(a) Income Tax Act (XI of 1922)--

----S. 10(2)(iii) & (xvi)---Allowable deduction---Amount in question was never intended or utilized for the purposes of carrying on the business, for the amount appeared in the balance sheet as a fund to be converted into the equity of the Federal Government---Assessee's claim thus could not fall for deduction under S.10(2)(iii) nor could it be allowed under S.10(2)(xvi) of the Act.

ITAs. Nos.104 and 105 of 1980-81 fol.

(b) Income-tax--

----Depreciation---Initial depreciation---Where the Assessing Officer had disallowed the initial depreciation, Tribunal set aside the assessment on the issue of initial depreciation and remitted back the case to the Assessing Officer to ascertain the claim and to allow same if admissible under the law.

ITAs. Nos. 104 and 105 of 1980-81 fol.

(c) Income Tax Ordinance (XXXI of 1979)--

----Ss. 30 & 31---Dividend income falls under S.30 and while computing income under this head, it is mandatory for the Assessing Officer to make "allowances and deductions" as prescribed by S.31 of the Ordinance.

(d) Income Tax Ordinance (XXXI of 1979)--

----S. 31(1)(b)---Words "wholly and exclusively" used in 31(1)(b) imply that only such expenditure "shall" be allowed as are clearly relatable to the income from dividend such as interest on capital borrowed for investment in shares etc. and excludes the overall aggregated or consolidated amount of expenditure which may not have been specifically incurred "wholly or exclusively' for the earning of dividend income---Interpretation of S.31(1)(b) thus rules out "allowances or deductions" in those expenses which are not susceptible to co relation and can only be determined (if at all) through a painstaking process of allocation (or bifurcation) for particularisation as attributable to the earning of

dividend income.

The significant words in S.31(1)(b) are "wholly and exclusively" thereby implying that only such expenditure `shall' be allowed as are clearly relatable to the income from Dividend such as: interest on capital borrowed for investment in shares etc. and excludes the overall aggregated or consolidated amount of expenditure which may not have been specifically incurred "wholly and exclusively" for the earning of Dividend income. There may be an assessee who alongwith other sources of income, receives dividend on shares but maintains combined set off accounts,, hence may not be able to particulars or to co-relate (or bifurcate) with any degree of meticulous accuracy the expenses pertaining to the earning of Dividend. For instance it may be quite an impossibility to fix the value for man-hours spent in relation to the maintenance of records submission of warrants for collecting dividend its credit in the books and deposit in the banks etc. etc. It appears that to avoid such minute (but fruitless) labour, the framers of law thought it fit in their wisdom to restrict the expenditure to the extent as it "wholly and exclusively" spent on the earning of such income. The interpretation of this particular provision of law, rules out `allowances or deductions' in respect of those expenses which are not susceptible to co-relation and can only be determined (if at all) through painstaking process of allocation (or bifurcation) for particularisation as attributable to the earning of Dividend income.

1984P T D341 and 1984 PTD 390 ref.

(e) Interpretation of statutes--

---- Fiscal statute---Nothing should be read in a taxing statute which is not evident from the plain language used by the legislature and no sophistry be employed to enlarge the scope beyond the one emerging from the unambiguous words of enactment.

(f) Income Tax Ordinance (XXXI of 1979)--

----S. 134---Appeal to Appellate Tribunal---New point---Pure legal issue was involved---Issue in question though had not be taken up before the First Appellate Court, Income Tax Appellate Tribunal, to do substantial justice, allowed the issue to be argued before it.

(g) Income-tax--

----Free reserve---Gratuity cannot be construed as a free reserve being an ascertained liability and consequently a proper charge on the profit and loss account on the basis of principles of commercial expediency.

1984 PTD 390 fol.

(h) Income Tax Ordinance (XXXI of 1979)--

----S. 23(1)(xii)---Expression "any expenditure laid out or expended on scientific research in Pakistan"---Connotation---Allowances and deduction in respect of any expenditure laid out, or expended are clearly restricted by S.23(1)(xii). thereby leaving no doubt- that any surplus or receipt over expenditure would be income.

(i) Income Tax. Ordinance (XXXI of 1979)--

----S. 23---Claim of deduction cannot be entertained in the income year wherein it has not been incurred and the liability has not yet crystallised---Such amount; however; can be claimed where it is quantified or incurred.

Zia H. Rizvi for Appellant.

Mian M. Masood, D.R. for Respondent.

Date of hearing: 25th September, 1991.

ORDER

These appeals have been filed at the instance of a; company who manages cement producting units of the country and enjoys income from; managing agency commission, office allowance and interest receipts. The history of assessment's (and appeals) is chequered inasmuch as assessments were first framed under section 23(3) of the repealed Act, later on, in some years additional assessment proceedings were initiated and in some appeals effects were given but caused fresh litigation. The appeals contain different issues in different appellate orders. The following are the impugned orders:---

AAC A-Range, consolidated order, dated 21-6-1980 for the assessment years 1976-77, 1977-78 and 1978-79.

: Commissioner (Appeals) Zone-1 order, dated 22-5-1982 for the assessment year1979-80.

:Commissioner (Appeals) Zone-1, Lahore order, dated 22-5-1982 for assessment year 1980-81.

:Commissioner (Appeals) Zone-1, consolidated order, dated 22-5-1982 for the assessment years 1976-77, 1977-78, 1978-79 and 1979-80.

:Commissioner (Appeals) Zone-1, consolidated order, dated 14-10-1985 for the assessment years 1981-82, 1982-83, 1983-84 and 1984-85.

:Commissioner (Appeals) Zone-1 consolidated order dated 21-5-1990 for the assessment years 1976-77 to 1984-85.

:Commissioner (Appeals) Zone-1, consolidated order, dated 7-6-1990 for the assessment years 1985-86,1987-88 and 1988-89.

:Commissioner (Appeals) Zone-1, Lahore consolidated order, dated 3-6-1991 for the assessment years 1986-87 to 1990-91.

:Commissioner (Appeals) Zone-1, Lahore order, dated 3-6-1991 in respect of the assessment year 1989-90.

The following issues came up for adjudication:

Dividend/Interest paid to Federal Government:

2. The learned counsel for the Appellant explained that interest expense was claimed as a deduction on account of payments to Federal Government at 6.5% of the amount representing the cost of shares transferred by the WPTDC. The assessing officer did not allow this deduction as, according to him the claim was not allowable. The first appellate authority agreed that the amounts representing cost of shares could not be considered as amount borrowed for utilization in the business. The learned counsel candidly conceded that this issue was subject-matter of- adjudication by this Tribunal and was decided on 15-4-1984 vide consolidated order on ITAs Nos. 104 and 105 of 1980-81 relating to the two immediately preceding years of 1974-75 and 1975-76. The Tribunal then held as under:---

"The facts mentioned hereinabove clearly show that the shares previously held by the WPIDC were transferred to the appellant corporation. Since the shares were not actually registered in the name of the Federal Government the value of the shares was shown as a fund which was to be converted into the equity of the Federal Government. Such funds, specifically earmarked for conversion into the equity could certainly not be considered as "capital borrowed" on which interest could be allowed under section 10(2)(iii) or 10(2) (xvi) of the repealed Income Tax Act In view of the facts mentioned above, we have no doubt in our mind that the appellant's claim could not fall for deduction under section 10(2) (iii) neither could it be allowed under section 10(2)(xvi) because this amount was never intended or utilised for the purposes of carrying on the business when the amount appeared in the balance sheet as a fund to be converted into the equity of the Federal Government. The orders of the departmental officer-are; therefore, confirmed on this issue."

3. We respectfully agree with the reasoning and the conclusion by the Members who pronounced the above verdict hence need not take long to DISMISS the appeal on this issue in all the three years under consideration.

NOTE.---The above adjudication relates to learned AAC A-Range, Lahore consolidated order, dated 21-6-1988 for assessment years 1976-77 to 1978-79.

Depreciation, Initial and Extra-Shift

4. The Appellants have contested against the assessing officer's action in not allowing Initial and Extra-Shift depreciation on various assets. The learned counsel submitted that these two issues also were the subject-matter of adjudication vide this Tribunal's order, dated 15-4-1984 on ITAs Nos. 104 and 105 of 1980-81 in the preceding two years. The Tribunal held the claim for extra-shift allowance as having no merit but as respects initial allowance the case was remitted back to the assessing officer to ascertain the claim and to allow it, if admissible under the law.

We fully subscribe the view expressed by our fore bearers, with the result that the claim for extra-shift allowance is DISMISSED but the assessment is set aside on the issue of initial depreciation.

NOTE,---The above adjudication relates to learned AAC A-Range, Lahore consolidated order, dated 21-6-1988 for assessment years 1976-77 to 1978-79.

Additional Tax and Penal Interest:

5. The learned counsel did not press these grounds of appeal, in all the years (=1976-77, 1977-78 and 1978-79). These are therefore, DISMISSED as withdrawn.

NOTE.---The above adjudication relates to learned AAC A-Range, Lahore consolidated order, dated 21-6-1988 for assessment years 1976-77 to 1978-79.

Interest on deposits in Cement Development Fund:

6. The learned counsel did not press the issue as respects assessment for the years 1980-81, 1981-82, 1983-84 and 1984-85. These are, therefore, DISMISSED as WITHDRAWN.

NOTE.---The above adjudication relates to CIT (Appeals) Zone-1, Lahore order, dated 22-5-1982 for the first year and consolidated order, dated 14-10-1985 for the other years.

Shortage Of Clinkers:

7. The learned counsel explained that the dispute related to a sum of yRs.1,061,776 in the assessment year 1980-81. He however, expressed the wish not to press the matter. It is, therefore, DISMISSED as WITHDRAWN.

NOTE.---The above adjudication relates to CIT (Appeals) consolidated order, dated 22-5-1982 inter alia for 1980w81.

Subsidy & Freight

8. The dispute related to a sum of Rs.70,701,204 in the assessment year 1980-81. The learned counsel expressed the wish not to press this claim and therefore, it is DISMISSED as WITHDRAWN.

NOTE: --The above adjudication relates to CIT (Appeals) consolidated order, dated 22-5-1982 inter alia for 1980-81.

Allocation of Administrative Expenses to Dividend Income.

9. The learned counsel explained that Dividend income is taxable at a reduced rate of 10% while tax on the other income of the Appellant is 50%. The assessing officer, therefore, thought it fit to allocate the overhead expenses for deduction against the above two blocks of income. He then apportioned 5% of the claimed expenses as attributable to the earning of Dividend income. The learned counsel argued that considerable part of the overhead administrative expenses was recovered by the Appellant from the various units which were controlled by it and was declared as receipt in the accounts. Therefore, no allocation out of administrative expenses could be made against Divided income. However, the assessing officer allocated the expenses, for in his view, these were common to all heads of income and a rational basis warranted their apportionment which he fixed at 5%. The counsel vehemently asserted , that no allocation could possibly be made. He, however, conceded that if an allocation was at all thought necessary, the percentage as fixed by the assessing officer was reasonable. The learned DR on his turn emphasised that the Income Tax Ordinance prescribes various heads of income in section 15. Income for each of these is to be worked out with reference to the section dealing with that head and the section prescribing deductions therefore. Therefore, for computing income from Dividend under section 30, the deductions under section 31 were to be set-off to work out income from this head for aggregation alongwith income computed under other heads.

After hearing the arguments from both the sides and examining the relevant provisions of law, we find that income from Dividend falls under section 30 of the Income Tax Ordinance. While computing income under this head, it is mandatory for the assessing officer to make "allowances and deductions" as prescribed by section 31 of the Ordinance. Clause (b) of subsection (1) of section 31 where under `administrative or financial expenses' are to fall, reads as under:--

Any expenditure laid out or expended wholly and exclusively for the purposes of earning such income "

(Here underlined for emphasis).

The significant words in this piece of legislation are "wholly and exclusively" thereby implying that only such expenditures `shall' be allowed as are clearly relatable to the income from Dividend such as interest on capital borrowed for investment in shares etc. and excludes the overall aggregated or consolidated amount of expenditure which may not have been specifically incurred "wholly and exclusively" for the earning of Dividend income. There may be an assessee who alongwith other sources of income, receives Dividend on shares but maintains combined set-off accounts, hence may not be able to" particulars or to co-relate (or bifurcate) with any degree of meticulous accuracy the expenses pertaining to the earning of Dividend. For instance it may be quite an impossibility to fix the value for man-hours spent in relation to the maintenance of records submission of warrants for collecting Dividend its credit in the books and deposit in the banks etc. etc. It appears that to avoid such minute (but fruitless) labour, the framers of law thought it fit in their wisdom to restrict the expenditure -to the extent as it "wholly and exclusively" spent on the earning of such income. We are, therefore, of the view that the interpretation of this particular provision of law, rules out `allowances or deduction' in respect of those expenses which are not susceptible to co-relation and can only be determined (if at all) through painstaking process of allocation (or bifurcation) for particularisation as attributable to the earning of Dividend income. The principles for interpretation of fiscal statutes are so well-settled that no authority need be cited to hold: nothing should be read in a taxing statute which is not evident from the plain language used by the legislature and that no sophistry be employed to enlarge the scope beyond the one emerging from the unambiguous words of the enactment. On this beneficial construction of law we do not subscribe to the view that expenditure which the present Appellant does not claim to have been incurred "wholly and exclusively" for the purpose of earning Dividend income should be thrust upon them simply because the income from Dividend has a different (or a lower) rate of tax. In forming this view we have immensely benefited from a ruling reported as 1988 I'TD 626 in re: PICIC where the learned Judges of the Karachi High Court had in mind their earlier decisions in 1984 PTD 341 and 1984 PTD 390 to rule: "no part of the total administrative and other expenses and interest should be allocated against Dividend income which was exempted from tax and other income which was so exempt". In the appeal before us the controversy is of lesser magnitude inasmuch as it does not entail total exemption but simply a lower rate of tax for the Dividend income. Respectfully following the decision (ibid), we vacate the treatment by the officers below with the result that the appeal on the issue succeeds.

NOTE.---The above adjudication relates to CIT (A) Zone-1 order, dated 22-5-1982 for assessment year 1980-81, consolidated order 14-10-1985 for assessment years 1981-82 to 1984-85, consolidated order, dated 7-6-1990 for assessment years 1987-88 and 1988-89, consolidated order dated 3-6-1991 for assessment years 1986-87 to 1990-91.

Deemed Interest:

10. The discussion with the two Representatives showed that in some years the Appellant was found to have made certain loans and advances to units under its control, such as the National Cement Industry Limited and Mustahkam Cement Limited. On these loans/advances, interest was not charged. The assessing officer believed that the provisions of deemed income, as contained in explanation-8 to subsection (1) of section 4 in respect of the years 1976-77 to 1978-79; were attracted (by mistake the two authorities below have mentioned it as subsection (7) of section 12 in respect of all the years, although it is only for 1979-80 and thereafter that this provision is applicable). He, therefore, worked out amounts at 2% above the bank rate, for inclusion in the total income in each year. On appeal, the learned Commissioner confirmed the same. Despite specific query by us, the learned counsel was unable to indicate the exact amount of the loans/advances, the dates on which these were made (and repaid), the rates at which interest (if any) was charged, the bank rate applicable to the relevant year and the shortfall which could be deemed as income. We, therefore, see no WAY but to MAINTAIN the treatment by the officers below, hence DISMISS the appeals on this issue.

NOTE.---The above adjudication relates to CIT (Appeals) Zone 1 consolidated order, dated 22-5-1982 for the assessment years 1976-77 to 1978 79 and another order, dated 22-5-1982 for 1979-80.

Allocation of Financial Charms to Dividend Income.

11. This issue had not been taken up before the first appellate authority in the years 1982-83, 1983-84 and 1984-85. However, as a purely legal issue is involved we allow it to be urged so that substantial justice is done. As about the years 1986-87,1987-88,1988-89, 1989-90 and 1990-91, the assessing officer gave a notice of his intention to allocate financial expenditure in proportion to the income from Dividend vis-a-vis income from other sources. In response, the Appellant contended that the investment in stock and shares was a result of substitution of share capital in various units entailing no financial disbursement for their acquisition. Therefore, it was not advisable to allocate and financial charges to the earning of Dividend income when the overhead expenses were from a common pool not strictly apportion able to the two categories of income. The assessing officer, however, made the allocation at 5%

a treatment similar to the one for `administrative expenses'. For the same reasons as discussed while adjudication on the "allocation of administrative expenditure to Dividend income" (= paragraph 9 hereinabove), we UNDO the treatment by the officers below thus declaring the appeal SUCCESSFUL on this issue also.

NOTE.-- The above adjudication relates to CIT (A)-I, consolidated order dated 14-10-1985 (assessment years 1981 to 1984-85) and consolidated orders, dated 7-6-1990 (assessment years 1985-86, 1987-88 and 1988-89), dated 3-6-1991 (assessment years 1986-87 to 1990-91).

Gratuity

12. While the appellant claimed entire liability including the one created in the preceding years, the assessing officer restricted the claim for disbursements made during the years only. This the learned Commissioner maintained rejecting the plea that the claim represented as ascertained liability which was admissible on accrual basis and not when payment was actually made. We recall that this issue has been in controversy in a number of appeals which was set at rest by decision of the Karachi High Court in re: Pakistan Security Printing Corporation Ltd. (= 1985) 51-Tax-137 where it was held that gratuity cannot be construed as a free reserve being an ascertained liability and, consequently, a proper charge on the Profits and Loss Account on the basis of principles of commercial expediency. This decision by the High Court has since been followed by superior Courts in several subsequent decisions and, therefore, we need not to take lone to order that the amounts set apart for gratuity relating to an ascertained liability which got quantified in the income year was a proper charge on the profit and therefore, should be allowed as a deduction. The additions made in all the years are, therefore, KNOCKED OFF.

NOTE.-- The above adjudication relates to CIT (A) consolidated order dated 14-10-1985 inter alia for assessment years 1983-84 and 1984-85.

Validity of, assessments under section 65 read with section 62 of the Ordinance.

13. This issue pertained to the assessment years 1976-77 to 1984-85 but the learned counsel expressed the wish not to press it. It is, therefore, DISMISSED as WITHDRAWN.

NOTE.---The above adjudication relates to CIT (A) consolidated order, dated 21-5-1990 for the years 1976-77 to 1984-85.

Additional Tax

14. The learned counsel submitted that additional tax under section 87 of the Income Tax Ordinance was charged in the assessment year 1984-85. The first appellate authority abstained from expressing any view because no appeal lies against an order under section 87 because it does not find mention in section 129 of the Income Tax Ordinance. He, however, made the following observations:

"Without prejudice to the foregoing I find the appeal to be devoid of merits as tax credit having been already consumed towards the tax liability in the assessment year 1984-85. The payment of advance tax under section 53 relevant to the charge year 1985-86 should have been separately made in order to discharge its legal obligations as laid down in the aforesaid provisions. Since the assessee clearly defaulted the action of the ITO is more than justified and legally tenable."

The learned counsel submitted that the appeal having already been dismissed in limine for the reason that it was not appealable under section 129, the above observation by the learned Commissioner caused them prejudice as respects action for rectification under section 156 of the Income Tax Ordinance and, therefore, should be expunged moreso when it is possible that due to appeal effects the position of payments and tax credit (etc.) may change warranting rectification and at later time the above observation may stand in their way. We see VALIDITY in this argument by the learned counsel and are of the View that the observations by the learned Commissioner were uncalled for when he had already adjudicated the matter and dismissed the appeal in limine on the issue.

These are, therefore, EXPUNGED.

NOTE.---The above adjudication relates to CIT (A) consolidated order, dated 7-6-1990 inter alia for assessment year 1985-86.

Surplus of Cement Research and Development Institute

15. The learned counsel explained that Cement Research and Development Institute was established to carry out scientific research in various aspects of cement manufacture and its utilization. The subscriptions to this fund are made by cement producing units and are received by the corporation but these are earmarked for the use by the Institute for its professed purposes. Therefore, the surplus is not the income or property of the appellant as its uses are specified. The learned authorities below, however, emphasised that the Institute had no individual identity, that the books of accounts were jointly maintained, and that the management of the funds was completely in the hands of the appellant. The authorities also discarded the view that the surplus available in the account was held under a trust to be spent on specified purposes. They finally held that surplus of receipts over expenditure constituted income of the appellant and as such liable to tax.

16. We find validity in the reasons recorded by the learned Commissioner moreso when there is no stipulation as to how the surplus is to be utilized. Moreover, it is admitted that the expenditure has already been incurred and the excess is lying in the accounts as a suspense. We may here refer to clause (xii) of subsection (1) of section 23 under which "any expenditure laid out or expended on scientific research in Pakistan..:" is allowed as a deduction in computing income under the head Income from Business or Profession. This clause clearly restricts allowances and deduction in respect of "any expenditure laid out or expended" thereby leaving no doubt that any surplus of receipt over expenditure would be income. We, therefore, UPHOLD the treatment by the officers below with the result that the appeal on this issue FAILS.

NOTE.---The above adjudication relates to-CIT (A) Zone-1 consolidated order, dated 7-6-1990 inter alia for 1987-.88 and 1988-89 and consolidated order, dated 3-6-1991 for assessment years 1986-87 to 1990-91.

Continent Liability

17. The learned counsel explained that a provision was made to meet the exchange fluctuation of the Pakistan currency vis-a-vis the foreign currencies. The assessing officer admitted the claim in the subsequent year of 1990-91 but in 1989-90 disallowed at Rs.117,414,000 holding it as unascertained contingent liability.

We feel inclined to agree with learned DR that the claim cannot be entertained in the income year wherein it has not been incurred and the liability has not yet crystallized. It may, however, be claimed where it is quantified or incurred. On this view, the appeal FAILS.

NOTE.--- The above adjudication relates to CIT (A) consolidated order, dated 3-6-1991 inter alia for 1988-89 and 1990-91.

Rectification under section 156

18. The learned counsel submitted that an order rectifying the assessment for the year 1990-91 was passed by the assessing officer against which appeal before the learned Commissioner failed. However, the learned counsel expressed the wish not to press this appeal. It is, therefore, DISMISSED as WITHDRAWN.

NOTE.--- The above adjudication relates to CIT (A) Zone-1 consolidated order, dated 3-6-1991 inter alia for 1990-91.

CONCLUSION

For the reasons recorded herd in above, all the issues in nine impugned orders in respect of fifteen assessment years stand adjudicated.

M.BA./1603/T Order accordingly.