Apportionment of Expenditures Under Rule 13 of the Income Tax Rules, 2002

Rule 13 of the Income Tax Rules, 2002, provides guidelines for the apportionment of expenditures, deductions, and allowances that are incurred for more than one purpose. This rule is crucial for determining the tax liability of taxpayers with diverse income streams.

Key Provisions of Rule 13:

1. Applicability: Rule 13 applies to all expenditures, deductions, and allowances that are incurred for multiple purposes, as defined under Section 67 of the Income Tax Ordinance, 2001.
2. Allocation of Expenditures: Expenditures incurred for a specific class of income shall be directly allocated to that class. Expenditures that cannot be directly allocated to a specific class of income (common expenditures) shall be apportioned among different classes of income based on a reasonable basis.
3. Basis for Allocation: The allocation of common expenditures should consider the nature and source of each class of income. The rule specifically mentions the importance of considering selling expenses when allocating expenditures related to sales income.
4. Chartered Accountant's Certificate: Where expenditures are allocated by a Chartered Accountant or Cost and Management Accountant, their certificate shall be accepted unless significant variations are found. For taxpayers not required to maintain audited books of accounts, the Commissioner may accept allocations based on a reasonable basis.
5. Definition of "Class of Income": Rule 13 provides a comprehensive list of income classes, including: Pakistan-source and foreign-source income under various heads (Salary, Income from Property, Income from Business, Capital Gains, Income from Other Sources). Income exempt from tax. Income chargeable under Sections 5, 6, or 7 of the Income Tax Ordinance.
6. Definition of "Common Expenditure": Common expenditures are those that cannot be directly attributed to any specific class of income. Examples include general administrative expenses, rent, and utilities.
7. Formula for Allocating Common Expenditures: Rule 13(3) outlines a formula for allocating common expenditures:

• A x B / C

Where: A is the amount of the expenditure incurred. B is the total amount of gross receipts for the tax year for the class of income. * C is the total amount of gross receipts and net gains for the tax year for all classes of income.

Considerations for Turnover-Based Income:

For income classes where net gain, brokerage, commission, or other income is calculated based on turnover, the formula for allocating common expenditures should be adjusted accordingly.

• Accurate Tax Calculation: Proper apportionment of expenditures is crucial for accurate tax calculations and ensures that taxpayers pay the correct amount of tax.
• Reduced Disputes: Clear guidelines for expenditure allocation can help to minimize disputes between taxpayers and the tax authorities.
• Fairness and Equity: By ensuring that expenditures are allocated fairly among different income streams, Rule 13 promotes fairness and equity in the tax system.

Income Tax Rules, 2002, provides a framework for the proper allocation of expenditures, deductions, and allowances. By adhering to the principles outlined in this rule, taxpayers can ensure accurate tax calculations and minimize disputes with the tax authorities.

This article was published at Division of Expenditures & Deductions for Multiple Sources of Income