare condiions for allowability of depriciation.


DEPRECIATION
Introduction: 
                     The term depreciation has not been defined in the income tax ordinance. therefore, it has to be understood in its usual commercial sense.
  Depreciation means  a gradual and permanent decrease in the value of an asset through wear and tear and obsolescence. In computing the taxable profits of a business  or profession, the income tax law permits the deduction of depreciation subject to certain conditions.

Assets allowable for depreciation;
                                                 According to section 22(1) of the income ordinance 2001," A person shall be allowed a deduction for depreciation of the person's depreciable assets[sec.22(15)]  used in the person's business  in the tax year"
It means only depreciable assets are allowed for depreciation.

Depreciable asset implies any tangible movable property, immovable property(other than unimproved land) or structural improvement to immovable property owned by the person that:
a- has a normal useful life exceeding one year,
b- is likely to lose value as a result of normal wear and tear or obsolescence< and
c- is used wholly or partly by the person in deriving income from business chargeable to tax.

Types of depreciation allowance.
There are four main types of depreciation allowance given in the income ordinance 2001.
1- Normal depreciation allowance
2- Initial depreciation allowance
3- First year allowance.
4- Accelerated Depreciation

1) Normal Depreciation Allowance: (22)
                                                         Normal depreciation is to be calculated at the prescribed rates for various types of assets on the written down value of the depreciable assets.
Depreciation rates specified for the purposes of section 22 shall be -
   
I.
Building (all types). 
10%
II. 
Furniture (including fittings) and machinery and plant (not otherwise specified), Motor vehicles (all types), ships, technical or professional books..
15%
III.
Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products aircrafts and aero engines.
30%
IV.
In case of mineral oil concerns the income of which is liable to be computed in accordance with the rules in Part-I of the Fifth Schedule.
(a)        Below ground installations
(b)        Offshore platform and production installations
(c)        A ramp built to provide access to the persons with disabilities not exceeding Rs. 250000 each.                                                1oo%
 
 
 100%
  20%

2-Initial Allowance  (23)  
    (1) A person who places an eligible depreciable asset in service in Pakistan for the first time in a tax year shall be allowed a deduction (initial allowance‖) provided the asset is used by the person for the purposes of his business for the first time or the tax year in which commercial production is commenced,whichever is later.

(2) The amount of the initial allowance of a person shall be computed by
applying the rate specified in Part II of the Third Schedule against the cost of the
asset. Rate of initial allowance is 50 %.

(3) A deduction allowed under this section to a leasing company or an
investment bank or a modaraba or a scheduled bank or a development finance
institution in respect of assets owned by such institutions and leased to another person shall be deducted only against the leased rental income derived in respect of such assets.]
NOTE; It must be noted that initial allowance for depreciation is not provided in the following  cases
(a) any road transport vehicle not the vehicle is plying for hire;
(b) any furniture, including fittings;
(c) any plant or machinery that has been used previously in
   Pakistan

First Year Allowance.(23A)
The FYA has been provided in order to accelerate the industrial process in rural and under developed areas. Plant, machinery and equipment installed
by any industrial undertaking set up in specified rural and under developed
areas, and owned and managed by a company shall be allowed first year
allowance at the rate of 90% against the cost of the ―eligible depreciable assets‖ put to use after July 1, 2008.

Accelerated depreciation: 23B
 Accelerated depreciation to alternate energy projects.— (1) Any plant,
machinery and equipments installed for generation of alternate energy by an
industrial undertaking set up anywhere in Pakistan and owned and managed by
a company shall be allowed first year allowance in lieu of initial allowance under
section 23, at the rate 90% against the cost of the eligible depreciation assets put to use after first day of July, 2009.

Conditions applicable to depreciation.
1-Asset used partly for business.    sec.22(3))
Where a depreciable asset is used in a tax year partly in derivingincome from business and partly for another use, the deductionallowed for that year shall be restricted to the fair proportionalpart of the amount that would be allowed if the asset was wholly used toderive income from business chargeable to tax.

2-Determination of written down value.           
The written down value of a depreciable asset of a person at thebeginning of the tax year shall be –—
(a) where the asset was acquired in the tax year, the cost of theasset to the person as reduced by any initial allowance inrespect of the asset under section 23; or

(b) in any other case, the cost of the asset to the person asreduced by the total depreciation deductions (including any
  initial allowance under section 23) allowed to the person in respect of the asset in previous tax years.

3-Determination of writtendown value in case asset used partly for business.
Where a depreciable asset is used during a tax year partly for business and partly for another use, the written down value of the asset shall be computed on the basis that the assethas been solely used to derive income from business chargeable to tax.

4-Depreciation allowance not to exceed original cost.
The total deductions allowed to a person during the period ofownership of a depreciable asset under this section and section 23 shall notexceed the cost of the asset.

5-Disposal of asset used for business
Where, in any tax year, a person disposes of a depreciable asset, no
depreciation deduction shall be allowed under this section for that year.

6- Profit or loss on disposl of asset.
1-if the consideration received exceeds the written down value ofthe asset at the time of disposal, the excess shall be chargeable to tax in that year under the head ―Income fromBusiness or

2-if the consideration received is less than the written downvalue of the asset at the time of disposal, the difference shall be allowed as a deduction in computing the person‘s income chargeable under the head ―Income from Business for tha year.

7-Disposal of asset partly used for business.(Maqsood ahmed , career academy hfd 03333424200)
Where a depreciable asset is not used for the whole of the tax year in deriving incomefrom business chargeable to tax, the written down value of the asset is computed by deducting the total depreciation allowed on asset till its disposal out of the sale proceeds received against the asset.
.
8-Depreciation allowance in case of asset owned by leasing company, bank etc.
The depreciation deductions allowed to a leasing company or aninvestment bank or a modaraba or a scheduled bank or a development finance institution in respect of assets owned by such institution and leased to another person shall be deductible only against the lease rental income derived in respect of such assets.

9-Dpreciable allowance in case of immovable property.
         The cost of immovable property or a structural improvement of immovable property shall not  include the cost of land.

10- Cost of depreciable asset exporteed or transfered out of pakistan.
 Where a depreciable asset that has been used by a person inPakistan is exported or transferred out of Pakistan, the person shall be treated ashaving disposed of the asset at the time of the export or transfer for aconsideration received equal to the cost of the asset.

Monday, October 10, 2011

INCOME TAX NUMERICAL FORMAT



NAME OF TAXPAYER
       NATIONAL TAX NUMBER
   TAX YEAR........................
   TAX YEAR ENDED..........
RESIDENTIAL STATUS
                    COMPUTATION OF TAX PAYABLE



INCOME FROM SALARY ..............................(section 12)
INCOME FROM PROPERTY...........................(=====15)
INCOME FROM BUSINESS...........................(=====18)
CAPITAL GAINS.............................................(=====37)
INCOME FROM OTHER SOURCES..............(=====39)

TOTAL INCOME
LESS DEDUCTIBLE ALLOWANCES:
1.Zakat paid 
2.payment to worker welfare fund
3.contribution to workers participation fund

ACTUALLY TAXABLE INCOME TAXABLE INCOME
Add share from AOP included for rate purpose only
Add any other income for rate purpose

TAXABLE INCOME FOR RATE PURPOSE
(here rate will be applied according to taxable income and marginal relief treatment will be applied , then tax payable will be calculated)
TAX ON TAXABLE INCOME......................................................................................XXXXXXXXXXXXXX

LESS CONCESSION FOR SENIOR CITIZENS

LESS CONCESSION FOR TEACHERS & RESEARCHERS

LESS FOREIGN TAX CREDIT
                     FORMULA FOR CREDIT....
                                           PAK INCOME TAX        X              FOREIGN INCOME
                                            TAXABLE INCOME INCLUDING FOREIGN INCOME

LESS TAX CREDIT FOR AVERAGE RELIEF
              1-CHARITEABLE DONATIONS
              2-INVESTMENT  SHARES
              3-CONTRIBUTION TO APP. PENSION FUND    
              4- PROFIT O DEBT ON HOSING PAYMENTS

FORMULA FOR AVERAGE RELIEF....
                                                    GROSS TAX         X AMOUNT ADMISSIBLE
                                                              TAXABLE INCOME

NET TAX= GROSS TAX - REBATE FOR AVERAGE RELIEF

LESS CREDIT FOR SHARE FROM AOP
                                FORMULA           =  NET TAX          X    ACTUAL TAXABLE INCOME
                                                                   TAXABLE INCOME FOR RATE PURPOSE

=TAX LIABILITY UNDER NORMAL TAX REGIME

= TAX PAYABLE WITH RETURN
footnote for :separate block of incomes
END

Wednesday, October 5, 2011

INCOME TAX AUTHORITIES--- FEDERAL BOARD OF REVENUE

Income Tax Authorities

The Federal Board of Revenue

INTRODUCTION:
The Federal Board of Revenue (more commonly known by its initials as FBR) is the semi-autonomous, supreme federal agency of Pakistan that is responsible for auditing, enforcing and collecting revenue for the government of Pakistan.. FBR is estimated to be the largest federal bureaucracy in Pakistan. As the agency conducts audit of taxpayers regularly, it's regarded as the guardian of national treasury in Pakistan. FBR primarily operates through its main collection arms, its field formations, the Regional Tax Offices (RTOs) and Large Taxpayer Units (LTUs) across the country. FBR has two major wings: the Inland Revenue Wing which brings in over 90% of FBR's total collection and Customs Wing.              
 Mr. Tariq Bajwa is the current chairman of the FBR and under his capacity as Chairman FBR, he is authorized Office of the Secretary, Revenue Division, Government of Pakistan
Definition
Up till 30th June  2006 the  Board meant Central Board Of Revenue as established under the central board of revenue act, 1924. On the commencement of Federal Board of Revenue Act 2007, Board means the Federal Board of Revenue.

Who appointed the FBR?
The Federal Government has appointed the Federal Board of Revenue (FBR) by the authority of the Federal Board of Revenue Act, 2007.

Basic function of the FBR:
Tax collection shall be the basic function of the FBR.

Status of the FBR:
FBR shall be the highest executive authority in Pakistan.

Head of the FBR:
Chairman of the FBR shall be the main authority in the FBR who shall be appointed by the Federal Government. He is responsible for
a- Formulation and administration  of fiscal policies.
b- Levy and collection federal taxes.
c- Judicial function of hearing of appeals.
     His responsibility also involve  interaction with the officers of the president, the prime minister, all economic ministries as well as trade and industry.

Members of the FBR:
The FBR currently comprises chairman and eleven members appointed by the federal govt. as follow;

a- Three line members which include
Member (Direct Taxes),
Member (Sales & Federal Excise) and
Member (Customs)

b-Four functional members are
Member Fiscal(Research & Statistics),
Member(Human resource management),
Member (Audit) and 
Member (Administration)

c-Support members include
Member( Legal),
Member(Tax policy & Reforms),
 Member(Information management system) and
 Member(Facilitation & Tax Education)

Appointment of Authorities By FBR.
The following tax authorities are appointed by the federal board of revenue.
  1. 1. Chief commissioners inland revenue,
  2. commissioner inland revenue,
  3. commissioner inland revenue appeals,
  4. deputy commissioner inland revenue,
  5. assistant commissioner inland revenue,
  6. inland revenue officers,
  7. inland revenue audit officers,
  8. superintendents inland revenue,
  9. inspectors inland revenue,and
  10. such other ministerial officers and staff as may be necessary.
    Besides this, the Board may appoint firms of chartered accountants and cost and management accountants to conduct the audit of any person. The scope of audit is determined by the Board on case to case basis.

    Powers and Functions of the Federal Board of Revenue (FBR):
    The FBR has following powers and performs the following functions in the presence of its powers:
    1)         Approval of research institutions: [26(2)]
                The FBR may approve any institution engaged in scientific research in Pakistan    as “Scientific Research Institution” so that such institution may claim its scientific     research expenditures as deduction against income from business.
    2)         Approval of employee training scheme: [27(c)]
    The FBR may approve a Pakistani employee training scheme against which deduction is allowed to business.
    3)         Approval of Leasing Companies and Modaraba: [28(3)]
    The FBR may approve any leasing company or Modaraba, where lease rental payment made to such company is allowed as deduction against income from business to that person who makes such payment.
    4)         Approval of charitable institutions: [61]
                The FBR may approve any institution as a charitable institution for the        purposes of the Income Tax Ordinance, 2001, especially, for donation      purposes.
    5)         Method of accounting: [32(3)]
                The FBR may specify that any class of persons shall record its "Income from        Business" on a cash or accrual basis.
    6)         Apportionment of deductions: [67(2)]
                The FBR may make rules u/s 237 for the purposes of apportioning             deductions where the expenditure relates to the derivation of more than one      head of income.
    7)         Permission for tax year: [74]
                The FBR may permit person or class of persons to use special tax year instead of normal tax year.
    8)         Power to demand particular data: [180]
    The FBR may demand any data regarding exempted income of any industrial and commercial organization (By delivering data collection and compilation responsibility to any government or private department)
    9)         Authority of circulars: [206]
                The FBR may issue circulars to achieve consistency in the administration of the   Ordinance and to provide guidance to taxpayers and officers of the FBR.
    10)       Empowerment of general administration:
                The FBR shall exercise the general administration of the Income Tax         Ordinance, 2001.
    11)       Appointment of income tax authorities: [208]
                The FBR may appoint as many income tax authorities as are necessary.
    12)       Criterion for selection of audit: [177(1)]
    The FBR may define criterion to guide the Commissioner of Income Tax that how the CIT select a particular person to conduct audit of its income tax affairs during a particular tax year.
    13)       Appointment of the auditor: [177(8)]
                The FBR may appoint a firm of Chartered Accountants, to conduct an audit of the             income tax affairs of any person.
    14)       Determination of the scope of audit: [179(8)]
                The scope of any audit conducted by firm of Chartered Accountants or Cost and   Management Accounts shall be determined by the FBR on a case to case basis.
    15)       Determination of jurisdiction: [209(6)]
    Where a question arises as to whether a Commissioner has jurisdiction over a person or not, the question shall be decided by the RCIT or RCITs concerned and, if they are not in agreement, it is determined by the FBR.
    16)       Authority of approval: [212]
                The FBR may authorize the RCIT or the CIT to grant approval on behalf of the       FBR.
    17)       Registration of income tax practitioners: [223(10)]
                The FBR may make rules u/s 237 for the registration of income tax            practitioners.
    18)       Power to make rules: [237(1)]
                The FBR may, by notification in the Official Gazette, make rules for            carrying out the purposes of the Income Tax Ordinance, 2001.
    19)       Delegation of powers: [209(2)]
    The FBR may delegate all or any of its powers and functions to any income tax authority.
    20)       Unexplained income or assets:
    The FBR may make rules u/s 237 for the procedure of taxation of any unexplained income or asset of any person discovered by any income tax authority.
    21)       Supervision of subordinate authorities:
                The FBR supervises the functions, duties and jurisdiction of its subordinate           authorities.
    22)        Approval of securities:
                   Approve a security for the purpose of taxation as "profit on debt"

    The FBR  has the powers to select persons or class of persons for audit of income tax affairs through computer ballot which may be random or parametric on the discretion of the board.

    DEFINE PERQUISITES



    DEFINE PERQUISITE,WHAT VARIOUS PERQUISITES /BENEFITS/ FACILITIES ARE PROVIDED BY AN EMPLOYER TO AN EMPLOYEE IN RELATION TO SALARY.

     INTRODUCTION:
                                Perquisite is defined as any casual emolument or benefit attached to an office or position in addition to salary.    or                
       An employee benefit is any benefit provided or paid by the employer for the benefit of the employee or the employee’s family. Benefits are generally included in the employee’s SALARY for tax purposes, except those benefits that qualify for an exclusion.

    Valuation of Perquisites(section 13 ITO 2001)
    SECTION 13(1) SAYS
                                    "For the purpose of computing the income of an employee for the tax year chargeable to tax under the head 'Salary" the value of perquisites provided by an employer to an employee in that year that is included in the employee's salary under section 12 shall be determined in accordance with this section"   
                  As a general rule, the taxable value of perquisites in the hands of the employees is its cost to the employer. However, specific rules for valuation of certain perquisites as per ITO2001 are briefly given below:
    • Accommodation
    • Conveyance
    • Services of Sweeper, Gardner, Watchman or Personal Assistant
    • Supply of Gas, Electric Power or Water (Utilities)
    • Interest Free or Concessional Loan Facility
    • Medical charges, Hospital charges or medical allowance. 
    • Provident Fund
    • Entertainment
    • Transfer of property or service
    • Obligation of employee waived by employer.
    • Obligation of employee paid by employer.
    • Any Other Benefit or Amenity, Service, Right or Privilege
    1. Accommodation 

      (a) House Rent Allowance:

            If an employer provides any accommodation allowance or house rent allowance, the whole amount will be fully taxable under the head income from salary.

         (b) Accommodation Facility:

         If the employer provides an accommodation, the following amount will be added in total income of the employee as value of perquisite:

    1- The amount that would have been paid by the employer in case such accommodation was not provided; or 

    2- 45% of the minimum of time scale of the basic salary;   whichever of (1) or (2) is higher.

    Note= In areas other than big cities the house rent allowance admissible to govt. employees is 30% of minimum time scale of the basic salary.

      Conveyance:

    (a) Conveyance Allowance;

       If the employer provides conveyance allowance to the employee, the whole allowance will be fully taxable under the head income from salary. 

     (b) Conveyance provide by the employer for personal use of the employee.

    If the employer has provided a conveyance to employee purely for personal use, 10% of the cost paid for purchasing the motor vehicle will be included in the taxable income of the employee every year.

    (c) Conveyance provided by employer partly for personal and partly for official use.

    When the motor vehicle is provided by the employer both for official and personal use, 5% of the cost paid by the employer for purchasing the motor vehicle will be included in the total income of the employee.

     NOTE= If the vehicle is acquired on lease, no leasing value will be considered for this purpose. The percentage  of 5% or 10% will be applied on fair market value of the vehicle.

    Medical charges, Hospital charges or Medical allowance: 

    (1) In case an employee receives free medical treatment or hospitalization or both by the employer or receives reimbursement of the medical expenses under the terms of employment whole such amount.

    (2) In case where the above mentioned facilities are not provided for in the terms of employment, any medical allowance given by the employer will be exempt up to 10% of basic salary of employee.

    Provident Fund

    Entertainment 

     Services of a sweeper, a gardener, a watchman or a personal assistant

    The value of benefit to the employee or any member of his household resulting from the provision of services of a sweeper, a gardener, a watchman or a personal attendant by the employer, shall be the actual cost to the employer. The actual cost in such a case shall be the total amount of salary paid or payable by the employer for such services as reduced by any amount paid by the employee for such services.

    Supply of Gas, Electric Energy or Water(utilities)
    If an employer provides utilities to an employee in a tax year, the amount chargeable to the tax under the head salary for that year shall include the fair market value of the utilities provided, as reduced by any payment made by the employee for the utilities.

    Interest free or Concessional Loan Facility

    The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose by the employer will be as follow:
            If a loan is made, on or after the 1 day of July, 2002, by an employer to  an employee and either no profit on loan is payable by the employee or the rate of profit on loan is less than the benchmark rate, the amount chargeable to tax to the employee under the head  Salary  for a tax year shall
    include an amount equal to—
    (a) the profit on loan computed at the benchmark rate, where no
       profit on loan is payable by the employee, or
    (b) the difference between the amount of profit on loan paid by the
       employee in that tax year and the amount of profit on loan
      computed at the benchmark rate,as the case may be.
    Bench mark rate for tax year 2012 is 14%. 

    Obligation of employee waived by employer.
    If an obligation of an employee to pay or repay an amount owing by the employee to the employer is waived by the employer, the amount chargeable to tax to the employee under the head  Salary  for that
    year shall include the amount so waived.

    Obligation of employee paid by employer
    If an obligation of an employee to pay or repay an amount[owing by the employee to another person is paid by the employer, the amount chargeable to tax to the employee under the head  Salary  for that
    year shall include the amount so paid.

    Transfer of property or service
    If property is transferred or services are provided by an employer to an employee, the amount chargeable to tax to the employee under the head ―Salary for that year shall include the fair market value of the
    property or services determined at the time the property is transferred or the services are provided, as reduced by any payment made by the employee for the property or services.

    Any Other Benefit or Amenity, Service, Right.
     If an employer has provided an employee with a perquisite which is not covered by sub-sections (3) through (12), the amount chargeable to tax to the employee under the head  Salary  for that year shall include the fair market value of the perquisite, as reduced by any payment made by the employee for the perquisite.
                                            end
      

      Wednesday, September 21, 2011

      DEFINE CONTRACT ALSO EXPLAIN ITS ESSENTIALS

      CONTRACT

      Question: Define contract, what are the essentials of a contract?

      Answer:
                  Introduction: Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda, which is usually translated "agreements must be kept" . The security and stability of business world depend upon the law of contract. Indeed the basis of trade and commerce today is the enforceability  of promises, very often contracts are made at one time and the performance is to follow latter, there should be legally enforceable obligation to perform the agreement.
       
      Definition:
                      Literally: The word contract comes from a Latin word"Contractus" which means consent, agreement or to enter into an agreement with a particular person.
      Traditionally: Salmond says , "A contract is an agreement creating and defining obligations between the parties"

      Sir John Smith says,"A voluntary, deliberate and legally binding agreement between competent parties."

      Example: Asif says to Hamid,"Will you purchase my car for Rs.500000?.it is an offer, Hamid says yes, the offer is accepted and a contract is formed.

      Contract law in Pakistan
                                                The law relating to contracts in Pakistan is contained in Contract Act 1872. It extends to whole Pakistan and came in to force on the first day of September 1872. It provides rules relating to commercial transactions. It determines the circumstances in which promises made by the parties shall be legally binding on them.

      According to Contract Act1872:
                                              Section 2(h) defines contract as,"An agreement enforceable by law is a contract"
      A contract consists of two elements, 1- Agreement    2- Enforceability.
       
      Agreement: Section 2(e) defines the term agreement as," every promise and set of promises forming the consideration for each other is an agreement."

      Now what is promise?
      Section 2(b) says,"when the person to whom the proposal is made, signifies his assent thereto,the proposal is said to be accepted, a proposal, when accepted becomes a promise"

      Enforceability:
      Enforceability is the second requirement of the contract. An agreement is enforceable if it is recognized by the courts of law. In order to be enforceable by law, the agreement must create legal obligation between the parties.
      ESSENTIALS OF A VALID CONTRACT
      " To be enforceable by law, an agreement must possess the essential elements of a valid contract as contained in sections 10, 29 and 56. According to section 10, "all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by the Act to be void, and where necessary, satisfy the requirements of any law as to writing or attention or registration".            
                                  The essential elements of a valid contract are as follows.
      1-Agreement:
      There must be at least two parties, one making an offer and the other accepting it. Acceptance must be unconditional and in the same mode as prescribed and communicated by the offeror. There must be “consensus ad idem”.(same thing in the same sense) To constitute a valid contract
      Example: A offer B to sell his car for Rs.500000. B agrees to buy it. This is an offer by A and acceptance by B
      2-Legal relationship:
      Parties must intend to create legal relationship. It arises when parties know that if one of them does not fulfill his part of promise, he shall be liable for the failure of the contract. (Balfour vs Balfour)
      Example: Asif offers to sell his phone to Alvi for Rs. 1000. Alvi agrees to buy. It is a contract as it creates legal relationship.
      3-Lawfull object: (sec.23 ) The object of the contract must be lawful.
      Under section 23, “Every agreement of which the object or consideration is unlawful is void”
      The object must not be:
      1. Illegal or unlawful,
      2. Immoral,
      3. Opposed to public policy.
      Object must not be forbidden by law or is of such a nature that if permitted it will defeat the provisions of law, imputes injury to the person or property of another.

      example: Hamid agrees to pay Asif Rs.20000 if he kills Ali. The agreement is illegal as the object is unlawful.

      4-Free consent (13)
      Two or more parties are said to be consent when they are agreed upon the same thing in the same sense. This emphasizes the need of consensus ad idem. Free consent is absent if contract is induced by coercion, misrepresentation, fraud, undue influence etc.
      Example: A compels B to enter into a contract on gun point. It is not a valid contract because consent is not free.
      5-Capacity of parties: (sec. 11)
      Every person is competent to contract if he is of the age of majority, is of sound mind and is not disqualified from contracting by law to which he is subject.
      Example: M, a minor agrees to sell his house to B. It is not a valid contract because he is not competent to make a contract.
      6-Lawful consideration:
      Consideration is something in return. It is the doing of or abstinence from an act. It is the price paid by one party for the promise of the other. It means that contract is only valid if both the parties get something and give something.
      Example: A agrees to sell his car for Rs. 50000 to B. For A the consideration is Rs.500000 and for B consideration is car.
      The consideration or object of an agreement is unlawful if….
      1-It is forbidden by law,
      2-If permitted; it would defeat the provisions of any law,
      3-Involes injury to any other person or property,
      4-It is fraudulent, or
      5-It is opposed to public policy.
      7-Agreement is not expressly declared to be void:
      A void agreement is not enforceable. It has no legal existence neither it gives rise to any rights or obligations. In order to make a valid contract must not be one of those that are expressly declared to be void.
      Examples of void agreements are:
                       a- Agreement in restraint of marriage.

      b- Agreement in restraint of legal proceedings.
      c- Agreement in restraint of trade.
      d- Agreement to do impossible acts.
      e- Agreement by way of wager.
      8-Possibility of performance:
      A contract must be possible to perform otherwise it will not be a valid contract.
      Section 56 says that “An agreement to do an act impossible in itself is void”.
      Example: An agreement to put the life into a dead body is void as it is not possible.
      9-Certainty of terms:
      The contract must not be uncertain, vague or indefinite. Where the agreement is vague and its meaning can not be understood, it shall be unenforceable.
      According to section 29, Agreement, the meaning of which is not certain or capable of being made certain, is void.
      Example: A agrees B to sell one ton of oil without informing the kind of oil. The agreement is void because of its uncertainty.
      10-Legal formalities:
      Legal formalities should also be fulfilled regarding
      1. Writing
      2. Registration
      3. Attestation etc.
      Example: Sale and purchase of land requires registration.
      CONCLUSION:
      If any of the essential elements is missing the contract is voidable, void, illegal or unenforceable in the eyes of law.