TAXATION – CAF 6

INCOME TAX
CHAPTER 12 – TAXATION OF INDIVIDUAL AND ASSOCIATION OF PERSONS

REFERENCE TOPIC DESCRIPTION EXPLANATION

Chapter 12 Contents ➢ Principles of taxation of Individuals
➢ Association of Persons (AOP) and its taxation
➢ Principles of taxation of joint venture

TAXATION OF INDIVIDUALS
Sec 86 Principle of taxation of individuals Taxable income and tax liability of each individual shall be determined separately
1stSchedule, Part I, Classification of individuals ➢ Individuals are re-classified in the following categories for tax rate purposes
Division I i. Non-Salaried individuals (where income chargeable under the head “salary” does not exceed 75% of his taxable income)
ii. Salaried individuals (where income chargeable under the head “salary” exceeds 75% of his taxable income)
Sec 87 Deceased individuals ➢ Legal representative shall be liable for any –
i. tax that individual would have become liable if not died
(Q3 & Q4) ii. tax payable in respect of income of deceased’s estate
➢ Liability is limited to the extent of deceased’s estate
➢ Tax liability shall be first charge on deceased’s estate
➢ Any proceedings against deceased taken against legal representative from the stage as stood on the death of deceased
➢ Any proceedings that could have been taken against deceased taken against legal representative
➢ “Legal representative” means
Person who in law represents the estate of a deceased person
Any person who intermeddles with the estate of the deceased
Where a party sues or is sued in representative character the person on whom the estate devolves on the death of the party so suing
or sued
Sec 2(33) Income of a minor child (1) Any income of a minor child for a tax year chargeable under the head "Income from Business" shall be chargeable to tax as the
income of the parent of the child with the highest taxable income for that year.
Q5 (2) However, the above is not applicable to the income of a minor child from a business acquired by the child through an inheritance.

“minor child” means an individual who is under the age of eighteen years at the end of a tax year.

Sec 89 Authors ➢ Where time taken exceeds 24 months

➢ by an author of a literary or artistic work to complete the work
➢ the author may elect to tax lump sum royalties in the tax year of receipt and preceding 2 tax years in equal proportions

TAXATION OF AOP / FIRM

Sec 80 (2) Definition of “AOP” & “Firm” Already covered in Chapter 4
Sec 92 Principles of taxation of association of ➢ AOP tax separately from the members
persons ➢ Where AOP paid tax, amount received by member out of AOP’s income is exempt
➢ Share of AOP is included for rate purposes in members income
[Q1,Q2(a),Q5] ➢ Loss of AOP not included for rate purposes in members income
Provided in case any member is a CO.
i. Share of CO. excluded from the computation of total income of AOP
ii. CO. shall be taxed separately at applicable rate on its share from AOP
Provided further that the share of a member of an AOP having turnover of Rs 300 mn or above during the tax year or any of the
preceding tax years shall not be exempt if financial statements duly audited by a firm of CAs under the CA Ordinance, 1961 or a firm
of CMA under the CMA Act, 1966 have not been filed along with return of income by the AOP to whom he is a member.
 Explanation.– if the income of AOP is exempt and no tax is payable due to this exemption, the share received in the capacity as
member out of the income of the AOP shall remain exempt.
Sec 88 An individual as a member of an ➢ If an individual has taxable income and derives share of income exempt from tax as member from AOP
association of persons ➢ Tax payable on taxable income computed as follows –
[Q1,Q2(a),Q5] Formula: Tax assessed considering exempt income as chargeable * Actual taxable income
Taxable income considering exempt income as chargeable

TAX LIABILITY IN CERTAIN CASES

Sec 98A Change in the constitution of an Where there is a change in constitution of AOP during a tax year
association of persons ➢ Liability of filing the return: of members constituted at the time (due date) of filing of return
➢ Income of AOP apportioned among members who were entitled to receive it and where tax assessed on member cannot be
recovered from him, recovered from members at the time of filing of return
Sec 98B Discontinuance of business or ➢ All provisions apply as if no discontinuance / dissolution takes place
dissolution of an association of ➢ Every member at the time of discontinuance / dissolution and legal representative (in case of deceased member) jointly and severally
persons liable for tax payable by AOP
Sec 98C Succession to business, otherwise ➢ Where a person carrying on any business or profession has been succeeded in any tax year by any other person (hereafter in this
than on death section referred to as the “predecessor” and “successor” respectively), otherwise than on the death of the predecessor, and the
successor continues to carry on that business or profession,-
a. the predecessor shall be liable to pay tax in respect of the income of the tax year in which the succession took place upto the
date of succession and of the tax year or years preceding that year; and
b. the successor shall be liable to pay tax in respect of the income of such tax year after the date of succession.
➢ Where the predecessor cannot be found, the tax liability in respect of the tax year in which the succession took place upto the date
of succession and of the tax year or years preceding that year shall be that of the successor in like manner and to the same extent
as it would have been that of the predecessor, and all the provisions of this Ordinance shall, so far as may be, apply accordingly.
➢ Where any tax payable under this section in respect of such business or profession cannot be recovered from the predecessor, it
shall be recoverable from the successor, who shall be entitled to recover it from the predecessor.
Chapter 12 Key points for solving numerical ➢ Any amount paid by the AOP to member not allowed as expenses, and added back
➢ Share of income included in members income for rate purposes is profit after tax
[Q2(b)] ➢ Loss of AoP can be set-off and carry forward against its income only
➢ Share of loss neither adjustable against member’s income nor considered for rate purposes
Chapter 12 Principles of taxation of joint venture Treated as AOP