Method of Accounting & Records Chapter- 11
- Income from long term contracts [u/s 36]
A person income from business on an accrual basis shall compute such income for a tax
year under a long term contract on the basis of percentage of completion method.
The percentage of completion of a long term contract by using cost basis formula is as
under:
Percentage of completion = Contract cost to date / Contract cost to date plus further expected
contract cost x 100
A contract which is not completed within the tax year in which work is commenced is
treated as long term contract. However if it is estimated to be completed within 6 months
from the date of its commencement then it will not be treated as long term contract.Example: Mr. Zahid entered into a contract for construction of building on July 01, 20 22. Total
contract price is Rs. 4,500,000 and it shall be completed in 4 years. It has been estimated that total
cost to complete the contract is Rs. 3,375,000. In tax year 20 23 cost of Rs. 843,750 has been
incurred on the contract.
Required: Compute the income chargeable to tax in respect of this contract for tax year 20 23.Solution:
Income chargeable to tax in tax year 20 23 :
Percentage of completion:
(Cost incurred to date / Total contract cost x 100)
843,750 / 3,375,000 x 100 25%
Income chargeable to tax:
Total price of contract x percentage of completion (Rs. 4,500,000 x 25%) 1,125,000
Less total contract cost x percentage of completion (Rs. 3,375,000 x 25%) 843,750
Gross profit for the year 281,250- Records [u/s 174]
Except where allowed by the CIR, every taxpayer shall maintain in Pakistan such accounts,
documents and records as may be prescribed.
The CIR may disallow or reduce a taxpayer's claim for a deduction if the taxpayer is unable,
without reasonable cause, to provide a receipt, or other record or evidence of the transaction in
support of the claim for expenditure.
The accounts and documents required to be maintained shall be kept for six years after the end of
the tax year to which they relate;
Provided where any proceeding is pending before any authority or court the taxpayer shall
maintain the record till final decision of the proceedings.
The CIR may require any person to install and use an Electronic Tax Register of such type and
description as may be prescribed for the purpose of storing and accessing information regarding any
transaction that has a bearing on the tax liability of such person.
In this section “deduction” means any amount debited to trading account, manufacturing account,
receipts and expenses account or profit and loss account.
Provided that limitation prescribed under this sub-section shall not apply to the records pertaining to
income, assets, expenses or transactions to foreign source as specified in clause (ii) of sub-section
(2) of section 111.- Prescribed books of account [RULE 28 to Rule 31]
Application through Rule 28
These rules apply for records to be kept by the taxpayer u/s 174.
The purpose of these rules is to prescribe the minimum level of books of accounts, documents
and records to be maintained by taxpayers;