INCOME TAX LAW DEFINITIONS

APPELLATE TRIBUNAL [Section 2(2)]

In case of any dispute between the taxpayer and tax department an appeal can be made to
Appellate Tribunal. This is the highest judicial authority in the matters of tax. It consists of
judicial as well as accountant members. The members are appointed by the Federal
Government. The decision of the Tribunal on point of facts is final. However, in case of point
of law the manner may referred to High Court.

APPROVED GRATUITY FUND [Section 2(3)]

The Government and private organizations maintain gratuity funds for the benefit of their
employees. The amounts in these funds continue to accumulate from year to year and
normally are paid to employees at the time of retirement. In case of death of an employee
during service, the amount is paid to his family.

The employer gets a lot of benefits if the gratuity fund is approved by the income tax
authorities. Under the Income Tax Ordinance, 2001, the Commissioner of Income Tax grants
such an approval.

ASSESSMENT [Section 2(5)]

Assessment includes re-assessment and amended assessment and the cognate expressions
shall be constructed accordingly.

Explanation:
Assessment is process whereby the data of a person, e.g. income expenses, tax payments etc.,
which help in calculating his final tax liability is checked either by the person himself or by
the tax department.

ASSESSMENT YEAR [Section 2(5A)]

Assessment Year means the period of 12 months beginning on the first day of July next
following the income year and includes any such period that is deemed under the provision of
this Ordinance, to be assessment year in respect of tax year.

Explanation:
The concept of assessment year was prevailing in our income tax law up to 2001. Until that
time any income earned by a person during one year was assessed in the relevant “assessment
year” which started on next 1st July. However, this concept is no more applicable when tax
under Income Tax Ordinance, 2001 is assessed and paid.

AGRICULTURAL INCOME [Section 41]

The agricultural income means income :
(i) derived from land;
(ii) land is situated in Pakistan; and
(iii) land is used for agricultural purposes.
Thus, any income derived as rent, revenue, or from sale of any produce which is grown on a
Pakistani land is agricultural income. However, it is necessary to understand that the land
must be used for agricultural purposes, which means that some human labour and efforts are
necessary to be employed. If a produce is grown wild or spontaneously on land without any
human efforts or labour, it will not be treated as agricultural income under this definition.

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DEPRECIABLE ASSET [Section 2(17)]
Depreciable asset means a depreciable asset as defined in Section 22 of Income Tax
Ordinance 2001.
In this section depreciable asset implies any tangible moveable property, immoveable
property (other than unimproved Land) or structural improvement to immoveable
property, owned by a 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.

INCOME [Section 2(29)]

Income includes:
(a) Any amount chargeable to tax under the Income Tax Ordinance, 2001.
(b) Any amount subject to collection or deduction of tax at the time of import of
goods.

Explanation:
It is necessary for Collector of Customs at the time of import of goods to collect the
tax at the prescribed rates from the importers. The value of the import has been treated as
income in the hands of importer under this clause.
(c) any payment received by a resident from a prescribed person for supply of
goods and services.
(d) Any amount received as export proceeds.
(e) Amounts received on prizes and winnings.

PERSON [Section 2(42) & (80)]

Under the Income Tax Ordinance 2001, a person includes the following:
(a) An individual
(b) A company;
(c) An association of persons incorporated, formed, organized or established in
Pakistan or elsewhere;
(d) The Federal Government, a foreign government, a political sub-division of a
foreign government, of public international organization.

RESIDENT AND NON-RESIDENT PERSONS [Section 81- 84]

Income Tax Ordinance 2001, does not make any distinction on nationality or domicile
basis, rather tax liability of a person is determined on the basis of the fact that whether he is a
resident or non-resident person.
It must be noted that:
1. To be a resident or non-resident as used above has nothing to do with a dwelling
place or nationality, rather it is a term purely designed for tax purposes.
2. The status of resident or non-resident is always associated with a particular
income year because it may change from year to year.
3. A person’s status is determined with reference to the period of his stay (purpose of
stay is immaterial) in Pakistan in the tax year.
4. The Federal Government is treated as resident.

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 For the purpose of income tax, all the persons are grouped under two categories:
(a) Residents
(b) Non-Residents

1. Resident Individual [Section 82]

An individual will be a resident in Pakistan in any tax year if he fulfils any one of the
following two conditions :
1. He is in Pakistan for a period or periods amounting, in all, to 183 days or
more.
2. He is an employee or official of the Federal Government or a Provincial
Government posted abroad in the tax year.
Explanation:
An individual will become a resident of Pakistan in a tax year if his stay in Pakistan in
that year is 183 days or more. It is not necessary that the stay should be continuous.
Moreover, as already mentioned, purpose of stay is also immaterial. It is also not necessary
that the stay should be at one place only. Mere physical presence for the period is sufficient.

Fulfillment of any one of the requirements given in clause (1) or (2) is sufficient. The
purpose or nature of stay, the place of stay, the frequency of visits, the circumstances of visits
etc. have no bearing on the determination of residential status. In case of (2) above a visit to
Pakistan is not necessary.

2. Resident Company [Section 83]

A company shall be a resident company for a tax year if it fulfills any one of the
following conditions:
(a) It is incorporated or formed by or under any law in Pakistan;
(b) The control and management of the company is situated wholly in Pakistan at any
time in the year, or
(c) It is Provincial Government or local authority in Pakistan.

Explanation :
(a) In case a company is incorporated in Pakistan, it will always be a resident
in Pakistan.

(b) In case of other companies, they will become resident in Pakistan only if
their control and management is wholly situated in Pakistan. Partial
control is not sufficient for this purpose.

(c) A major difference in determining the status of an association of persons

and company (other than a company incorporated in Pakistan) must be
noted. In case of association of persons, even if partial control is in
Pakistan it will be resident of Pakistan for that tax year. But in case of a
company (other than a company incorporated in Pakistan) if partial control
is in Pakistan, it will be treated as non-resident.

(d) It is necessary to differentiate between the act of doing business and

controlling and managing a business. It may be possible that a business is
being wholly done in a foreign country but it is being fully managed and
controlled from within Pakistan, and vice versa. Distinction should be
made between employees, agents, attorneys or managers who are doing
business and partners, board of directors, presidents, etc, who are
controlling the organization. For the purpose of finding the place of control

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 and management for tax purposes, the whereabouts of the brain behind the
business should be found out.

3. Association Persons [Section 84]

An association of persons shall be resident for any tax year if the control and
management of the affairs of the association is situated wholly or partly in Pakistan at any
time in the year.

RESIDENT PERSONS [Section 2(52)]

A person shall be a resident person for a tax year if the person is:
(a) A resident individual, resident company or resident association of person for
the year, or
(b) The Federal Government

NON-RESIDENT PERSONS [Section 2(37)]

Under the Income Tax Ordinance 2001, a person shall be a non-resident person for a
tax year if the person is not a resident person for that year.

TAXABLE INCOME [Section 2(64)]

The taxable income of a person for a tax year shall be the total income of the person
for the year as reduced by any deductible allowances. However, the taxable income should
not be below zero.

TAXPAYER [Section 2(66)]

Taxpayer means :
(a) A person who derives an amount chargeable to tax;
(b) Representative of such person;
(c) A person responsible to deduct or collect tax and deposit it with the government
under the provisions of the income tax law;
(d) Any person required to furnish a return or pay tax under income tax ordinance
2001.

Explanation :
1. It is necessary for the following persons to furnish the return of income :
(a) Every person whose total income during the tax year exceeds the prescribed
limit;
(b) Every company irrespective of its income;
(c) Any non-profit organization;
(d) Any approved welfare institution;
(e) Any person who has been charged to tax for any of the two tax years
immediately preceding the previous tax year;
(f) Any person who claims a loss carried forward from a previous tax year;
(g) Any person who owns immovable property, with land area of 250 square
yards or more located in areas situated within limits of a metropolitan
corporation, a municipal corporation, a cantonment board or the Islamabad
capital territory or owns any flat;

Section (e) above, however, will not be applicable, i.e. the person is not required to
file the return if he belongs to any of the following categories:
1. A widow.
2. An orphan below the age of 25 years.
3. A non-resident person.

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 4. A disabled person.

2. In case of taxpayers whose entire income during the tax year consists of
salary, they may either:
(h) Furnish the return of total income; or
(i) Furnish a certificate from the employer in the prescribed form and this
certificate shall be deemed to be the return. However, it is necessary for these
persons also that they should furnish wealth statement along with this
certificate, if their last income or the declared income of this year is Rs.
5,00,000 or more.

TAX YEAR [Section 2(68)]

The concept of tax year has been introduced in our income tax law through Income
Tax Ordinance, 2001. Tax year is a period of time for which tax is to be calculated regarding
a person.
The tax year may be of three types :

1. Normal Tax Year

It is a period of twelve months ending on 30th June and is known by the Calendar Year
in which the ending date falls. Such a tax year is known as normal tax year.

Explanation:
Period starting on 1.7.2001 and ending on 30.6.2002 is a normal tax year and will be
known as tax year 2002. In some cases a normal tax year may be of less than twelve months.
e.g ., if a person starts a business on 1.9.2002 and ends his accounting period on 30.6.2003.
This period of ten months will also be a “normal tax year” and will be tax year 2003. Tax
years of most of the persons fall under this category.

2. Special Tax Year

In case of any person or class of persons or any source of income the Board may
specify a period of twelve months as their tax year. For example, in case of all companies
manufacturing cotton textiles the Board has specified that their tax year will commence on 1st
October and will end on 30th September following. This period of 12 months is tax year for
all companies engaged in cotton textiles manufacturing. Such a tax year is called special tax
year and is known by the calendar year relevant to normal tax year in which the ending date
falls.

Explanation:
These specific periods of time to be considered as “tax year” have been declared by
the Board keeping in view the nature of businesses. In this respect the following years have
been specified by the Board through notification in the official Gazette :

TOTAL INCOME [Section 2(69)]

The total income of a person for a tax year shall be the sum of the person’s income
under each of the heads of income for the year. Following are the heads specified in the law
for this purpose.

(a) Salary
(b) Income from property
(c) Income from business
(d) Capital gains

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 (e) Income from other sources.

HEADS OF INCOME [Section 11]

A person may earn and receive income from difference sources during the tax year.
For the purpose of charge of income tax and calculation of tax payable, the income is
classified under five heads. These heads of income have been specified in section 11 of the
Income Tax Ordinance 2001, and are as follows :

(a) Salary
(b) Income from house property.
(c) Income from business or profession.
(d) Capital gains; and
(e) Income from other sources.

Each and every income earned by the person can be classified in one of these heads.
The presence of the fifth head that is ‘income from other sources’ makes it sure that any
income which cannot be included in any of the first four heads must be taxed under this
general head.

SALARY [Section 12]

This is the first head or source of income mentioned in section 11 of the Income Tax
Ordinance, 2001. For proper understanding it is necessary to distinguish the income from
salary from income taxable under other heads.

Valuation of Perquisites, Allowance and Benefits

To determine the above values, first of all, the following terms must be clearly
understood.

(a) Minimum of Time Scale of Basic Salary

The amount from where the salary scale of the employee starts.

(b) Basic Salary

Basic salary means the pay and allowances payable monthly or otherwise but does not
include :
1. Dearness allowance or dearness pay unless it is taken into account for
computation of superannuation or retirement benefits of the employee;
2. Employer’s contribution to the provident fund; and
3. Special allowance, conveyance allowance, accommodation allowance,
medical allowance, entertainment allowance, utilities allowance, etc.

(c) Salary
For the purpose of determining the value of perquisites, allowances and benefits,
salary :
(1) includes basic salary, overseas allowance, dearness allowance, cost of living
allowance, bonus and commission.
(2) Does not include employer’s contribution to a recognized provident fund,
superannuation fund or gratuity fund.
(3) Apart from the items mentioned in (1) and (2) any other amount paid by
employer will be included in the salary if it enters into the computation of
pension and retirement benefits.

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 VARIOUS INCOME TAX AUTHORITIES
Under the income tax ordinance two types of authorities have been prescribed, viz
judicial and administrative. Certain authorities exercise both judicial and administrative
functions. Here a list of authorities is given that are involved in tax administration.
1) Central board of revenue
2) Regional commissioner of income tax.
3) Director general of investigation and intelligence.
4) Director general of training and research.
5) Director general of tax withholding.
6) Commissioner of income tax.
7) Appellate Additional Commissioner of income tax.
8) Inspecting Additional Commissioner of income tax.
9) Deputy commissioner.
10) Income-tax panels.
11) Inspector of income tax
12) Firms of accountants.

1) Central board of revenue (C.B.R)-section 3(a)[1996,1998]

Status: The central board of revenue consisting of few members is appointed by the federal
Government to control government revenue from income tax, customs, etc. One member of
the board is the in charge of the income-tax department for the whole of Pakistan. He is the
head of that department. The board cannot interfere with the appellate functions of the
Appellate Additional Commissioner.

Power and function: The main powers and functions of the board are :
1. Assign work to commissioner and additional commissioner.
2. Determine a period as income year.
3. Appoint executive and ministerial officers and staff.
4. Allocate functions and distribute work.
5. Determine disputed jurisdiction.
6. Make rules.
7. Admit appeal after expiry of time.
8. Appoint valuers and fix their fees.
9. Authorize any person to assists deputy commissioner.

2) Regional Commissioner(R.C)-Section 2(37A) & 3(aa)

Regional Commissioner means a person appointed as such under section 4 and includes
director-general of tax withholding and a director general Intelligence and investigation.
He is appointed by C.B.R and performs such functions as may be assigned to him, by CBR,
Certain income tax authorize are subordinate to him like Commissioner, Additional
Commissioner, deputy commissioner and inspectors.

Power : Regional Commissioner has the following powers:

1. Determine a question of jurisdiction between different commissioner.

2. Exercise power of AAC where directed by CBR.
3. Appoint sufficient numbers of valuers.
4. Perform any function assigned to him.

3) Director general of investigation and intelligence-Section 2(19) & 3(b)

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Director-general of intelligence and investigation means a person appointed as such under
section 4.
They are appointed by CBR and perform such duties as may be assigned to them by the CBR,
and they are subject to supreme control and super intendance of CBR.

Power and duties: The main powers and duties are:

1. Perform such duties as may be assigned to them.
2. Issue Instructions and directions to deputy commissioners under their charge.
3. Exercise power of D.C with regard to any enquiry in respect of any person or
corporation.

4) Director general training and research-Section 3(bb)

Director general training and research includes director, additional director, deputy director,
assistant director or other officers appointed by CBR.
The basic job of director general training is to provide a service training to the employees of
income tax department and conduct research in the related field . He is to perform any other
job assigned to him by CBR under whose supervision he is working. He is an executive
authority in the tax structure.

Director General of tax withholding - sections 2(19AA) & 4(1):

Director general of tax withholding means a person appointed as such under section 4. He is
appointed by CBR with a view to monitor tax withholding more effectively. His powers and
functions have not been defined in the income-tax ordinance.

5) Commissioner of Income tax section 2(15) & 3(c) [1994]

Commissioner of income tax means a person appointed to be a commissioner of income-tax
includes a director of tax withholding and a director of intelligence and investigation. They
are appointed by CBR and their territorial jurisdiction is also assigned by it. Certain
authorities’ functions within his jurisdiction are subordinate to him, like IAC, D.C, and
inspectors.

Powers: Powers of commissioners are:

1. Determine jurisdiction of IAC and D.C.
2. Transfer jurisdiction.
3. Grant approval to withhold refund.
4. Launch prosecution.
5. Pass orders on revision petition.
6. Rectify mistakes.
7. Disqualify persons as I.T.P.

6) Inspecting Additional Commissioner-Section 2(27) & 3(d)

Inspecting additional commissioner means a person appointed as such under section 4 and
includes an additional director of tax withholding and an additional director of intelligence
and investigation.
He is appointed by CBR and is subordinate to the commissioner within whose jurisdiction he
performs functions.

Powers: His powers are:

1. Approve imposition of penalty.
2. Enter any place and make inventory of articles.

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 3. Make enquiries
4. Exercise power of D.C
5. Rectify mistakes.

7) Appellate additional commissioner-section 3(d)

He is appointed by CBR and may be assigned by the powers of AAC. He is subordinate to
CBR but C.B.R cannot interfere with the discretionary powers with regards to appeal
preferred to him. He is the authority to whom lies the first appeal against the orders of D.C
and against his orders a second appeals lies to appellate tribunal.

Powers: Powers of AAC are as under:

1. Hear appeals.
2. Admit a time-barred appeal.
3. Confirm, reduce, enhance or amend assessment.
4. Take evidence on oath.
5. Impound and retain accounts books and documents.

8) Deputy Commissioner (D.C)-Section 17A & 3(e) [1997,1996]

Deputy Commissioner of income-tax means a person appointed as such under section 4 and
includes the following:
a. Assistant commissioner of income-tax.
b. Income-tax officer.
c. Special officer.
d. Tax recovery officer.
e. Deputy Director of tax withholding.
f. Assistant director of tax withholding.
g. Deputy Director of intelligence and investigation.
h. Assistant director of intelligence and investigation.
Deputy Commissioner is the actual assessor. He makes the assessment, demands the
tax from the assessee and recovers it from him. His powers are regulated by the I.T.
Ordinate and his jurisdiction is fixed by the commissioner.

Powers and functions: Powers of D.C are:

1. Call for return an income.
2. Make assessment.
3. Register firms.
4. Issue notice for submission of return.
5. Make best judgment assessment.
6. Enter and search premises.
7. Impose penalty.
8. Enforce attendance of assessee.
9. Impound and retain books and records.
10. Rectify mistakes apparent from records.
11. Make refunds.

9) Inspectors Of Income – Tax – Section 2(28) & 3(f)

He is field officer doing survey work, He is also assigned the work of making local enquiries
in connection with any proceeding before D.C.

Power: Powers of inspectors of income – tax are:

1. Outdoor inspection and survey.
2. Examine books of accounts.
3. Enquiry regarding new sources of income.

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 4. Recovery of outstanding demand.

10) Tax Recovery Officer

He has the status of D.C and his powers, duties and functions are similar to that of D.C except
assessment proceedings. He is appointed by the CBR

Powers: Wide powers have been given to Tax Recovery Officer which are:
1. Proceed to recover tax due.
2. Attach and sell property
3. Appoint received.
4. Arrest and detain assessee upto 6 months.

11) Directorate General of inspections – section 38L

Appointment: The Federal Government appoints a directorate general of inspection. It is an
independent of central board of revenue. Its administrative control has been vested in
finance division.

Function and powers are:

a) Carry out inspections of income tax cases and offices.
b) Investigate either itself or with the help of any other agency where leakage of
revenue of evasion of tax is suspected.
c) Authorize to investigate officers or staff of income tax offices.
d) Carry out audit of cases or offices involving income tax revenues.
e) Provide recommendation to C.B.R in matter of tax policy, tax administration or
tax operation.

12) Appointment Of Firm Of Accountants – Section 4A

Appointment: The central Board of Revenue may appoint a firm of chartered Accountants to
conduct the audit of any person.

Powers: The person appointed to conduct the audit has the following powers:
a) Enter into any premises belonging to or occupied by the person to whom audit
relates.
b) Call for books of accounts and documents.
c) Inspect the books and records.
d) Seize the records.
e) Exercise powers stated in section 144 to 146 and 148 as may be authorized by the
commissioner in writing.

Scope of Audit: Shall be such as determined in each case by the Central Board of
Revenue.

Appellate Tribunal:
The Appellate Tribunal is appointed by the Federal Government. It is a second court
of appeal. The assessee or the income tax department, if not satisfied with the decision
of commissioner of income – tax (Appeal) can appeal to appellate Tribunal.

The Appellate Tribunal consists of two types of members (a) judicial member and (b)
accountant member. The Federal Government may appoint as many judicial and
accountant members as it think necessary for the proper working of the Appellate
Tribunal.

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 One member is appointed as the chairman. Such chairman constitute benches to
perform the functions of Tribunal. Each bench normally consists of two members.

The decision of the Appellate Tribunal on the point of facts is final. So Tribunal is the
final fact finding authority. But if the decision involves a point of law, the case can be
referred to the High Court.

Survey By a Private Agency – Section 4AA

Central Board of Revenue has power to appoint and private agency, firm or a company to
carry out a survey in respect of such persons or such were as may be assigned. The scope of
the survey shall be determined by the CBR.

Withholding Taxes in Pakistan

Withholding is an act of deduction or collection of tax at source, which has generally been in
the nature of an advance tax payment. It is an effective mechanism and important/timely
source of revenue. Their contribution is about 41 percent of total direct tax revenues. Increase
from Rs.5 (b) in 1991 to above Rs 169(b) in 2007 speaks of exponential growth and
consequential heavy reliance on withholding taxes in Pakistan.

Under the repealed Income Tax Act, 1922, tax was deducted from two main sources of
income; namely, salaries and interest on securities. Over the period of time, Withholding Tax
net was extended, by steadily introducing different Provisions in the Tax Laws. The repealed
Income Tax Ordinance, 1979, brought in all the provisions of the Income Tax Act, 1922.
However, in the 1990s, withholding tax net was expanded extensively by providing for
withholding tax on a wider variety of transactions and making most of them presumptive.
Provisions of the Income Tax Ordinance, 2001, are more or less the same, except for a few
changes and additions. Important withholding provisions relate to salary, imports, exports,
commission and brokerage, dividend, contracts, profit on debt, utilities, vehicles tax, stock
exchange-related provisions and non-residents, etc., with varying rates.

Sales Tax
A system of licensed manufacturers & wholesalers was instituted whereby they were allowed
to purchase goods free of sales tax from each other and pay tax on sales to unlicensed traders.
Imports were chargeable to Sales Tax but the licensed manufacturers & wholesalers were
allowed to import goods without the payment of Sales Tax. Later on Sales Tax became
chargeable on locally produced & imported goods at the time of their sales & import,
respectively. The sales tax, was collected under the Finance Ordinance, 1956, on goods
which were chargeable to Central Excise Duty, as if it were a duty of Central Excise. In April
1981, by virtue of an amendment in the Sales Tax act, 1951, the collection of Sales Tax on
non-excisable goods was also entrusted to the Central Excise Department.

In the late eighties the government decided to replace Sales Tax with the Value Added Tax in
the country as a part of its structural adjustment program which was undertaken to correct
anomalies & distortions both in our tax & non-tax regimes. Accordingly new enactment titled
Sales Tax Act 1990 replaced Sales Tax Act 1951 with effect from 1-11-1990.

Valuation of perquisites, allowances benefits: -

for the purpose of computing the income chargeable to tax under the head “Salary”, the value
of perquisites, allowances and benefits
includible in the said income shall be determined in accordance with the rule 4 to 9.
4. For the purpose of determining the value of perquisites, allowances and benefits under-
rule:
(a) “annual value” of an accommodation means the sum for which the

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accommodation might reasonably be expected to let from year to year;
(b) “basic salary” means the pay and allowances payable monthly or otherwise, but
does not include.
(c) “salary” means remuneration or compensation for services rendered, paid or to
be paid at regular intervals and includes overseas, dearness or cost of living
allowance by whatever name it may be described
(d) “employee” includes a director of a company working whole-time for one
company
(e) "unfurnished accommodation or housing" includes electric fans, built in
cupboards, cooking range and water heater
(f) "furnished accommodation or housing" includes basic furniture and furnishing,
appliances for cooking, refrigeration and heating and cooling appliances in
addition to the items available in respect of "unfurnished accommodation or

Section 148
And whereas, an amount of Rs.______ is tax due outstanding against the
person, and whereas the taxpayer has not paid the same amount in time, therefore, under the
provisions of section 148, you are required to remit or send the money to the
undersigned through pay order/ D. Draft or through banking transfer or cheque for
payment to the government, treasury under Income tax head of account.

Section 149
All amounts deducted under section 149in a month shall be paid to the credit of the Federal
Government by remittance to the Government Treasury, an authorized branch of the State
Bank of Pakistan or the National Bank of Pakistan within15 days from the end of the month.
Where the annual salary paid by an employer to its employees for a tax year is estimated to
be less than 300,000 rupees per employee, the employer may apply to the Commissioner for
permission to pay tax deducted under section 149 on a quarterly basis, provided the quarterly
returns are regularly filed.

Section 234
Quarterly and annual statements of tax collected in relation to motor vehicles.-The
quarterly and annual statements to be furnished under section 165 by a person collecting tax
under section 234 in relation to motor vehicles shall be in the following form and verified in
the manner indicated therein,

Section 236
Quarterly and annual statements of tax collected with telephone bills:
The quarterly and annual statements to be furnished under section 165 by a person collecting
tax under section236 shall be in the following form and verified in the manner indicated
therein,

Advantages of External Audit.

1. Audited account are detected as an authentic record of transaction.
2. Errors and frauds are detected and rectified.
3. It increases the morale of the staff and thus it prevents frauds and errors.
4. Because of his expertise the auditor may advise on various matters to his clients.
5. An auditor acts as a trustee of his shareholders. Hence he safeguards their financial interest.
6. For taxation purpose auditing of account is a must.
7. In case of any claim is to be made from the insurance company only audited account should be
submitted.

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8. Even in case of partnership firm auditing of accounts helps in the settlement of claim at the time
of retirement/death of a partner.
9. Auditor account helps in managerial decisions.
10. They are useful to secure loan at the of amalgamation, absorption, reconstruction etc.
11. Auditing safeguards the interest of owners, creditors, investors, and workers.
12. It is useful to take certain financial decisions like issuing of shares, payment of dividend etc.

Advantages of Management Audit

1. Management audit helps in decision making areas such as make or buy, closing down of an unit,
acquisition of a business, etc.
2. It also helps in assessing the efficiency of the executives. It serves as a moral check on the
executives.
3. Management audit suggests ways to utilize the resources of the organization effectively.
4. Management audit helps in rehabilitation of sick units.
5. Management audit report is jointly reported by experts &om various fields.
6. The opinions and suggestions of a group of experts on the functioning of the organization are
possible only through management audit.

Q : Importance / Purpose of Audit Programme.

OR Why it is necessary for audit to prepare audit programme?
1. Supervision Of Work :
The auditor can judge the efficiency of his audit team by holding of an audit programme. He is in a
position to know the progress of the work. He can see at any time that what part of the work has been
completed and what remains to be done.
2. Distribution Of Work :
Audit programme is very useful in distributing the audit work properly among the members f the
audit team according to their talent.
3. Uniformity Of Work :
Audit programme helps in settling all the things in advance, so the uniformity of work can be
achieved.
4. Basic Instrument For Training :
Audit programme is very useful for the new auditor. It provides training and guidance to him. So it is
rightly called the basic instrument for training.
5. Legal Evidence :
Audit programme is a legal evidence of work done by every assistant of the audit team. It can be
presented in the court of law if any client is taken against the auditor for negligence.
6. Fixation Of Responsibility :
If any error or fraud remains undetected the responsibility of negligence will fall on the particular
assistant who has performed that job.
7. Several Audits may Be Controlled :
The auditor controls the audit of various companies at the same time. In the absence of audit
programme he can not supervise them effectively.
8. Easy Transfer :
If one assistant is unable to continue the work given to him, it can be given to another person. Audit
programme guides him that what is done and what is remaining.
9. Final Review :
Before signing the report, final review is made and for this purpose also auditing programme is very
useful.
10. Useful For Future :
On completion of an audit, it serves the purpose of audit record which may be useful for future
reference.

Q : Write a note on the following

1. Auditor is a watch dog not a blood hound
2. Audit note book
3. Audit working papers
4. Test check

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5. Routine Checking

1. AUDITOR IS WATCH DOG NOT A BLOOD HOUND :

"Auditor is watch dog and not a blood hound" is a phrase which is given by Justice Lopes. According
to the above phrase it is explained that like a watch dog auditor should protect the interest of those
who appointed. But he will assume the servants of the company honest and he will rely on their
statements. Further he can take a reasonable care. He should perform his duties with normal skill.
The attitude of watch dog will not reduce his responsibilities.
In doubtful cases he should investigate the matters thoroughly. But he is also not expected that he
should become suspicious mind. Any how, an auditor is a watching dog but not a sleeping watching
dog.

2. AUDIT NOTE BOOK :

The auditor writes down the important notes on a book during the course of audit for his record. He
notes down that he may not forget them. Sometimes he is not satisfied with some entries recorded in
the books, so he makes inquires about them. So the audit note book is maintained by the auditor for
particular business to make his job more easy.
Importance Of Audit Note Book :
Justice William throws light on the importance of audit note book in the following words,
"The audit note book which contained detailed information proved to be very helpful to the auditor
in every critical moment."
For preparing the audit report it is very useful for the auditor.
1. In case of negligence charge against the auditor, audit note book as a good evidence can be
presented.
2. It may be also used for future guidance and reference.
3. It also enables to auditor to know that what work has been done by his assistant at each audit.
Contents Of The Book :
Following are the important contents of this book :
1.All the important points which require further explanation.
2. A record of all the missing vouchers duplicates and invoices.
3. All mistakes and errors discovered.
4. Important balances of cash book.
5. Those queries which might be required at a subsequent audit.
6. All those points which have to be included in the audit report.
7. Those points which need discussion with client or seniors.
8. A record of exact work done on audit list of books of account and names of officers with their
duties and powers.
9. Beginning and completion of audit dates.

3. AUDIT WORKING PAPERS :

Important documents and papers regarding the business are collected which are needed by the
auditor during the course of audit. These papers are called working papers.
These working papers contain essential facts about the accounts. So accounts cannot be examined
properly by the auditor without the working papers.
Audit working papers consists of schedules statements, analysis and other statements essential for the
preparation of final accounts and find report of the auditor.
Note :- Audit working papers are prepared from the clients record but these are the property of the
auditor.
Objects or Importance Of Working Papers :
Importance of working papers can be judged by the following facts :
1. These papers are very useful in framing the opinion about the efficiency of the audit team.
2. These papers also throw light on the weak points of the client business.
3. Working papers are the permanent record of the data examined.
4. These are very useful for defending the auditor in case of negligence.
5. Working papers are also very helpful for the auditor in preparing the audit report.
6. Working paper are also very useful for the future audit.
7. Shifting of work from one clerk to another is also easy in the presence of working papers.

4. TEST CHECK or TEST CHECKING :

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Prof. Weigh defines, "Test checking means to select and examine a representative sampler from a
large number of similar items".
In a big business there are a large numbers of transactions and auditor has not so much time to check
each and every entry. In this so auditor draws some samples representing the number of entries of
each class of transaction. In this way he saves his time. In the test checking auditor checks only
samples instead of thorough checking.
Precautions Of Test Checking :
1. Selected period for the test check should not be disclosed to the client by himself.
2. First and last month of the audit large number of entries should be checked.
3. Each entry of the cash book should be checked and test check should not be applied to the cash
book.
4. Test check should be framed in such a way that each audit clerk work may be checked.
5. Entries of each class should be represented.
6. At each audit, entries and periods should be different.
7. Auditor should apply test check and some errors or frauds remains undetected auditor will be
responsible.

5. ROUTINE CHECKING :
It means the following checking :
Checking of totals subtotals, additions subtraction and other calculations in the books of original
entry.
1. Checking of postings into ledgers.
2. Checking of complete ledger accounts.
3. The above work is too mechanical so auditor should perform his job very carefully.
Objects And Importance Of Routine Checking :
Routine checking is very useful to verify the arithmetical accuracy of the entries.
1. Special ticks are employed to ensure that no figures are alternated after checking.
2. To verify that postings from the books original entries have been made to the correct accounts in
the ledgers.
3. To verify that ledgers accounts have been correctly balanced.

Q : OWNERSHIP OF WORKING PAPERS

The auditor who collects information through working papers for his audit work. Usually claims that
he is the owner of the working papers. On the other hand the company claims that the auditor was
appointed by and he only acts as its agent. Hence, all the documents that the auditor had collected
should belong to the company several cases have been referred to the courts regarding the ownership
in one of the cases it was decided that the working papers belong to the auditor because he was an
independent professional and not an agent of the client. In another case also, it was held that the
working papers belong to the auditor.

Q : Define dividend and what are the duties of auditor relating to dividends.

DIVIDENDS :
The return on investment in share is called dividend. It is the part of the profit earned by the
company.
Dividend rate approved in the general meeting by the shareholders.

DUTIES OF AUDITOR RELATING TO DIVIDENDS :

Following are the important duties of the auditor :
1. Rules Of Company :
The auditor should check the rules of a company. He should examine that articles of association and
companies ordinance allow the management to propose dividends out of revenue profits.
2. Rate Of Dividend :
The auditor should check that rate of dividend must not be above the rate of profit. It should also not
exceed the market rate.
3. Reasonable Profit :
The auditor should check that amount of revenue profits is reasonable. If it is not reasonable then
dividend should not be paid.
4. Account :
Dividend amount is payable with in the days. The auditor should check that dividend account is
opened in the bank or not. The amount equal to dividend must be deposited.

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5. Tax :
It is also the duty of the auditor that he should check the tax payable or dividend is paid to the Govt.
or not ? The payment of tax is a legal formality.

6. Not Collected :
Sometimes shareholders fail to collect the amount from the banks. The auditor should check such
amount because it is stated in the balance sheet as liability.
7. Profit & Loss Account :
The profit and loss appropriation account must be checked by the auditor. He should note the
amount of dividend recorded in it.
8. Account Statement :
The auditor examines that amount of dividend paid and due prepares reconciliation statement of
dividend account. He should make detailed checking in case of discrepancy. The errors can be
detected.
9. Warrant :
To register the shareholder management issues dividend warrants. Such amount can be claimed by
the shareholders from the bank. The auditor should check these warrants has been issued or not?
10. Check The Decision :
The auditor should check the directors decision about dividend proposal. He should check the
minutes of the directors meeting about the consent of the directors.

Q : Discuss the matters/factors to be considered before the payment of the dividend?

A firm's dividend policy is influenced by the large numbers of factors. Some factors affect the amount
of dividend and some factors affect types of dividend. The following are the some major factors
which influence the dividend policy of the firm.
1. Legal requirements
There is no legal compulsion on the part of a company to distribute dividend. However, there certain
conditions imposed by law regarding the way dividend is distributed. Basically there are three rules
relating to dividend payments. They are the net profit rule, the capital impairment rule and
insolvency rule.
2. Firm's liquidity position
Dividend payout is also affected by firm's liquidity position. In spite of sufficient retained earnings,
the firm may not be able to pay cash dividend if the earnings are not held in cash.
3. Repayment need
A firm uses several forms of debt financing to meet its investment needs. These debt must be repaid
at the maturity. If the firm has to retain its profits for the purpose of repaying debt, the dividend
payment capacity reduces.
4. Expected rate of return
If a firm has relatively higher expected rate of return on the new investment, the firm prefers to retain
the earnings for reinvestment rather than distributing cash dividend.
5. Stability of earning
If a firm has relatively stable earnings, it is more likely to pay relatively larger dividend than a firm
with relatively fluctuating earnings.
6. Desire of control
When the needs for additional financing arise, the management of the firm may not prefer to issue
additional common stock because of the fear of dilution in control on management. Therefore, a firm
prefers to retain more earnings to satisfy additional financing need which reduces dividend payment
capacity.
7. Access to the capital market
If a firm has easy access to capital markets in raising additional financing, it does not require more
retained earnings. So a firm's dividend payment capacity becomes high.
8. Shareholder's individual tax situation
For a closely held company, stockholders prefer relatively lower cash dividend because of higher tax
to be paid on dividend income. The stockholders in higher personal tax bracket prefer capital gain
rather than dividend gains.

Q : Discuss the Income Tax authorities in Pakistan.

In Pakistan, Federal Government is empowered to levy and collect tax on the income of a person from
all sources except agriculture. The history of modern income taxation dates back to the year 1860. The

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British Empire introduced first formal Income Tax Act of 1860 in an effort to end the budgetary deficit
faced due to the war of independence of 1857. The tax was not intended to be permanent
and was repealed in 1865.
The Income Tax Act of 1886 was a general income tax that had been imposed on traders by some of
the provinces. This Act of 1886 was a great improvement on earlier enactments. Its basic scheme, by
and large, survives till today. It introduced the definition of “agricultural income” which is almost the
same as in the Income Tax Ordinance 2001. This Act continued in force for 32 years.
The 1918 Act consolidated a number of wartime amendments. A graduated super tax on income over
Rs.50,000 and on the undistributed profits of the corporation and other entities was introduced by the
Super Tax Act of 1917 and continued in force through modifications by the Super Tax Act of 1920. The
Income Tax Act and the Super Tax Act were later on consolidated in another act i.e. the Income Tax
Act of 1922, which remained in force in Pakistan till 30th June1979; when General Mohammad Zia-ul-
haq, in his position as President-cum-Chief Martial Law Administrator, decided to enforce a new law
i.e. the Income Tax Ordinance, 1979 with effect from 1st July 1979.
Income Tax Ordinance 1979 was amended through innumerable presidential ordinances, annual
finance acts/ordinances and statutory regulatory orders(SROs) and most of its lacunas were removed
over a long period of time.
However, after approximately 23 years of its existence when substantive amendments and judicial
pronouncements made it a universally understandable and acceptable piece of legislation for
everybody, a new ordinance i.e. Income Tax Ordinance, 2001 was promulgated on 13th September
2001. The new Ordinance underwent more than three hundred amendments through the Finance
Ordinance, 2002 even before its inception practice that still continues to this day.

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