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.