I.TAS. NOS. 358/HQ AND 379/HQ OF 1990-91, DECIDED ON 30TH MARCH, 1991. VS I.TAS. NOS. 358/HQ AND 379/HQ OF 1990-91, DECIDED ON 30TH MARCH, 1991.
1991 P T D (Trib.) 804
[Income-tax Appellate Tribunal Pakistan]
Before Farhat Ali Khan, Chairman and Iqbal M. Qureshi, Accountant Member
I.TAs. Nos. 358/HQ and 379/HQ of 1990-91, decided on 30/03/1991.
(a) Zakat and Ushr Ordinance (XVIII of 1980)---
----Ss. 25, 3 & Preamble---Income Tax Ordinance (XXXI of 1979)---Object of Zakat and Ushr Ordinance, 1980---Special concession regarding deduction of Zakat from taxable income while determining the tax liability of an assessee---Khas Deposit Certificates being an asset which was subjected to Zakat under various provisions of Zakat and Ushr Ordinance, 1980, Zakat was thus a charge on the asset and not an expenditure for earning interest---Provisions of S. 25 of the Zakat and Ushr Ordinance, 1980 having laid down special provision they would prevail upon all the provisions of the Income-tax Ordinance, 1979 and the principles of tax laws including the principle that the expenditure incurred for earning exempt income could not be allowed as a deduction.
The legislature has acknowledged Zakat as one of the fundamental pillars of Islam. Zakat Ordinance has been promulgated so that Zakat could be recovered from all Sahib-e-Nisab Muslims through the agency of State of Islamic Republic of Pakistan and then disburse it according to Injunctions of Islam.
The Zakat is payable by a person who is Sahib-e-Nisab or in other words who owns or possesses the assets on the valuation date. Zakat is charged once in a Zakat year and it is subsequently credited to Zakat fund wherefrom it is disbursed according to tenets and injunctions of Islam.
The legislature has allowed special concession regarding deduction of Zakat from taxable income while determining the tax liability of an assessee. The expression "Notwithstanding anything contained in any other law for the time being in force" clearly indicates that this is a special tax concession.
Khas Deposit Certificates are an "asset" which is subjected to Zakat under various provisions of Zakat Ordinance. Thus, the Zakat is a charge on the "asset" and not an expenditure for earning interest. In other words an assessee pays Zakat because he is under religious as well as legal obligation to pay it simply because he is in possession of assets on the valuation date. It is not an expenditure for earning the "asset" namely the Khas Deposit Certificates.
Section 25 of the Zakat Ordinance has laid down special provisions and they have to prevail upon all the provisions of the Income-tax Ordinance and the principles of tax laws including the principle that the expenditure incurred for earning exempt income could not be allowed as deduction.
It is clear from the perusal of the return of total income that all sorts of income are first to be grouped together and then from the total income earned from all sources the amount of Zakat and wealth tax paid-is to be deducted. It is important to note that Part II of the return provides column for exempt income which is not included in total income. But there is nothing to show that Zakat deducted from exempt income shall not be deductible from total income worked out in Part I.
(b) Words and phrases--
----Plant" --Meaning.
I.T.As. No. 1481 to 1482/KB of 1980-81 ref.
(c) Income-tax---
----Addbacks---Assessee had produced all the relevant vouchers before the Assessing Officer ---Addbacks, held, were not justified and were ordered to be deleted by Tribunal.
Z.H. Jafri for Appellant (in I.T.A. No-358/HQ of 1990-91 and for Respondent in I.T.A. No. 379/HQ of 1990-91),
A.D. Bhatti, D.R. for Respondent (in I.T.A. No.358/HQ of 1990-92 and for Appellant in I.T.A. No. 379/HQ of 1990-91).
Date of hearing: 30th March, 1991.
ORDER
FARHAT ALI KHAN (CHAIRMAN).---Mr. Z.H. Jafri, the learned counsel for the appellant, submits that the first question which arises in these cross-appeals is as to whether both the officers below were justified in not allowing deduction of Rs.1,74,313 which was amount of Zakat deducted out of profits earned from investment in Khas Deposit Certificates and FDR? The learned counsel has invited our attention to section 25 of the Zakat and Ushr Ordinance, 1980, hereinafter referred to as the `Zakat Ordinance' and the prescribed pro forma for Return. According to him the Zakat was to be deducted from taxable income in order to determine the tax liability of an assessee under section 25 of the Zakat Ordinance as a special concession. According to him the income-tax Officer and for that matter the learned CIT(A) fell in serious error m not allowing Rs.1,71,710 as deduction on account of payment of Zakat out of profit earned from investment in Khas Deposit Certificates for the reason that it was expenditure incurred for earning exempt income. The learned CIT(A), however, has supported both the officers below.
2. We have heard both the learned counsel for the appellant as well as learned D.R. From perusal of the assessment order it appears that the Income?tax Officer disallowed deduction of Rs.1,71,710 with the following observation:
??????????? "-----Income from Khas Deposit Certificates is exempt from tax. Following the principle, that the expenditure incurred for earning exempt income, cannot be allowed as a deduction, against income, liable to tax ft the expenditure incurred on earning profit on Khas Deposit Certificates is disallowed. Hence add Rs.1,71,710.
From perusal of impugned order it appears that the learned C.I.T.(A) has confirmed the finding of the Income Tax Officer with the following observation:
??????????? " ??As regards disallowance of claim of Rs.1,71,710 pertaining to Zakat the same is fully justified because this amount was paid on profits of Khas Deposit Certificates which is exempt from tax and has not been considered while computing taxable income.
The action of the assessing authority in this respect is, therefore, upheld ???
3. Thus, it is clear that both the officers below have treated Zakat as an expenditure incurred for earning exempt income. However, with due respect to them the Zakat is one of the five pillars of Islamic Faith. If we peruse the Zakat Ordinance it appears from its preamble that the legislature has acknowledged it as one of the fundamental pillars of Islam. It also becomes obvious that the Zakat Ordinance has been promulgated so that Zakat could be recovered from all Sahib-e-Nisab Muslims through the agency of State of Islamic Republic of Pakistan and then disburse it according to Injunctions of Islam. For easy reference the Preamble of Zakat Ordinance is re-produced hereinbelow:
"WHEREAS it is necessary to make provisions relating to the assessment, collection and disbursement of Zakat and Ushr and matters connected therewith or incidental thereto ;
AND WHEREAS Pakistan, being an Islamic State, must provide for the implementation of Islamic precepts;
AND WHEREAS the Constitution of Islamic Republic of Pakistan lays down that the Muslims of Pakistan shall be enabled to order their lives. in the individual and collective spheres, in accordance with the tenets of Islam; AND WHEREAS Zakat including Ushr, is one of the fundamental pillars Arkan of Islam;
AND WHEREAS the prime objective of the collection of Zakat and Ushr, and disbursements therefrom, is to assist the needy, the indigent and the poor;
AND WHEREAS the rates of Zakat and Ushr, as also the purposes for the utilization of Zakat and Ushr, are specified in Shariah;
AND WHEREAS Shariah enjoins all Muslims who are Sahib-e-Nisab to pay and the State to arrange for the proper collection, disbursement and utilisation of Zakat and Ushr, and also allows such Muslims to disburse for the purposes authorised by Shariah the part thereof not collected by the State;
AND WHEREAS the Constitution also provides, in Article 31, that the State shall endeavour as respects the Muslims of Pakistan, to secure inter alia, the proper organisation of Zakat;
AND WHEREAS the President is satisfied that circumstances exist which render it necessary to take immediate action ;
NOW THEREFORE in pursuance of the Proclamation of the fifth day of July, 1977, read with the Laws (Continuance in Force) Order, 1979 (C.M.L.A. Order No.l of 1977) and in exercise of all powers enabling him in that behalf, the President is pleased to make and promulgate the following Ordinance."
(The underlining has been added)
4. From persual of the Zakat Ordinance it further appears that, inter alia the clauses (iii), (xiii), (xxx), (xxxi) and (xxxii) of its section 2 have laid down the definitions of assets, Sahib-e-Nisab, valuation date, Zakat fund and Zakat year. However, the provisions for charging and collection of Zakat read as under:
"3. Charge and collection of Zakat.---(1) Subject to the other provisions of this Ordinance, Zakat in respect of assets mentioned in the First Schedule shall be charged and collected, on compulsory basis, for each Zakat year, at the rates and in the manner specified therein, and as may be prescribed, from every person (other than a person excluded from the definition of Sahib-e-nisab) who owns or possesses such assets on the valuation date:
Provided that where an asset mentioned in First Schedule has been assigned by the person owning or possessing it, in favour of another person, Zakat in respect of that asset shall be charged and collected on compulsory basis as if the asset had not been so assigned.
(2) In determining the amount to be collected as Zakat on compulsory basis, the value of an asset or which Zakat is deductible at source may be reduced, to the extent and in the manner prescribed, only on account of debts, which have been: ???????
(a) primarily secured by that asset;
(b) used for the creation of an asset on which Zakat is deductible at source; and
(c) obtained from the Deducting Agency having custody of the asset securing the debt in clause (a) and of the asset created under clause (b), .
(3) Where a person from whom Zakat has been deducted at source proves that:
(a) he is not a Muslim, or
(b) he is not a citizen of Pakistan, or
(c) the amount deducted from him is more than what is due under this ordinance, either--
(i) on account of error apparent from the record,
(ii) on account of reduction provided for in subsection (2) not having been duly allowed to him, the amount so deducted or, as, the case may be, the amount so deducted in excess, shall be refunded to him in the prescribed manner.
(4) Where the recovery of Zakat deductible at source, in respect of any of the assets mentioned in the First Schedule, falls into arrears, the Administrator-General may forward to the Collector of the district concerned a duly signed certificate specifying the amount of arrears due and the particulars of the person from whom due, and the Collector shall, on receipt of such certificate, proceed to recover the amount so specified, as if it were an arrear of land revenue.
(5) A Sahib-e-nisab may pay either to a Zakat fund or directly to those. eligible under Shariah to receive Zakat so much of the Zakat due under Shariah as is not deductible at source under this Ordinance, for example. that due in respect of assets mentioned in the second Schedule.
(6) Any amount deducted at source as Zakat by the Deducting Agency from any person shall be treated as payment of Zakat on behalf of such person."
Thus, it is clear that the Zakat is payable by a person who is Sahib-e- Nisab or in other words who owns or possesses the assets on the valuation date. It further appears that Zakat is charged once in a Zakat year and it is subsequently credited to Zakat Fund wherefrom it is disbursed according to tenets and injunctions of Islam. Mr. Jafri, however, has relied upon section 25 of the Zakat Ordinance and it reads:
?
"25. Certain tax concession.---(1) Notwithstanding anything contained in any other law for the time being in force:
?(a) in determining the tax liability of an assessee for an assessment year,--
(i) under the Income Tax Ordinance, 1979 (XXXI of 1979), his taxable income shall be reduced by the amount paid by him to a Zakat Fund, during the previous year relevant to that assessment year; and
(ii) under the Wealth-tax Act, 1963 (XV of 1963), his assets in respect of which Zakat or contribution in lieu thereof, has been deducted at source during the year relevant to that assessment year shall be excluded from his taxable wealth; and
(b) land revenue and development cess shall not be levied on and on the produce of which Ushr or contribution in lieu thereof, has been charged on compulsory basis.
(2) Nothing in the preceding subsection shall be deemed to affect the liability to pay income tax, wealth tax, land revenue or development cess in respect of any period preceding the enforcement of the relevant provisions of this Ordinance:
From perusal of clause (a) of subsection (1) of this section it appears, that The legislature has allowed special concession regarding deduction of Zakat from taxable income while determining the tax liability of an assessee. The expression "notwithstanding anything contained in any other law for the time being in force" clearly indicates that this is a special tax concession. With this background let us now revert to the merits of this appeal on this issue.
5. As discussed above it appears that both the officers below have disallowed Zakat on the principle that an expenditure incurred for earning exempt income cannot be allowed as a deduction. However, with due respect to them we are not inclined to accept their conclusion. Khas Deposit certificates are an "asset" which is subjected to Zakat under various provisions of Zakat Ordinance. Thus, the Zakat is a charge on the "asset" and not an expenditure for earning interest. In other words an assessee pays Zakat because he is under religious as well as legal obligation to pay it simply because he is in possession thereof on the valuation date. It is not an expenditure for earning the "asset" namely the Khas Deposit Certificates. It is important to note that the Income Tax Ordinance has not exempted the Khas Deposit Certificates but the income earned therefrom. On the other hand the Zakat Ordinance has charged Zakat on the Khas Deposit Certificates themselves whereas it may be deducted from its usufruct, which is under the provision of Income Tax Ordinance exempt from income tax. Moreover, as it clear from perusal of section 25 that the Zakat ordinance has laid down special provisions and they have to prevail upon all the provisions of the Income Tax Ordinance and the principles of Tax Laws including the alleged principle relied upon by both the officers below.
6: The reliance of Mr. Z.H. Jafri on the prescribed form of Return of total income to be determined under Income Tax Ordinance also appears to be very much well-placed. It is clear from its perusal that all sorts of incomes are first to be grouped together and then from the total income earned from all sources the amount of Zakat and wealth tax paid is to be deducted. It is important to note that its Part II provides column for Exempt income which is not included in total income. But there is nothing to show that Zakat deducted from exempt income shall not be deductible from total income worked out in Part I. Thus, we find force in submission of Mr. Z.H. Jafri and allowing the appeal on this point direct the assessing officer to allow deduction of Rs.1,71,710.
7. The next point argued by Mr. Z.H. Jafri is regarding disallowance of initial depreciation on fire-fighting equipment and addition of pipes.
8. Now as far as the initial depreciation on fire-fighting equipment is concerned Mr. Jafri quite rightly conceded that the appellant was not entitled to it because the claim consisted not of an addition of fire-fighting equipment but it pertains to the cost paid for filling in the gas in the shells of fire-fighting equipment. The appeal on this point, therefore, stands dismissed.
9 Turning to other leg of his submissions Mr. Jafri vehemently argued that steel pipes were added to the storage tanks so as to expedite the transfer of liquid from ships to them. According to learned counsel the pipes were essential part of the plant and both the officers below fell in error in not allowing initial depreciation thereon though they have allowed regular depreciation. In order to fortify his submission Mr. Jafri has also relied upon a decision of this Tribunal recorded in ITA Nos. 1481 to 1482/KB of 1980-81, decided on 23-4-1984 wherein true import and meaning of the word `plant' has been explained. Mr. A.D. Bhatti the learned D.R. however has supported both the officers below,????
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10. We have heard the learned counsel fore the appellant as well as learned D.R. From persual of the record it appears that the receipts of appellant shot up from Rs.18,50,000 to Rs.46,09,800 in the assessment year 1988-89. Thus the contention of Mr. Jafri that pipes were added to expedite the transfer of liquid from the ship to the storage tank seems to be correct. If the addition of pipes is looked into in this context the contention of Mr. Jafri appears to be very much fortified. Moreover, from persual of our decision we find that this Tribunal has given wider meaning to word `plant' by putting reliance on a decision of House of Lords. The observation is as under:--
"We have carefully gone through the order of ITO as well as the learned C.I.T.(A) and we feel that the submission of Mr. Jafri has merit. The House of Lords in case of Hinton v. Haden & Ireland Ltd. 38 TU 39 has considered the meaning and import of the word `plant'. According to their Lordships word `plant' in its ordinary sense includes whatever apparatus is used by a businessman for carrying on business provided it is not his stock in trade. The above view has also been reiterated by Indian Supreme Court in C.I.T. v. Taj Mahal Hotel (82 ITR 44). We are in respectful agreement with both the authorities."
It is important to keep in mind that in that case also gas containers were added for drainage purposes and initial depreciation was claimed thereon which was allowed by this Tribunal with the above-quoted observation: The appeal is, therefore, allowed on this point also and the Income Tax Officer is directed to allow initial depreciation on cost of addition of steel pipes.
11. Mr. Z.H. Jafri has also disputed some addbacks made out of entertainment, office expenses, office vehicle hire, office telephone and other charges. It appears that the Income Tax Officer disallowed Rs.4,767, Rs.2,850, Rs.3,200, Rs.11,327 and Rs.7,327 out of claim of Rs.19,067, Rs.14,251, Rs.16,000, Rs.45,306 and Rs.37,702 relating to entertainment, office expenses, office vehicle office telephone and compressor hire expenses respectively, and on appeal they have been confirmed. It appears that the addbacks have been made for lack of verification.? However, from the letter of Mr. Jaffri dated, 8-8-1989 it is clear that the appellant had produced all the relevant vouchers, before the Income Tax Officer. Hence the addbacks do not appear to be justifiable and are hereby ordered to be deleted.
12. Now as far as the departmental appeal is concerned Mr. Bhatti the learned D.R. submits that the learned C.I.T.(A) was not justified in deleting the addback of Rs.50,000 made out of Rs.1,00,000 claimed as oil lubricant and repair and maintenance expenses as the same were not claimed in earlier assessment year. Mr. Jafri the learned counsel on the other hand has submitted that in his aforesaid letter the explanation was offered to the Income-tax Officer. He further submits that the tremendous rise in the receipts was also indicating some additional expenditure. From persual of the impugned order it appears that the learned C.I.T.(A) has taken into consideration all these facts as such the deletion as ordered by him appears to be quite justifiable.
13. Since no other point has been pressed both the appeals filed by the assessee as well as by the department stand disposed of accordingly.
M.B.A./1187/T ?????????????????????????????????????????????????????????? Order accordingly.