1. Basic Concept/Method of Accounting

2. 1. Accounting concepts in Income Tax Ordinance, 2001. 1- Accounting Concepts;

3. ‘’ 1- Accural Basis of Accounting; only CFS is on cash basis: a- Expenses are allowed despite not paid b- Income is taxed despite not actually received c- Expenses have to be paid in 3 years, anyway, Other wise. added back as “Unpaid Liabilites”. d- Provision are still not allowed because these are measurenment of fairness of M.V. in stock, Accounts Receivable or Intangible, F/A or Shares Investment. Provision for slow moving Stock Provision for Obsolete Provision for Doubtful debt Provision for Discrimination in values of Shares Provision for Discrimination in values of Investmen Provision for Discrimination in values of Intangible Provision for Impairment

4. ‘’ 1- Accural Basis of Accounting; only CFS is on cash basis: e- These are to do with Prudence, Fairness etc. not accural basis. Provision will still be made or considered even if cash basis of accounting is followed. Points; Sales as per Sales Tax Returns; Sales as per IT Return 161/205; Figures of A/cs; wrong it includes payable

5. 2- Substance Over Form: ▣ a-Finance lease, buying of assets at 10% SD value at the end of lease, which is lower than M.V of the asset. ▣ Now it is not only not taxed but even taken out of withholding under section 153. Purchase, sell & lease back Sale & lease back ▣ b-Employment versus Consulting ▣ Contract of Service versus Contract for Service ▣ Form 29, Form A ▣ Functional title, Duties, Responsibilites, Liabilites, (if he is not then who is MD, who will be held responsible & liable) ▣ c-Teachers rebate ▣ VC, VP; Teacher/Lecturer/Professor/Researcher

6. 3- Offsetting: ▣ Knock off, Adjustment, Netting of ▣ a- Magazine Account: Only surplus & only defecit cannot be shown. Gross receipt and Gross Expenses will have to be shown. ▣ b-Advance Tax Deducted during the year. ▣ Tax Expense for the Year ▣ Tax Liability for the Year (All should be shown, not only the balance advance or refund neither only the remaining liability

7. 4- Notional Gain versus Actual Gain Notional Loss versus Actual Loss ▣ A-Exchange loss at the year end date ▣ It may change the very next day. ▣ B-Provisions are not allowed for the same reason that these expenses are not real unless actually happened. ▣ Stock / Inventory ▣ Shares / Units ▣ F/A ▣ Accounts Receivable ▣ Intangible; software ▣ Impairment; Royalty, Franchise ▣ Tax losses / Tax Depreciation ▣ Still on the company Balance Sheet

8. 5- Gross Profit / Net Profit: ▣ a-This is purely financial accounting and Cost accounting concept. ▣ But duly recognized & applied in Tax law. ▣ b-Gross Profit is after the cost of manufacturing / purchasing etc. Net Profit is after the cost of Marketing, Selling, Administering [i.e after the cost of whole organization] ▣ c-No Accounts are acceptable without any Gross profit and Net Profit. It also helps in dividing expenses, proration of common expenses.

9. 6- CAPEX: ▣ Capital Expenditure, F/A is purely an accounting concept ▣ Can you charge the purchase of P&M as 100% expense in the year. Definition of depreciable asset. ▣ Depreciation, amortization in accounting. ▣ Fixed Assets, Intangible, Pre-commencement Expenditure are actually all in all are accounting concept. ▣ Land; lease hold rights 30 years, 50 years. ▣ Accounting; Depreciation @1% or 2% or 3% spread over the life of lease right ▣ So far not duly recognized in tax laws. ▣ On new Factory ▣ Borrowing cost in, therefore capitalized in the factory cost & therefore will be depreciated.

10. 7- Group Taxation: ▣ No Tax incidence on inter corporate dividends. ▣ Section 97 on sale of Asset between wholly owned group companies.

11. 8- Waiver of Loan: ▣ In accounting this is Exceptional Income or Extra Ordinary Income. ▣ In Tax it is not taxable income at all. ▣ Only waiver of those loans are taxable which were written off under any SBP circular. ▣ Other loans are not taxable ▣ Waiver of interest is taxable, which was claimed as expenses.

12. Review; 1- Accrual Basis of accounting. 2- Substance One Form 3- Offsetting 4- National Gain versus Actual Gain/loss 5- Gross Profit / Net Profit. 6- CAPEX; Captial Expenditure 7- Group Taxation 8- Waiver Of Loan

13. 2. Section 32, 33 and 34 of Income Tax Ordinance, 2001. Tax Accounting

14. 32- Method of accounting ▣ [(1) Subject to this Ordinance, a person’s income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person.] ▣ (2)Subject to sub-section (3), a company shall account for income chargeable to tax under the head “Income from Business” on an accrual basis, while other persons may account for such income on a cash or accrual basis. ▣ (3)The [Board] may prescribe that any class of persons shall account for income chargeable to tax under the head “Income from Business” on a cash or accrual basis.

15. 32- Method of accounting ▣ (4)A person may apply, in writing, for a change in the person’s method of accounting and the Commissioner may, by [order] in writing, approve such an application but only if satisfied that the change is necessary to clearly reflect the person’s income chargeable to tax under the head “Income from Business”. ▣ (5)If a person’s method of accounting has changed, the person shall make adjustments to items of income, deduction, or credit, or to any other items affected by the change so that no item is omitted and no item is taken into account more than once.

16. 33- Cash-basis accounting ▣ A person accounting for income chargeable to tax under the head “Income from Business” on a cash basis shall derive income when it is received and shall incur expenditure when it is paid.

17. 34- Accrual-basis accounting ▣ (1) A person accounting for income chargeable to tax under the head “Income from Business” on an accrual basis shall derive income when it is due to the person and shall incur expenditure when it is payable by the person. ▣ (2)Subject to this Ordinance, an amount shall be due to a person when the person becomes entitled to receive it even if the time for discharge of the entitlement is postponed or the amount is payable by instalments. ▣ (3)Subject to this Ordinance, an amount shall be payable by a person when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy

18. 34- Accrual-basis accounting ▣ (5)Where a person has been allowed a deduction for any expenditure incurred in deriving income chargeable to tax under the head “Income from Business” and the person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head “Income from Business” in the first tax year following the end of the three years. ▣ [(5A) Where a person has been allowed a deduction in respect of a trading liability and such person has derived any benefit in respect of such trading liability, the value of such benefit shall be chargeable to tax under [the] head “Income from Business” for the tax year in which such benefit is received.] ▣ (6)Where an unpaid liability is chargeable to tax as a result of the application of sub-section (5) and the person subsequently pays the liability or a part of the liability, the person shall be allowed a deduction for the amount paid in the tax year in which the payment is made.

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