Accrual-basis accounting

2025 PTD 1448 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S. 34(3)Accrual-basis accountingScope and effect

Officer Inland Revenue (OIR) disallowed provisional expense being inadmissible as provisions of other benefits and compensated absences and provident funds contributions has been claimed and was included in under the head of salaries

Department filed appeal as the Commissioner Inland Revenue (Appeals) ('the Commissioner-Appeals') deleted the impugned addition

Held, that the Commissioner-Appeals rightly observed that in mercantile system of accounting expenses are to be allowed when it become payable and have been determined with reasonable accuracy

It is a general practice that liability regarding leave encashment, an unavailed leave is calculated at the end of the year and then paid in subsequent year

Record revealed that the addition was made by the OIR without bringing on record any material within terms of S. 34(3) of the Income Tax Ordinance, 2001 ('the Ordinance 2001')

Under provision of S. 34(3) of the Ordinance 2001, an amount shall be payable by a person when all the events that determine liability have occurred and the amount of liability can be determined with reasonable accuracy

Similarly, contribution to recognized provident fund is an admissible expense

Thus, impugned addition was rightly deleted

No case of interference by the Tribunal was made out

Appeal filed by Department was dismissed.

2014 PTD 2085 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S. 34(3)Accrual-basis accountingProvision against other assetsDisallowance was made for the reason that it was not an ascertainable liability

Taxpayer contended that provisions had been determined in accordance with the reasonable accuracy; and that provision against other assets was an allowable deduction

Validity

Held, keeping in view the facts and circumstances of the case the addition on account of provision against other assets was deleted by the Appellate Tribunal.

2014 PTD 2085 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.21(e), (f) & 34(3)Deductions not allowedAccrual-basis accountingDisallowance on account of post employment medical benefits plan

Taxpayer contended that accounts were maintained on mercantile basis and every year certain contributions were made to the employees' retirement medical benefits plan as an ascertained liability; and that disallowance was made more than the confronted amount after considering the reply

Validity

Addition was not maintainable for the simple reason that the taxpayer was never confronted for the addition of the disallowed amount.

2014 PTD 1101 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S. 34(5)Income Tax Ordinance (XXXI of 1979), S.25(c)Accrual-basis accountingTax year 2005Unpaid liabilities of road cessAddition ofLimitationAddition made in respect of unpaid liabilities of road cess was deleted by the First Appellate AuthorityRevenue contended that addition was correctly made as the unpaid liabilities were more than three years oldValidity

Unpaid liability of road cess for assessment years 1993-94 onward could not be added back under S.34(5) of the Income Tax Ordinance, 2001 in tax year 2005, but the provision of S.25(c) of the Income Tax Ordinance, 1979 could be invoked if permissible under the law

First Appellate Authority had correctly deleted the unpaid liability of road cess in tax year 2005 as it was beyond the limitation period specified under S.34(5) of the Income Tax Ordinance, 2001

Order of First Appellate Authority was confirmed and appeal for tax year 2005 was dismissed.

2014 PTD 1101 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 34(3), 32 & 122(5A)Accrual-basis accountingProvision for gratuityDisallowance of

Revenue contended that provisions for gratuity was correctly disallowed by the assessing officer as same were not admissible deduction; and that First Appellate Authority was not justified in deleting the addition, without appreciating that the actual payment made during the year was allowed

Taxpayer contended that claim of gratuity charged to cash flow statement was on the basis of actual and determined liability for the year which had been worked out on the basis of salary of each employee; that observations of assessing officer were neither correct, nor based on facts and law for the reason that the claim of gratuity being a determined and ascertained liability under Ss.32 & 34(3) of the Income Tax Ordinance, 2001, the claim was never disallowed

Appellate Tribunal confirmed the finding of First Appellate Authority and that of the Department was dismissed.