Section 174 of Income Tax Ordinance, 2001 deals with the provisions of maintaining record for the taxpayers.
The main provisions covered under this section are:
1. Every taxpayer shall maintain such accounts, documents and records as may be prescribed.
2. The commissioner may disallow or reduce a taxpayer's claim if the taxpayer is unable to provide record or evidence of transaction.
3. The accounts and documents shall be maintained for five years after the end of the tax year to which they relate.
4. For the purposes of this section the expression "deduction" is meant for any amount debited to trading, manufacturing or receipt and expenses or profit and loss account.
Comparable provisions of the repealed Income Tax Ordinance 1979
Previously the provisions regarding maintenance of record were covered under section 32 and 32(a) relevant to rules 27 to 33 of Repealed Income Tax Ordinance 1979.
The provisions are the same as featured in section 174 except that the time limit for maintaining record was previously three years whereas now it has been extended to five years. However as per the provision of section 32(a) of the repealed Income Tax Ordinance "every private limited company whose paid up capital on the last day of any income is 500,000/- rupees was required to furnish a copy of balance sheet and profit and loss account and auditors report in "Form 35A" of Companies Rules 1985 duly signed by Chartered Accountant or Cost and Management Accountant."
Where the company has not complied with the requirements then the DCIT was competent to compute the income in such manner as he may determine.
The provisions relating to maintenance of records are covered in Rules 29 to 33 of Income Tax Rules, 2002.
Rule 29-books of account, documents and record to be maintained.
General provisions of maintenance of record.
Every taxpayer who derives income chargeable under the head "Income form Business" shall maintain proper books of account, documents and records with respect to following:
a) All sums of money received and expended.
b) All sales and purchases of goods and services.
c) All assets of taxpayer.
d) All liabilities of taxpayer.
e) In case of a taxpayer, who is engaged in assembling, production, processing, manufacturing, and mining or like activities, he will also keep the records relating to utilisation of material, labour and other manufacturing overheads.
Electronic or computer records
a) In case the taxpayer uses fiscal electronic cash register or computerised accounting software the rule allows the taxpayer to issue cash memo/invoice/receipts generated by electronic cash register.
b) The taxpayer is required to retain the duplicate copies or computer records of cash memo/invoice/receipts which will form part of the record to be maintained under this chapter.
Period of maintenance of record
The books of account, documents and record shall be maintained for five years after the end of the tax year to which they relate.
Rule 30 - specific provisions for maintenance of records
In Rule 30 of Income Tax Rules, 2001 the provisions have been elaborated for maintenance of the minimum books of account, documents and record for every taxpayer other than the companies. In this regard the taxpayers are bifurcated into the following broad categories.
1. Taxpayers with business income up to Rs 200,000/- and new taxpayers deriving "Income form business."
2. Taxpayers with business income exceeding Rs 200,000/- and wholesalers, distributors, dealers and commission agents.
3. Professionals (like medical practitioners, legal practitioners, accountants, auditors, architects, engineers etc)
4. Manufacturers with turnover exceeding Rs 2.5 million.
5. A company as defined in section 80 of Income Tax Ordinance 2001.
(with reference to Rule 32(2) of the Income Tax Rules, 2002.
The Rules 30 to 32 provides specific requirements for maintenance of minimum books of account, documents and records of each category of taxpayer discussed above which is mentioned below:
-- Taxpayers with business income up to Rs 200,000/- and new taxpayers deriving "Income form business."
a) Serially numbered and dated cash memo/invoice/receipt for each transaction of sale or receipt containing;
-- taxpayer's name or the name of his business,
-- address,
-- national tax number,
-- sales tax register number, if any and;
-- the description, quantity and value of goods sold or services rendered
b) Daily record of receipt, sales, payments, purchases and expenses. A single entry in respect of daily receipts/sales/purchases and different head of expenses will be sufficient.
c) Vouchers of purchases and expenses.
-- Taxpayer with business income exceeding Rs 200,000/- and wholesalers, distributors, dealers and commission agents.
a) Serially numbered and dated cash memo/invoice/receipt for each transaction of sale or receipt containing the following;
-- taxpayer's name or the name of his business,
-- address,
-- national tax number,
-- sales tax register number, if any
-- the description, quantity and value of goods sold or services rendered
-- In the case of wholesalers, distributors, dealers and commission agents where a single transaction exceeds Rs 10,000/- the name and the address of the customers.
b) Cashbook/bank book or daily record of receipts/sales/payments/purchases and expenses.
c) General ledger or annual summary of receipts/sales/payments/purchases and expenses under distinctive heads.
d) Voucher of purchases and expenses.
e) Where the taxpayer deals in purchases and sales of goods, quarterly inventory of stock in trade showing description, quantity and value of such goods.
-- Professionals (like medical practitioners, legal practitioners, accountants, auditors, architects, engineers etc)
a) Serially numbered and dated patients slip/invoice/receipt for each transaction of receipt containing the following:
i) Taxpayer's name or name of his business or profession, address, national tax number sales tax number, if any
ii) The description, quantity and value of medicine or detail of treatment or services rendered and amount charged. (Confidential details are not required.)
iii) The name and address of the patient.
(Condition of recording address of the patient or patient slip, under this clause is not required for general medical practitioner.)
b) Daily appointment and engagement diary in respect of clients and patients. (General practitioners are exempted from this clause.)
c) Daily record of receipt/sales/payments/purchases and expenses. (Single entry will be sufficient.)
d) Vouchers of purchases and expenses.
-- Manufacturers with turnover exceeding Rs 2.5 million.
a) Serially numbered and dated cash memo/invoice/receipt for each transaction of sale or receipt containing the following;
-- taxpayer's name or the name of his business, address, national tax number, sales tax register number, if any
-- the description, quantity and value of goods sold
-- where a single transaction exceeds Rs 10,000/- the name and the address of the customer.
b) Cash book and/or Bankbook
c) Sales day book and Sales ledger
d) Purchase daybook and Purchase ledger
e) General ledger
f) Vouchers of purchases and expenses (where a single transaction exceeds Rs 10,000/- the name and address of the payee.)
g) Stock register of stock in trade, supported with gate inward and outward record and quarterly inventory of all items of stock in trade including work in process showing;
-- description,
-- quantity and;
-- value
(The stock register of stock in trade is required to be maintained for major raw materials and finished goods.)
-- Company as defined in section 80 of Income Tax Ordinance 2001.
It is important to note that at present there are 43,000 companies are registered with the Securities and Exchange Commission of Pakistan as limited liability companies out of which 2,200 are public companies and out of these public companies, 685 are listed on the Stock Exchanges.
i. As per Rule 32(2) of the Income Tax Rules, 2002 the books of account, documents and records required to be maintained by a company shall be maintained in accordance with the international and financial reporting standards (IFRSs) and as required under the Companies Ordinance, 1984.
In this regard the provisions of section 230 of the Companies Ordinance, 1984 are relevant which provide the mandatory requirements for the maintenance of records. As per provision of section 230 of Companies Ordinance, 1984, every company shall keep at its registered office the Proper Books of accounts with respect to;
a) All sums of money received and expended by the company,
b) All sales and purchases of goods by the company.
c) All assets of the company.
d) All liabilities of the company.
e) In case of company engaged in production, processing, manufacturing or mining activities such particular relating to utilisation of labour or other inputs or item of the cost as may be prescribed by Securities and Exchange Commission of Pakistan relating to class of companies notified by general or special orders. Presently the class of companies which fall under this category are of vegetable and cooking oils companies, cement manufacturing companies, sugar producing companies which are required to keep their cost records as per cost orders notified by the Securities and Exchange Commission of Pakistan (SECP) from time to time.
ii. Where a company has a branch office, it will keep books of account relating to transactions effected at the branch office or kept at the branch office and proper summarised return made up to date at intervals of not more than 3 months are sent by the branch office of the company at its registered office.
iii. Proper books of account shall not be deemed to keep if such books do not give true and fair views of the state of affairs of the company.
iv. The books of account shall be open to inspection by the directors.
v. The financial statements shall be prepared in case of private limited companies as per requirements of fifth schedule to the Companies Ordinance, 1984 and in case of listed company it will comply with the requirements of fourth Schedule to the Companies Ordinance, 1984.
vi. As regards the listed company it is also mandatory that the international financial reporting standards (IFRSs) and other standards should be followed in regard to the accounts and preparation of financial statements as notified for this purpose in the official gazette by the Securities and Exchange Commission of Pakistan (SECP). The members are well aware that so far the Securities and Exchange Commission has notified the following international financial reporting standards (IFRSs) for disclosure requirements of listed companies.
Penalty for failure to maintain the records
As per provision of section 109 of repealed Income Tax Ordinance, 1979 the penalty for failure to maintain prescribed record without reasonable cause was 15% of tax payable subject to a minimum of Rs 2,000/- and moreover it was a one (1) time levy. As per new Income Tax Ordinance, 2001 the penalty provisions are prescribed under section 185 which is as under;
a) First failure Rs 2,000/-
b) Second failure Rs 5,000/-
c) Subsequent failure Rs 10,000/-
Amendments/notifications made by CBR relating to rules of maintenance of records
The Central Board of Revenue after promulgations of Income Tax Rules, 2002 had issued in the past following Four (4) main important notifications pertaining to Income Tax Rules, 2002 relating to provisions of maintenance of record.
(From a lecture delivered at the Lahore Tax Bar Association)
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