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) 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.

(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.
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.

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) 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) 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 .

(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.
35. Stock-in-trade.

(1) For the purposes of determining a person‘s income chargeable to tax under the head ―Income
from Business‖ for a tax year, the cost of stock-in-trade disposed of by the person in the year shall
be computed in accordance with the following formula, namely:

(A + B) – C
where :

A is the opening value of the person‘s stock-in-trade for the year;

B is cost of stock-in-trade acquired by the person in the year; and
C is the closing value of stock-in-trade for the year.

(2) The opening value of stock-in-trade of a person for a tax year shall be :

(a) the closing value of the person‘s stock-in-trade at the end of the previous year; or
(b) where the person commenced to carry on business in the year, the fair market value of
any stock-in-trade acquired by the person prior to the commencement of the business.

(3) The fair market value of stock-in-trade referred to in clause (b) of sub-section (2) shall be
determined at the time the stock-in-trade is ventured in the business.

(4) The closing value of a person‘s stock-in-trade for a tax year shall be the lower of cost or net
realisable value of the person‘s stock-in-trade on hand at the end of the year.
35. Stock-in-trade.

(5) A person accounting for income chargeable to tax under the head ―Income
from Business‖ on a cash basis may compute the person‘s cost of stock-in-trade on

the prime-cost method or

absorption-cost method,

and a person accounting for such income on an accrual basis shall compute the
person‘s cost of stock-in-trade on the absorption-cost method.

(6) Where particular items of stock-in-trade are not readily identifiable, a person
may account for that stock on the

first-in-first-out method or
the average-cost method

but, once chosen, a stock valuation method may be changed only with the written
permission of the Commissioner and in accordance with any conditions that the
Commissioner may impose.
absorption-cost method‖ means the generally accepted accounting principle under which the cost of an item
of stock-in-trade is the sum of direct material costs, direct labour costs, and factory overhead costs;

average-cost method‖ means the generally accepted accounting principle under which the valuation of
stock-in-trade is based on a weighted average cost of units on hand;

direct labour costs‖ means labour costs directly related to the manufacture or production of stock-in-trade;

dIrect material costs‖ means the cost of materials that become an integral part of the stock-in-trade
manufactured or produced, or which are consumed in the manufacturing or production process; 67

factory overhead costs‖ means the total costs of manufacturing or producing stock-in-trade, other than
direct labour and direct material costs;

first-in-first-out method‖ means the generally accepted accounting principle under which the valuation of
stock-in-trade is based on the assumption that stock is sold in the order of its acquisition;

prime-cost method‖ means the generally accepted accounting principle under which the cost of stock-in-
trade is the sum of direct material costs, direct labour costs, and variable factory overhead costs;

stock-in-trade‖ means anything produced, manufactured, purchased, or otherwise acquired for manufacture,
sale or exchange, and any materials or supplies to be consumed in the production or manufacturing process,
but does not include stocks or shares; and

variable factory overhead costs‖ means those factory overhead costs which vary directly with changes in
volume of stock-in-trade manufactured or produced.
36. Long-term contracts.

(1) A person accounting for income chargeable to tax under the head Income from
Business‖ on an accrual basis shall compute such income arising for a tax year under a
long-term contract on the basis of the percentage of completion method.

(2) The percentage of completion of a long-term contract in a tax year shall be

determined by comparing the total costs allocated to the contract and incurred before
the end of the year with the estimated total contract costs as determined at the
commencement of the contract.

(3) In this section, —-

―long-term contract‖ means a contract for manufacture, installation, or construction,
or, in relation to each, the performance of related services, which is not completed
within the tax year in which work under the contract commenced, other than a contract
estimated to be completed within six months of the date on which work under the
contract commenced; and
―percentage of completion method‖ means the generally accepted accounting principle
under which revenue and expenses arising under a long-term contract are recognised by
reference to the stage of completion of the contract, as modified by sub-section (2).
174. Records.

(1) Unless otherwise authorized by the Commissioner, every taxpayer shall maintain in Pakistan such
accounts, documents and records as may be prescribed.

(2) The Commissioner may disallow or reduce a taxpayer‘s claim for a deduction if the taxpayer is unable,
without reasonable cause, to provide a receipt, or other record or evidence of the transaction or
circumstances giving rise to the claim for the deduction.

(3) The accounts and documents required to be maintained under this section shall be maintained for six
years after the end of the tax year to which they relate:

Provided that where any proceeding is pending before any authority or court the taxpayer shall
maintain the record till final decision of the proceedings.

Explanation. Pending proceedings include proceedings for assessment or amendment of assessment,

appeal, revision, reference, petition or prosecution and any proceedings before an Alternative Dispute
Resolution Committee.

(4) For the purpose of this section, the expression deduction means any amount debited to trading
account, manufacturing account, receipts and expenses account or profit and loss account.

(5) The Commissioner may require any person to install and use an Electronic Tax Register of such type and
description as may be prescribed for the purpose of storing and accessing information regarding any
transaction that has a bearing on the tax liability of such person.