VIEWS: 44 PAGES: 5 CATEGORY: Public Policy POSTED ON: 7/29/2011
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:
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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