Liability not Paid

    Liability not Paid

    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 yeas of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability
    Where an unpaid liability is chargeable to tax as a result of the above application and the person subsequently pays the liability, the person shall be allowed a deduction for the amount paid in the tax year in which the payment is made

    Method of Accounting Prescribed by the Board

    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.

    Change in the Method of Accounting

    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 change is necessary to clearly reflect the person’s income from business.

    If a person’s method of accounting has changed, the person shall make adjustment to items of income, deduction, or credit, or to any other items affected by the change so that no items is omitted and no item is taken into account more than once.

    Stock in Trade

    1. Computation of Stock in Trade

    The cost of stock in trade disposed of during a tax year shall be computed in accordance with the following formula:

    (A+B)-C

    A is the opening value of stocks.

    B is the cost of stock acquired during the year.

    C is the closing value of stocks.

    2. Value of Stock in Trade

    (a) The opening value of stock in trade of a person for a tax shall be the closing value of stock in trade at the end of the previous years, or

    (b) Where the person commenced business during the year, the opening trade.

    value of stock in trade shall be the fair market value of stock in

    Notes

    1. Fair market value of stock in trade shall be determined at the time the stock in trade is ventured in the business. Section 35(3)

    2. The closing value of stock in trade for a tax year shall be the lower of cost or net realizable value of the stock in trade on hand at the end of the year. Section 35(4)

    3. Different Methods of Determining Cost The following are the different methods for determining the cost:

    (a) Prime cost method,
    (b) Absorption cost method,

    (c) First in first out cost method, and

    Explanation

    Average cost method.

    On cash basis system of accounting, cost of stock in trade is determined by using prime cost method or absorption cost method.

    On an accrual basis system of accounting, cost of stock in trade is

    by using absorption cost method. In case particular items of stock in trade are not readily identifiable, cost is determined by using the first in first out method or the average cost method.

    Note: Stock valuation method is changed only with the written per-

    mission of the Commissioner of Income Tax and in accordance with any conditions that the Commissioner may impose. [Section 36(1) & (2)] It means a contract for manufacture, installation, or construction which

    Long-Term Contracts

    is not completed within the tax year in which the work of contract is

    commenced, ie more than six months. Under this contract, income derived

    by the person shall be computed on the basis of the percentage of completion

    method.

    Explanation

    Percentage of completion method means the generally accepted accounting principle under which revenue and expenses arising under a long-term contract are recognized with reference to the stage of completion. This method is determined by Dfa Ho comparing the total costs allocated to the contract and incurred before the end of the year with the estimated total contact costs as determined at the commencement of the contract.

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