LAHORE: The Tax department has failed to force an investment bank to offer the interest against sticky loans for calculating the income tax liability even if parked in a separate account, said sources.

According to details, an assessing officer had questioned the method of maintaining accounts by the bank whereby interest against sticky loans had been debited to a separate account i.e., markup suspense account. The department was pressing the bank to offer this Interest for calculating the income tax liability being accrued during a particular tax year.

Furthermore, the assessing officer had held that the assessee had not credited the amount on accruals to suspense account and had rather resorted to netting off the same from receivable in an attempt to conceal the amount to be credited to suspense account without prejudice to the fact that the income tax law was not subservient to the international accounting system.

According to the assessing officer, a hefty amount was supposed to be accrued to the assessee on non-performing loans but the bank has netted off the interest accrued on non-performing advances from receivable and an attempt has been made to suppress the receipts by an equal amount contrary to the principles of mercantile system of accountancy. Therefore, he taxed the amount.

However, the bank was of the view that every financial institution reports receivable against advances after netting off suspended mark up on advances, as required by the State Bank of Pakistan and International Accounting Standard.

The relevant appellate forum maintained that the sticky advance in commercial parlance is the amount whose recovery becomes highly improbable or doubtful. The interest accruing on such advance is debited to the parties concerned by those institutions which maintain their accounts on mercantile system and the same is credited to a separate account suspense account instead of carrying it to the profit and loss account.

It further held that mere fact that interest becomes receivable to a bank against its sticky loans does not necessarily become its income when the banks are maintaining their accounts on mercantile based or even maintaining a hybrid method of accounting. The said interest becomes subject to impost of tax when it is offered for taxation by the bank or lending institution as per mercantile practice.

Copyright Business Recorder, 2024