Sources told Business Recorder on Monday that the cases mainly related to the Tax Year 2006, Tax Year 2007 and other tax years involving banking issues of doubtful debts, bad debts; non-performing loans; provisions for compensated absences and post retirement medical benefits.
The department has used powers under section 29 of the Income Tax Ordinance to disallow the provisions for bad debts and non-performing loans. The bad debts were disallowed by the department, as bad debts were not actually written off in the books of account, department opined.
Under section 29 (Bad debts), deduction for bad debt shall be allowed in certain conditions. The amount of the debt was previously included in the person's income from business chargeable to tax or in respect of money lent by a financial institution in deriving income from business chargeable to tax. The debt or part of the debt is written off in the accounts of the person in the tax year and there are reasonable grounds for believing that the debt is irrecoverable.
Therefore, the loan should be simultaneously irrecoverable as well as written off for claiming deductions by the banks, department opined. The department is of the view that the few banks are claiming deductions not allowed under the provisions. The income tax department has disallowed inadmissible claims of banks and added this amount into the income of the bank.
As far as powers of the income tax officials are concerned, sources said that the Income Tax Ordinance 2001 has overriding provisions over the banking regulations in cases where question is concerned to the income tax. The issue is related to the income tax and Ordinance 2001 has overriding effect on the SBP regulations.
Recently, the income tax demands has been raised against few banks within the jurisdiction of LTU Islamabad by disallowing provisions of non-performing loans and provisions for post retirement medical benefits. The first stage of appeal ie Commissioner (Appeals) has accepted the stance of the LTU, Islamabad.
On similar account, the LTU Karachi has also recently raised demands against few banks on account of non-performing loans and bad debts under Ordinance 2001. The assessments have been amended under section 177 by way of audit and 122(5A) relating to revision of assessment.
In one case of a government owned bank within the jurisdiction of LTU, Islamabad, the income tax circular (April 17 1994) relating to the provisions of banks has been rescinded through a circular of 2008. The circular of 1994 was issued under the repealed Income Tax Ordinance of 1979.
The redundant circular was specifically applicable on the wholly owned banks of the government. Under the rescinded circular of 1994, the provisions for bad debts were allowed on the certification of the State Bank. If the circular of 1994 was applicable in the field formations, tax authorities were bound to follow section 206 of the Income Tax Ordinance 2001.
Under section 206, a circular issued by the FBR shall be binding on all Income Tax Authorities and other persons employed in the execution of the Income Tax Ordinance, under the control of the said Board other than Commissioners of Income Tax. As the circular of 1994 has been withdrawn the department is not bound to follow the same under Income Tax Ordinance 2001. Therefore demand has also been raised against this government owned bank, sources added.
On the other hand the tax consultants and tax lawyers have a different point of view on the provisions of non-performing loans under Income Tax Ordinance 2001. Tax professionals were of the view that the department has no jurisdiction to disallow the provisions as they have been charged on the strength of prudential regulations issued by the SBP.
It is also their view that once the provision has been charged to profit and loss account, the same is deemed to be written off in the books of accounts of the banks. There is no specific provision, which allows the department to override the Prudential regulations issued by the SBP. However, by exercising arbitrary powers under section 29 of the Ordinance, the same has been disallowed.
There are many judgements to support the claim of the banks. Presently, the same are subjudice before various high courts.A careful study of section 29 of the Ordinance 2001 would clearly support the allow ability of non-performing advances, as the same had been clearly written off in the accounts.
The claim under this head is fully admissible. The issue under consideration was also examined thoroughly by the Income Tax Appellate Tribunal while relying on reported judgements of the superior courts of both India and Pakistan in case therefore, question of admissibility viz a viz allow ability does not arise.
Tax professionals also argued that in case of banks, normally the provision for bad debts is created and charged to the Profit & Loss Account. In case if any recovery is made against such provisions then they are charged to the profit & loss account and income is shown due to recovery out of bad debts. They added that the banks claim under this head (provisions against non-performing loans) is fully admissible under the provisions of the Income Tax Ordinance, 2001.