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Rules of tax

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An isolated transaction could not be treated as an adventure in the nature of tread, commerce or manufacture. Any transaction cannot properly be treated as tread or business. It is allied to transactions that constitute trade of business. it may not be characterized by all of the essential feature of business but presence of some of them will bring an isolated transaction within the taxation net. The deciding factor is noted below:

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									Adventure in the nature of trade:

An isolated transaction could not be treated as an adventure in the nature of
tread, commerce or manufacture. Any transaction cannot properly be treated
as tread or business. It is allied to transactions that constitute trade of
business. it may not be characterized by all of the essential feature of
business but presence of some of them will bring an isolated transaction
within the taxation net. The deciding factor are noted below:
     1. What quantity of a commodity was purchased and resold?
     2. The nature of the commodity, which is purchased and resold.
     3. Whether purchaser is a trader and purchase of the commodity and its
        resale allied to his usual trade, business, or incidental therein?
     4. What are the incidents associated with the purchased and resale?
     5. Were they similar to the operations usually associated with the
        purchased and resale?
     6. Are the transition of purchase and resale repeated?
     7. Was the purchase made with the intention at a profit?

Sometimes a single plunge in the waters of trade may partake of the
character of an adventure in the nature of tread. It is true that at least one of
the essential features of trade must be present in the isolated or single
transaction. One of the essential elements in an adventure in the nature of
trade is the intention to trade, that intention must be present at the time of the
time of the purchase.
Where a transaction was not in the line of business of the assessee but was
an isolated or single transaction, the onus is on the Department to prove that
the transaction was an adventure in the nature of trade.

Condition of Assessibility:
Under Section 28, the following conditions need to be satisfied:
  1. The business shall be running in income year.
  2. The income shall be a revenue income.
  3. The assessee shall be pursued by the assessee or by his agent.
  4. The business shall be relevant to income year.
  5. The business shall be pursued by the assessee or by his agent.
  6. The income/receipt shall not come from sale of property at time of
     dissolution of business or profession.
Method of accounting:
Income tax ordinance, Section 5, 1984 Method of account has made the
prerogative of the assessee to follow any method of accounting system as
employed by him on regular basis. Thus the law is found not to prescribe
any method of account rather keeps it flexible to the choice of the assessee.
In this law the following guideline are feature are revealed:
    1. All income (agricultural income, income from business or profession)
       shall be computed in accordance with the method of accounting
       regularly employed by the sub section.
    2. Income-tax authority will not take any adverse view if the assessee
       does not maintain account.
    3. Every company having capital not less then Tk. 500000 on the 1st day
       of income year shall submit with income tax return the profit and loss
       account and balance sheet certified by Chartered Accountant.
    4. The income of the assessee shall be computed on such basic and in
       such manner as the Deputy Commissioner of Taxes may think fit.

Prevailing Method of Accounts:
The assessee is free to select his own accounting system, but assessee cannot
switch over the practice from time to time. The condition is that the system
should be maintained over the period. There are three system of accounting:
   1. Cash Basis of Accounting: Records are only made when cash is
      received or paid. Accounts are not kept for outstanding and prepared
      items.
   2. Mercantile System: The records are made as early as when the
      revenue is earned and expense are incurred, whether cash is received
      or not. Accounts maintained under this system reveal real picture of
      income/loss of an organization.
   3. Mixed System: In this system, both cash and accrual basis is merged
      depending on the nature of operation prevalent in the business of
      assessee. That system, for some items accounts are kept on cash basis
      and for some items on mercantile basis.
Profit from Business:
It is revenue profit that is charged to tax under the head “Income from
business and profession”. A newly promoted company is assessable in
respect of profit earned by the promoters before incorporation only if the
company endorses the activities of the promoters after incorporation. A
business is not any profit from a theoretical, academic or legalistic sense but
commercial profit.
There can be trading or carrying of a business by the liquidation in the
winding up of a company even though the object of the liquidation is not to
earn profit but merely to wind up. These profit are taxable [C.I.T. Vs.
National Mills Ltd (1958) 34 ITR 155]

Speculation Business:
According to Section 2(61), “Speculation Business” means business in
which a contract for the purpose or sale of any commodity, including stocks
and shares, is periodically or ultimately settled otherwise than by the actual
delivery or transfer of the commodity or scrip, but does not include business
in which:
    A contract in respect of raw materials or merchandise is entered into
      by a person in the course of his manufacturing or mercantile business
      to guard against loss through future price fluctuations for the purpose
      of fulfilling his other contracts for the actual delivery of the goods to
      be manufactured or the merchandise to be sold by him;
    A contract in respect of stocks and shares is entered into by a dealer or
      investor therein to guard against loss in his holdings of stocks and
      share through price fluctuation; and
    A contract is entered into by a member of a forward market or a stock
      exchange in the course of any transaction in the nature of jobbing or
      arbitrage to guard against loss, which may arise in the ordinary course
      of his business as such member.



Insurance business:
The profit and gain of the insurance business should be computed to
calculate taxable income in accordance with the provision of the Fourth
Schedule
(A) Life Insurance:
Any person who carrying life insurance business, the profit and gain of life
insurance business shall be computed separately from his income, profit or
gains from any other business.

Computation of profits and gains of life insurance business:
The profit and gain of life insurance business, other than pension and
annuity business shall be taken to be either of the following whichever
would be the higher:
   (a) The annual average of the surplus or deficit disclosed by the actuarial
       valuation made for the last inter-valuation period ending before the
       year for which the assessment is to be made, or
   (b) The gross external incoming of the income year from that business
       less the management expenses of that year.

  “Gross external income” means the full amount of and incoming from
interest, dividend. “Management expenses” manes the full amount of
expenses (including commission) incurred exclusively in the management of
the business of life insurance.

(B) General Insurance:
The profit or gain as disclosed by the annual accounts are considered as
income from business. Loss or depreciation on investment would be allowed
as deduction.
It is noted that the revenue account should be prepared separately for each
type of insurance business as per provisions of insurance act, 1938. In this
context some of the important feature are given below:
     The account should be maintained under full mercantile method;
     Assets valuation should be made with regard to their realization or
        market value and the management is to certify that the value of all
        assets have been received at the balance sheet date and that the values
        of the assets as shown in the balance sheet do not exceed their
        realization value; and
     Items of fictitious assets i.e. preliminary expense, goodwill etc should
        be written off as early as possible.
It is also noted that in respect of the income from house property, the usual
deduction would be allowed as are permissible in the case of computation of
income under the dead “Income from House Property”.
Exploration and production of petroleum:
As per Section 28, the profit and gain from the exploration and production of
petroleum (including natural gas) should be computed in accordance with
the provisions of Part A of the Fifth Schedule.
     Profit or gain from exploration and production of petroleum should
       be computed separately from income, profit and gain from any other
       business.
     In addition to the usual deduction under Section 29,the following
       things are considered for computing profit and gain:
     Tax on income in respect of profit and gain would be as per
       agreement between the Govt. and the assessee.
     Expenditure incurred on commercial production would be allowed as
       usual deduction subject to the condition that in re4spect of
       depreciable assets, the depreciation would be allowed in accordance
       with the provisions of the Third Schedule.
     Expenditure on testing, drilling, searching or discovery of oil fields
       up as not productive or as dry holes may be amortized within six
       years out of profits and gains from other business or income from any
       other head except dividend income.
     Depletion allowance would be allowed at the rate of 15% of the gross
       receipt, if such allowance does not exceed one-half of the profit and
       gain before deduction of such allowance.

								
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