Presented by : Haider Ali Patel
10 September 2011
Karachi Tax Bar Association
APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Historical Perspective
Apportionment of expenses has been in vogue even before
the promulgation of Income Tax Ordinance, 2001
FBR Circular No. 12 of 1991 laid down the basis of
apportionment of expenses among sources of income
taxable under presumptive and normal tax regime
Circular 12 also directed apportionment of expenses in case
of income from other sources
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Historical Perspective (cont’d.)
Apportionment of expenses largely done in cases where
revenue was subjected to Presumptive as well as normal
taxation
The department however carried out apportionment of
expenses in cases that declared exempt income mainly
capital gains and tried to disallow expenses to the extent
allocable to exempt income
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Historical Perspective (cont’d.)
Varied decisions were pronounced by various benches of
the Tribunal however, in the case reported as (2005) 92
TAX 128, a larger bench of the Tribunal held that
expenditure relating to a particular class of income should
be allowed and expenditure relatable to exempt income
may only be disallowed after proper examination of the
nature of expense and its relativity to such income
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Historical Perspective (cont’d.)
In Atlas Investment Bank V/s. CIT reported as 2005 PTD
2586, the Hon’ble Sindh High Court observed that the
concept of apportionment is very old and is in practice
from the very inception of Income Tax Law in the subcontinent.
Previously, it was being acted upon on the
basis of judicial pronouncements and on the interpretation
of provisions contained in the law and now that principle
has been given legislative recognition
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
The Law
Where an expenditure relates to –
(a) the derivation of more than one head of income;
or
(b)
derivation of FTR income; or
(c) derivation of income chargeable to tax under a
head of income and to some other purpose
The expenditure may be apportioned on any reasonable
basis taking account the relative nature and size of the
activities to which the amount relates
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Rule for specific identifiable expenses [Rule 13(2)]
Any expenditure that is incurred for a particular class or
classes of income shall be allocated to that class or
classes, as the case may be
Any expenditure can be
Any particular administrative expense

Financial cost

Any other expense incurred directly related to a
particular income
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Rule for non specific common expenses [13(3)(a)] (cont’d.)
Any common expenditure [other than expense allocated as per
sub rule 13(2)] allocation formula is A x B/C where –
A.
is the amount of the expenditure incurred
B.
is the total amount of gross receipts (without deduction
of expenditures) for the tax year for the class of income
C.
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is the total amount of gross receipts (without deduction
of expenses) and net gains for the tax year of all classes
of income;
APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Rule for allocation in case of other income Rule 13(3)(b)
Where, allocation is required between normal business
income and any net gain, brokerage, commission and
other income, such income shall be compared with gross
profit from business for adopting figures for components
“B” and “C” of the formula instead of gross receipts
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Consideration of nature and source of each activity Rule 13(4)
Where expenditures are to be allocated among different
classes of income under sub-rule (3), consideration shall
be given to the nature and source of each class of
income, on reasonable basis to earn each class of
income (particularly, in allocating selling expenses)
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Certification by External Auditors – Rule 13(5)
Where books of accounts are maintained, a certificate by a CA or
CMA stating the basis of allocation shall be accepted unless
significant variations are found
Where books are not required to be audited, the reasonable
basis may be adopted which would be accepted by the
Commissioner, unless variation is found
Significant variations would be beyond the limits of 10 + in
collection as in sub-rule (3) under any head of account
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Class of income
(a) Pakistan-source income and foreign-source income
chargeable under the head “Salary”
(b) Pakistan-source income and foreign-source income
chargeable under the head “Income from Property”;
(c) Pakistan-source income and foreign source income
chargeable under the head “Income from Business”
(other than income subject to section 19);
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Class of income (cont’d.)
(d) Pakistan-source income and foreign-source income
from a speculation business chargeable under the
head “Income from Business”;
(e) Pakistan-source income and foreign-source income
chargeable under the head “Capital Gains”;
(f)
Pakistan-source income and foreign-source income
chargeable under the head “Income from Other
Sources”;
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Class of income (cont’d.)
(g) income exempt from tax;
(h) Income chargeable to tax under section 5, 6 or 7;
and
(i)
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amounts to which section 169 applies
APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Common expenditure
Expenditure that is not clearly allocable to any particular
class or classes of income, such as general administrative
and other such allocable expenditures
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation
Rule 13(2) needs to be adopted first and where it is not
possible to allocate specific expenses then only general
allocation rule should be applied
Every revenue stream may not necessarily have related
expenditure for e.g.

Dividend income

Capital gains
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation (cont’d.)
Revenue based allocation cannot always be a reasonable
basis of allocation
There can be different basis of allocation for e.g. source of
funds utilized needs to be examined in allocating financial
expenses to interest income or capital gains
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation (cont’d.)
Where taxpayer has regular streams of revenue/ income
from different sources for e.g. trading and manufacturing
activity
A good practice would be to prepare segmented Profit &
Loss account, whereby all expenses would be allocated
to the related activities based on certain criteria and
reasoning
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation – Case Law
Bolan Bank V/s. Additional Commissioner
ITRA No.101 of 2008
The Bank itself apportioned/ allocated certain expenses to
dividend income. The Taxation Officer summarily rejected the
apportionment and made apportionment out of administrative
and financial expenses on revenue basis of allocation. The
Hon’ble High Court rejected the apportionment and remanded
the case directing the Taxation Officer to give reasons as to
why the allocation made by the Bank is not acceptable
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation – Case Law
The Commissioner (IR) V/s. Habib Bank AG Zurich
ITRA No.104 of 2010
The Hon’ble High Court held that after filing of a statement by
the taxpayer giving basis of apportionment made by it, the only
way that it could be rejected would be by giving cogent reasons
that the expenses that are claimed to be related are proved as
not relatable
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation – Case Law
The Commissioner of Income-tax V/s. K. Raheja Corporation P.
Limited
2011 PTR 886 (HC Bombay)
The assessee had investments in shares & mutual funds of
Rs.20 crores on which it earned tax-free dividend of Rs.13.35
lakhs. The assessee also had borrowed funds on which it
claimed deduction of interest of Rs.8.70 crores.
The AO
disallowed interest of Rs.2.79 crores on the ground that it was
relatable to earning tax free dividend. The Tribunal deleted the
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation – Case Law
disallowance on the ground that the investments had been
made out of the assessee’s own funds and not out of the
borrowed funds. The department filed an appeal before the
High Court. HELD dismissing the appeal that the department
could not make out a case that the Tribunal’s findings were
incorrect
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APPORTIONMENT OF DEDUCTIONS –
Section 67 and Rule 13
Issues of reasonable basis of allocation – Case Law
The Commissioner of Income tax V/s. Dawood Lawrencepur
Limited
2011 PTD (Trib.) 845
The assessee submitted a certificate issued by Chartered
Accountant as per sub-Rule (5) of Rule 13. The certificate was
disregarded and expenses were apportioned to income from
capital gains and dividend income on the basis of turnover.
Amended assessment was set-aside by the learned Tribunal
for denovo proceedings
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THANK YOU