Recouped expenditure

Assessing Officer had observed through Show Cause Notice that "reversal of provision claimed during previous year stood allowed to the company as deductions against income for previous years; and since these amounts had been reversed in the accounts, the same should have been offered for tax as recouped expense as the same was taxable as recoveries or reversals of earlier deductions that were taxable in accordance with S.70 of the Income Tax Ordinance, 2001 read with R.9 of the Seventh Schedule to the Income Tax Ordinance, 2001; and reversals of provision was liable to be added to balance of income for the year"

Taxpayer contended that provision was made on client to client basis, in one case there may be reversal of provision but in another case provision was required to be made as required under Prudential Regulations issued by the State Bank of Pakistan; that net amount was claimed as expense in profit and loss account which had duly been added back and offered for taxation at the time of filing of return in accordance with Seventh Schedule to the Income Tax Ordinance, 2001; that provision of Non-Performing Loan had never been claimed in profit and loss account as well as computation of taxable income; that there was no error in financial statements, the provision of S.111 of the Income Tax Ordinance, 2001 was not applicable; that the addition was not maintainable as the same did not come under the ambit of Seventh Schedule of the Income Tax Ordinance, 2001: and that business income had to be computed under the Seventh Schedule as specifically provided in its R.6

Revenue contended that the claimed reversal had not been offered for taxation as recouped expenses as per audited accounts and the same were taxable as recoveries or reversals of earlier years deductions that were taxable in accordance with S.70 of the Income Tax Ordinance, 2001 and that First Appellate Authority was not justified to remand the issue to the Assessing Officer

Validity

Reversal against provisions had not been claimed as deduction by the taxpayer

Addition made by the Assessing Officer was not in accordance with settled law and the addition was deleted by the Appellate Tribunal.

Reversal of provision against other assets on the ground that the amount represented reversal of provisions claimed as deduction in previous years; and constituted recouped expenditure

Taxpayer contended that expense was not claimed for tax year 2011 on account of provision but offered for tax during the year under the head other income" and that the addition was not maintainable as the same did not come under the ambit of Seventh Schedule of the Income Tax Ordinance, 2001: and business income had to be computed as specifically provided in R.6 of said schedule

Validity

As the reversal of provision against other assets had not been claimed as deduction by the taxpayer and the issue had already been decided in the previous years i.e. 2006 & 2007 by the Appellate Tribunal, the addition made was deleted by the Appellate Tribunal.

Addition was confirmed by the First Appellate Authority on the ground that the same was provision and not an actual expense

Department contended that an expense could only be claimed if all the events that determine liability had occurred and the amount of liability could be determined with reasonable accuracy

Taxpayer contended that provision was according to Prudential Regulations of State Bank of Pakistan which was allowable vide S.91A read with S.35 of Banking Companies Ordinance, 1962 and Ss.46B and 54A of State Bank of Pakistan Act, 1956 which was ascertainable liability and not a provision; that it was the substance that mattered and not mere nomenclature given to any transaction; that any ascertainable accrued liability was deductible under mercantile system of account; that even disputed liabilities were allowable under mercantile system of account; and that any subsequent recovery would taxed under S.70 of the Income Tax Ordinance, 2001

Validity

Appellate Tribunal accepted the arguments of the taxpayer and held that present was an ascertainable liability and directed to delete the additions for all the years under appeal.