LAHORE: A Development Financial Institution (DFI) had failed to avail deduction of income as bad debt for not proving that the amounts have become irrecoverable due to any reason, said sources in the Income Tax Department.

The department while making the assessment found out that the DFI had made a provision for bad debts, which was not allowable under the Ordinance. Only the amounts which were irrecoverable and have become bad could only be allowed to be written off under the relevant provisions of the law. Mere provisioning of certain amounts could by no stretch of imagination be considered as bad debt, it added.

The department further maintained that for all practice purposes, the DFIs are considered as banks and all the prudential regulations issued by the SBP are applicable upon them, which duly provide a mechanism with regard to claiming any amount as bad debt for the purpose of writing off the same.

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However, the DFI was of the view that it was maintaining mercantile system of accounting and the provision of bad debt was made as per the accounting method employed by it. It further maintained that the law required that the amount claimed should be a bad debt which has become irrecoverable. Since the amounts given in loan to certain persons have become irrecoverable, therefore, the said amounts were shown as bad debt, it added.

According to the management of DFI, the department was not justified in disallowing the claim on the grounds that firstly the claim was premature, secondly the amount was not written off and thirdly the claim was a mere provision only, which was not allowable.

The management stressed that for claiming bad debt it is not necessary that amount should be actually written off and showing an irrecoverable amount as bad debt is sufficient to claim an amount as bad debt. They added that a DFI, strictly speaking, is not a bank, therefore, the parameters as prescribed by the SBP in its prudential regulations are not applicable to them, though all banks and DFIs are under the control of SBP.

But the department made it clear to the DFI that only such amounts are allowed as bad debts which are determined by the competent authority to be irrecoverable. It was not a matter of discretion of an assessee to decide what is bad debt but to establish with cogent material and on reasonable grounds for declaration of any amount as bad debt.

Copyright Business Recorder, 2023