Method of Accounting in ITO: All income classifiable under the head “Agricultural income” [u/s 26
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& 27], “Income from business or profession” [u/s 28-30, 30A] or “Income from other sources” [u/s
33, 34, 36 & 43] shall be computed in accordance with the method of accounting regularly employed by the business entity [sec. 35(1)]. However, every public or private company as defined in the Companies Act, 1913 or 1994 shall, with the return of income required to be filed under the Income Tax Ordinance for any income year, furnish a copy of the trading account, profit and loss account and the balance sheet in respect of that income year certified by a chartered accountant (CA) [sec. 35(3)]. Where no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the DCT, the income of the assessee cannot be properly deduced therefrom; or where a company fails to furnish financial statements certified by a CA with its return, the income of the entity shall be computed on such basis and in such manner as the DCT may think fit [sec. 35(4)]. The method of accounting may be ‘mercantile system’ (or accrual basis) or ‘cash system’ (or cash basis) or a hybrid system (i.e., mixture of these two for separate heads of income). However, in the income tax laws, few incomes must be computed under a specific accounting method. For instance, declared dividend is taxable under mercantile system [u/s 19(7)], income from house property is taxable under cash system [S.R.O. No. 454-L/80 dated 31.12.1980, vide sec. 60(1) of the Income-tax Act 1922], and advance salary income are taxable under cash system [u/s 21(1)(b)] subject to a relief u/s 172.
The time constraint may also be important in case of working with a closely held private company as a shareholder director, i.e., the owner/operator (O/O). The salaries with arrangement of tax-deduction at source (TDS) of the director are an allowable deduction with some other limits u/s 30 in case of determining the total income of the company. The salaries are taxable in the hand of the director subject to the exclusions under rules 33 and 33A-33J and Part A, Sixth Schedule. The method of accounting followed by the company may be ‘mercantile system’, but the accounting method followed by the director may be ‘cash system’. Depending on this entity level advantage (as O/O of the company), a year-end bonus to the director may be shown as a deduction under accrual basis but the O/O is not required to show it as an income until the time of receipt. Even income year might be different from the entity to its O/O. Such accounting legerdemain is a common practice for tax planning purpose.
TAX PLANNING UNDER THE SCHOLES-WOLFSON PARADIGM
Myron S. Scholes, the 1997 Nobel Winner in Economics as the co-originator of the Black-Scholes option pricing model and a partner of Oak Hill Capital Management and Mark A. Wolfson, a managing partner of Oak Hill Capital Management, have jointly developed a paradigm for tax strategy in 1992 through their book titled Taxes and Business Strategy: A Planning Approach. They have adopted a contractual perspective for their paradigm and suggested three key aspects of tax planning globally:本文来自辣.文,论-文·网原文请找腾讯752018766
1. Multilateral Approach: All contracting parties must be taken into account in tax planning, which allows a global or multilateral, rather than a unilateral, approach.
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