I.TA. NO.58/HQ OF 1987-88, DECIDED ON 15TH OCTOBER, 1994. VS I.TA. NO.58/HQ OF 1987-88, DECIDED ON 15TH OCTOBER, 1994.
1995 P T D (Trib.) 421
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and Muhammad Mahboob Alam, Accountant Member
I.TA. No.58/HQ of 1987-88, decided on 15/10/1994.
(a) Income Tax Ordinance (XXXI of 1979)--
----S. 23(xviii)---Advertisement expenses ---Admissibility---Assessee, a manufacturer and seller of pharmaceutical products---Advertisement expenses in excess of the limit prescribed in R.33, Drugs (Licensing, Registration and Advertising) Rules, 1976 is admissible expense---Income Tax Department cannot restrict advertising expenses of 5% of the sales of the pharmaceuticals.
1994 PTD 1271 and PLD 1981 SC 293 fol.
(b) Income Tax Ordinance (XXXI of 1979)--
----S. 2(24) read with Second Sched., Cl.(65)---"Income"---Financial assistance received by assessee from foreign company does not fall within the definition or description of term "Income"---Even if such receipt is assumed to be income, such income would be casual and non-recurring in nature, and therefore, is not liable to be taxed.
1991 PTD 999 fol.
PIA v. CIT, Karachi (1975) 32 Tax 225 ref.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 2(44) & 11---Workers' Welfare Fund Ordinance, (XXXVI of 1971), S.4(2)---Worker's Welfare Fund ---Chargeability---Brought forward business loss---Total income---Such fund has to be charged on the total income assessed for any accounting year is determined prior to the adjustment of the brought forward business loss.
Iqbal Naeem Pasha for Appellant.
M. Yousuf Butt, D.R. for Respondent.
Date of hearing: 12th October, 1994.
JUDGMENT
MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN).----The above appeals are directed against various orders of the learned C.I.T. (A). The appellant is a private limited company earning income from manufacture and sale of pharmaceutical products. The appellant has raised following grounds in the above appeals:
1980-81
Under section62/132
"1. The learned C.I.T.(A) erred in maintaining the order of the I.T.O. restricting advertising expenses to five per cent. of sales thus disallowing Rs.814,808.
1984-85
Under section 62
1. The learned C.I.T.(A) has erred in maintaining the order of the I.T.O. levying tax on assistance received from group company amounting to Rs.3,571,403 which is exempt from tax under clause 65 of the Second Schedule to the Income Tax Ordinance, 1979. The cases relied upon have not been discussed by the C.I.T.(A) in the order.
1984-85
Under section 62/132
1. The learned C.I.T.(A) has erred in holding that Workers' Welfare Fund is leviable before adjustment of brought forward business losses.
Heard Mr. I.N. Pasha, learned counsel for the appellant and Mr. Yousuf Butt, learned representative for the department. We will decide appeal for each assessment year separately.
ASSESSMENT YEAR 1980-81
The sole objection raised in the assessment year 1980-81 is to the restricting of advertising expenses to 5% of sales. Briefly stated the relevant facts are that the assessing officer restricted the claim on account of advertisement expenses to 5% of the turnover by recourse to the provisions contained in Rule 33 of the Drug Rules and by placing reliance on a judgment of this Tribunal in I.T.Os. Nos.129 7 to 1300/KB, dated 26-6-1986. The learned CIT(A) confirmed the treatment. Mr. I.N.Pasha has submitted that the law has not been correctly appreciated in the order dated 26-6-1986 on which the two officers below have placed reliance. He has submitted that the Drugs (Licensing, Registration and Advertising) Rules, 1976 have been framed in exercise of the powers conferred under the Drugs Act, 1976 which was enacted in order to regulate the import, export, manufacture, storage, distribution and sale of drugs. Thus, all the provisions contained in the Drugs Act and the Rules framed thereunder are confined to the purposes for which the Drugs Act was enacted and the Rules thereunder were framed. They are regulatory in nature and by no stretch of imagination the provisions contained in the Drugs Act or the Rules framed thereunder can be made applicable to the assessment proceedings under the Income Tax Ordinance, 1979. He has submitted that another Division Bench of this Tribunal subsequently observed that the views expressed in the order dated 26-6-1986 in I.T.As. Nos.1297/KB to 1300/KB of 1982-83 require reconsideration as the ratio of the judgment of Hon'ble Supreme Court of Pakistan in the case of Alpha Insurance Company reported as PLD 1981 SC 293 has not been considered properly. Mr. Pasha has taken us through the earlier findings of this Tribunal in the order dated 26-6-1986 wherein it has been held that the advertisement expenses in excess of 5% of the turnover cannot be allowed in view of Rule 33 of the Drugs (Licensing, Registering and Advertising) Rules, 1976. The reason assigned was that, "the Central Licensing Board was vested with the power of cancelling or suspending a licence if it found a licensee violating the provisions of the Ordinance of the Rules ... ... ...not only that it also provides for an opportunity of hearing before licence is cancelled or suspended and on top of it, it also grants right of appeal to the licensee. Thus, the case of Alpha Insurance Company does not come to the rescue of the respondent. On the other hand 1981 PTD (Trib.) 71 very much supports the assessing officer. This is a case of a Scheduled Bank which has to pay penal interest to State Bank of Pakistan under section 36(1) of the State Bank of Pakistan Act, 1956 because of infraction of law. In that case the point involved was as to whether the penal interest paid by the Scheduled Bank in view of infraction of law was an admissible expenditure. The then President and the present Chairman of the Tribunal speaking for the Bench answered the question against the Scheduled Bank. Respectfully following it we, therefore, vacate the order of the learned CIT (A) and restore that of the assessing officer".
4. Mr. Pasha has submitted that the above finding is mainly based on the earlier judgment of this Tribunal reported as 1981 PTD (Trib.) 71 which has been recently overruled by the Hon'ble Sindh High Court in the judgment reported as 1994 PTD 1271 in the case of Citi Bank v. C.I.T. The following question was referred to Hon'ble High Court in the cited case:
"Whether on the facts and circumstances of the case the Tribunal was justified in holding that the penal interest charged by the State Bank for bursting the credit ceiling under section 25 of the Banking Companies Ordinance, 1962 was not admissible as an expense by placing reliance on its own decision reported as (1981) 43 Tax 69 (Trib.) dealing with penalty for violating the provisions of legal requirement contained in subsections (4), (5) and (8) of section 36 of the State Bank of Pakistan Act, 1956."
5. In the above-cited case the facts were that the banking company did not comply with the provisions of section 25 of the Banking Companies Ordinance, 1962 and the State Bank of Pakistan levied penal interest and recovered the same from them. The Banking Company claimed the expenses on account of penal interest as deduction which was disallowed by the department for the reason that the penal interest was paid because of infraction of law and, therefore, it was not deductible expense. The treatment was confirmed by the Tribunal. The Hon'ble High Court after examining various provisions contained in the Banking Companies Ordinance and the State Bank of Pakistan Act, held that the penal interest could not be equated with penalty. The Hon'ble High Court further held that since it was not a penalty and the transactions made by the Bank were admittedly integrally connected with carrying on of its normal banking business entitling it to earn more profits and consequently pay and increased income-tax and, therefore, the amount paid as penal interest was admissible deduction. The question referred to the Hon'ble High Court was answered in negative. Mr.I.N. Pasha has vehemently argued that after the judgment of Hon'ble Sindh High Court in the case of Citi Bank cited above the earlier decision of this Tribunal in I.TAs. Nos. 1297/KB to 1300/KB of 1982-83 dated 26-6-1986 requires reconsideration, as the very basis of the order stands demolished. Mr. Pasha has contended that the effect of judgment by the Hon'ble Sindh High Court in the case of Citi Bank is that the view expressed by this Tribunal in the judgment reported as 1981 PTD (Trib.) 71 and in I.T.As. Nos.1297 to 1300/KB of 1982-83 dated 26-6-1986 do not hold the ground. Mr. Pasha has further submitted that the second effect of the judgment by Hon'ble Sindh High Court in the case of Citi Bank is that if any expenses are incurred in violation of any law other than the Income Tax Ordinance, 1979, the expense cannot be held to be inadmissible until and unless it falls within the category of penalty, fine or forfeiture. In support of his contention he has placed reliance on certain observations made by Hon'ble Sindh High Court in the case of M/s. General Tyre and Rubber v. C.I.T. 1986 PTD 52. In this case following question was referred to the Hon'ble High Court:
"Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the sum of Rs.1,16,400 representing the amount of the penalty imposed in contravention of the relevant laws of the country for importing goods without obtaining an import licence was not an allowable deduction under the provisions of Income-tax Act, 1922."
6. The Hon'ble High Court answered the above question in affirmative for the reason that the expense claimed was in the nature of penalty and while referring to the Judgment of Hon'ble Supreme Court of Pakistan in the case of Alpha Insurance Company reported as PLD 1981 SC 293, observed that, after all a line has to be drawn between a case where a trader has actually incurred expenses in connection with his business but in violation of some law and a case where penalty has been imposed on him due to transgression of some law.
7. Mr. I.N. Pasha has submitted that in fact, controversy if any expense incurred by an assessee during the course of business in violation or infraction of any law is an admissible expense or not has been laid to rest by the Hon'ble Supreme Court of Pakistan in the case of C.I.T. v. Alpha Insurance Co. PLD 1981 SC 293. In the cited case the Insurance Company incurred management expenses in the sum of Rs.3,66,354. According to ceiling prescribed by Rule 40 of Insurance Rules the management expenses could not have exceeded Rs.3,45,784. Thus, the insurance company incurred excess management expenses of Rs.20,570. The assessing officer disallowed the excess and added back to the total income of the company. The Appellate Assistant Commissioner deleted the addition by placing reliance on a judgment of this Tribunal reported as (1967) 15 Tax 1 (Trib.). An appeal preferred before the Tribunal was dismissed and the reference before Hon'ble High Court was also rejected. Leave to appeal was granted by the Hon'ble Supreme Court of Pakistan. In addition to various issues of law the Hon'ble Supreme Court of Pakistan considered the argument whether the excess in management expenses in contravention of law can qualify as an expense wholly and exclusively for the purpose of such business and whether it can be treated as admissible expense under section 10 of the Income-tax Act, 1922. The Hon'ble Supreme Court of Pakistan held as follows:
"The effort by the learned counsel for the appellant to equate the excess management expense with penalty, fine etc. for the purpose of their inadmissibility cannot succeed for various reasons. His argument on this point would have had greater force and relevance if the penalty imposed under section 102 of the Insurance Act for violating the provisions of section 40(c) were involved and were in issue in these appeals."
8. The Hon'ble Supreme Court further held as under:
"It follows, therefore, that penalty, fine and forfeiture have a different content altogether and are bound to receive a different treatment than expenses of business incurred either in contravention of law or in carrying out the business in contravention of law. The former is invariably disallowed, the latter when some factor other than or in addition to the taint of illegality is present, not otherwise. "
9. The Hon'ble Supreme Court of Pakistan ultimately concluded as follows:--
"The expenses of management incurred in excess of the limit prescribed under section 40(c) of the Insurance Act and Rule 40 of the Insurance Rules are not in the nature of penalty, fine or forfeiture for the purpose of their admissibility for deduction as business expenses under section 10 of the Income Tax Act."
10. Mr. Pasha has thus submitted that in the present case the appellant has incurred expenses on advertisement in excess of the limit provided in Rule 33 of the Drugs (Licensing, Registering and Advertising) Rules, 1976 but admittedly the expenses have been incurred wholly and exclusively for the purpose of business and by incurring such expenses the appellant has earned more profit. The income so earned has been offered to tax and, therefore, notwithstanding the incurring of expenses in excess of the limit provided in Rule 33 of the Drugs Rules the expenses are admissible. According to Mr. Pasha only those expenses are inadmissible which fall within the purview of fine, forfeiture or penalty or held to be inadmissible under any provision of the Income Tax Ordinance, 1979. On factual plane the expenses can be disallowed if they are not wholly and exclusively for the purposes of business or if they are not verifiable. He has submitted that the only reason for the disallowance is that the expenses have been incurred in excess of the limit prescribed in Rule 33 of the Drug Rules. 1976. Mr. Pasha has further submitted that the Hon'ble Supreme Court 'of Pakistan has observed in the case of Alpha Insurance Co. (supra) that in section 40(c) of the Insurance Act, 1938 there is a prohibition against exceeding the management expenses. The prohibition is not, however, absolute, irremediable or punitive in all cases. On the contrary it appears from the language of the proviso itself that it is a regulatory, supervisory and corrective power exercisable by the Controller of Insurance. Likewise, the very preamble of the Drugs Act, 1976 shows that it has been enacted to regulate the import, export, manufacture, storage, distribution and sale of drugs. The rules have been framed in order to carry out the purposes of this Act and thus the Drugs Act as well as the Drugs Rules are also regulatory, supervisory and corrective in nature empowering Central Licensing Board to cancel the licence to import, manufacture or sale drugs or suspend such licence for a specified period if any person is found to have contravened any of the provisions of the Drugs Act or the Rules in respect of any drug. Mr. Pasha has submitted that it is admitted position that no penalty has been levied by any competent authority and, therefore, expenditure in excess of limit prescribed in Rule 33 does not fall within the purview of penalty, fine or forfeiture and, therefore, it should be held to be an admissible expense. The learned D.R. has supported the disallowance.
11. We have carefully considered the contentions raised at Bar by the learned representatives for the parties. So far the facts of the case are concerned the learned D.R. has conceded that the disallowance has been made on account of incurring expenses in excess of limit prescribed in Rule 33 of the Drugs Rules, 1976 only. He has further conceded that no penalty or fine has been imposed on the appellant by any competent authority for the infraction of law. Thus, in view of this admitted facts we are persuaded to agree with the contentions raised by Mr. I.N. Pasha. We find that no penalty has been provided in the Drugs Act, 1976 or the Drugs Rules, 1976 for violation of Rule 33 and, therefore, we are of the opinion that the limit prescribed is directory in nature only. So far the punishment of cancellation or suspension of licence is concerned we find that Mr. Pasha has rightly argued that as a matter of fact the licence of the appellant has neither been cancelled nor suspended for exceeding the limit prescribed in Rule 33 of the Drugs Rules. So far the power of cancellation or suspension of license provided in section 41 is concerned Mr. Pasha has contended that it is not applicable to the expenditure only. Section 41 of the Drugs Act, 1976 reads as follows:
"Cancellation or suspension of licences: --Where any person has been found to have contravened any of the provisions of this Act, or the rules in respect of any drug and the contravention is of such a nature that the import, export, manufacture or sale of any drug by such person is, in the opinion of the Licensing Authority or the Central Licensing Board, likely to endanger public health, that authority may, after giving such person an opportunity of being heard, cancel the licence to import, export, manufacture or sell drugs issued to such person or suspend such licence for a specified period."
12. A perusal of the above section clearly shows that it speaks of contravention of the provisions of the Act or the Rules in respect of any drug and the contravention is of such nature that the import, export, manufacture or sale of any drug by any person is in the opinion of Licensing Authority or the Central Licensing Board likely to endanger public health. By any stretch of imagination it cannot be held that any expenditure in excess of limit provided in rule 33 on advertisement can endanger the public health. Thus, section 41 of the Drugs Act, 1976 shall be applicable to the contravention of any rules or the Act in respect of any drug in such a manner that it endangers public health and it will not apply to other contraventions of the Act or Rules. Rule 12 of the Drugs Rules, 1976 also deals with the cancellation or suspension of licences and reads as follows:--
"Cancellation or suspension of licences.--(1) If a licensee does not comply with any of the conditions of a licence or violates any of the provisions of the Ordinance or the rules, or fails to deposit the requisite amount of the Central Research Fund due from him, the Central Licensing Board may, by an order in writing stating the reasons thereof, cancel a licence or suspend it for such period as it thinks fit, either wholly or in respect of some of the drugs to which it relates.
(2) The Central Licensing Board shall, before cancelling or suspending a licence under sub-rule (1), provide an opportunity of being heard to the licensee.
(3) When a licence is cancelled or suspended an entry to that effect shall be recorded on the licence.
(4) A licensee whose licence has been cancelled or suspended may appeal to the Appellate Board within sixty days of the date of receipt of the decision of the Central Licensing Board by the licensee and until the Appellate Board has given its order, the licence shall remain cancelled or suspended, as the case may be."
13. A perusal of the above rules shows that it has provided for cancellation or suspension of licence if a licensee does not comply with any of the conditions of licence or violates any of the provisions of the Ordinance or rules. Though this rule has not specifically provided that it relates to the contravention in respect of any drug only but a careful consideration of the rule indicates the intention as it further provides that the Central Licensing Board may cancel a licence or suspend it for such period as it thinks fit, either wholly or in respect of some of the drugs to which it relates. In any case the discussion if the provision relating to cancellation and suspension of licence is applicable to the exceeding of limit prescribed in Rule 33 for advertisement, is concerned, it is more or less of an academic nature, because admittedly the competent authority has neither cancelled nor suspended the licence of the appellant. For the purpose of income-tax the material consideration if any expense claimed has been incurred wholly or exclusively for the purpose of business or not, whether the expenditure is reasonable and/or verifiable, whether there is any prohibition in the Income Tax Ordinance, 1979 on the allow ability of such expenditure and it goes without saying that a fine, forfeiture or penalty is not an admissible expenditure. Reverting to the facts of the present case we do not find that any of the conditions are satisfied. The plea of the Department that since the expenditure has been made in contravention of law, therefore, it is not admissible is not tenable in view of the judgment of the Hon'ble Sindh High Court reported as 1994 PTD 1271 and the judgment of Hon'ble Supreme Court of Pakistan reported as PLD 1981 SC 293.
14. For the foregoing reasons it is held that the advertisement expenses in excess of the limit prescribed in Rule 33 of the Drugs Rules, 1976 is admissible expense and the learned two officials below were not justified in restricting advertising expenses to 5% of the sales. The addition thus stands deleted.
15. The appeal for the assessment year 1980-81 is allowed as above.
ASSESSMENT YEAR 1984-85
16. In the assessment year 1984-85 the first objection is to the levy of tax receipts from a group company amounting to Rs.35,71,403, Mr. Pasha has submitted that the point in issue already stands decided in favour of the assessee by the Hon'ble Supreme Court of Pakistan vide judgment reported as 1991 PTD 999.
17. Briefly stated the relevant facts as contained in the assessment order are that the appellant received an amount of Rs.35,71,403 from its foreign principals. The amount so received was not offered to tax and exemption was claimed in respect thereof. The assessing officer refused the exemption by observing that there is no specific provision in the Second Schedule to the Income Tax Ordinance, 1979 regarding exemption of subsidy receipts from group companies, principals or any other source, as such the exemption cannot be allowed. The amount of subsidy was added to the total income of appellant. The learned C.I.T.(A) confirmed the treatment holding that the I.T.O. was justified in taxing this amount in view of decision in the case of P.I.A. v. C.I.T., Karachi (1975) 32 Tax 225. Mr. I.N. Pasha has contended that the facts in the case of P.IA. on which the learned C.I.T.(A) has placed reliance are distinguishable from the facts of the present case: In support of his contention he has taken us through the judgment of Hon'ble Supreme Court of Pakistan in the case of Smith Kline and French of Pakistan Ltd. (supra) in which the Hon'ble Supreme Court of Pakistan has examined the facts and circumstances in the case of P.IA. wherein the Hon'ble Supreme Court of Pakistan had held that the amount paid by the Central Government of the P.I.A. to make good the loss was in the nature of income receipts liable to tax under the Income-tax Act, 1922. While analysing the facts of the above case the Hon'ble Supreme Court has observed as under:--
"Now it will be seen from the above facts and findings that a nexus was found between the receipts and the trading of the Corporation while in the present appeals there was no nexus between the payment made by the foreign shareholders/company to the business done by the Pakistan companies."
18. Mr. Pasha has further submitted that the facts in the case of Smith Kline and French of Pakistan Ltd. (supra) were similar as in the present case. A perusal of the judgment of Hon'ble Supreme Court of Pakistan shows that the contention of Mr. Pasha is correct. In the case of Smith Kline and French of Pakistan Ltd. the Hon'ble Supreme Court of Pakistan has held that the financial assistance received from the foreign company does not fall within the definition or description of the term "income" as envisaged in the Income-tax Act, 1922. The Hon'ble Supreme Court further held that even if such receipts are assumed to the income they are casual and non-recurring in nature and, therefore, are not liable to be taxed. Respectfully following the judgment of Hon'ble Supreme Court of Pakistan the addition stands deleted.
19. The last objection relating to the assessment year 1984-85 raised in the appeal arising out of the order under section 62/132 is that the learned CIT(A) has erred in holding that workers' welfare fund is allowable before adjustment of brought forward business losses. A perusal of the assessment order shows that the assessing officer deducted workers' welfare fund before adjustment of brought forward losses. The appellant preferred appeal and the learned CTT (A)-held as follows:--
"After scrutiny of the records and discussion of the case and taking into consideration the provisions of law the action of the I.T.O. on issue of levy of worker's welfare fund is set aside. The I.T.O. is directed to verify the facts and in case any brought forward depreciation losses exist and the said losses are to be adjusted against the income so computed and after adjustment of the same workers if the losses as such are business losses and not losses due to unabsorbed depreciation then no such adjustment is to be made and the workers welfare fund is to be levied on the income as computed."
20. Mr. Pasha has submitted that the learned CIT (A) was not justified in holding that the workers' welfare fund is leviable before adjustment of brought forward business losses. He has submitted that under section 4(2) of the Workers' Welfare Fund Ordinance, 1971 the workers' welfare fund is to be paid on total income as is assessable under the Ordinance. He has submitted that the total income assessable means the total income taxable. The learned D.R. has supported the impugned finding of the learned CIT(A). A perusal of the assessment from I.T. 30 shows that in Part B, item (b) the heading is "total income/loss assessed". The item No. (c) is "total income/loss reassessed" and at Serial No.7 there is a column with the heading "total income" and thereafter column No.8 is "total income after adjustment of loss brought forward." Thus, according to this assessment form the total income for the year is assessed first and thereafter brought forward loss is adjusted. After doing so other deductions are made such as Zakat paid, wealth tax paid, others including workers' welfare fund, donations under section 47(3)(a) and thereafter the total taxable income is computed. Now if we read section 4 of the Workers' Welfare Fund Ordinance, 1971 we find that it provides that, "every industrial establishment, the total income of which in any year of account commencing on or after the date specified by the Federal Government in the official Gazette in this behalf is not less than one lakh of rupees shall pay to the fund in respect of that year a sum equal to 2% of so much of its total income as is assessable under the Ordinance". The provisions contained in section 4 of the Workers' Welfare Fund Ordinance are very clear to the effect that for the purpose of workers' welfare fund the total income of an industrial establishment in any year of account which is assessable under the Income Tax Ordinance is to be taken into consideration. It does not speak of total taxable income but it speaks of the total income assessable under the Ordinance. So far the adjustment of brought forward loss is concerned it is allowed after the total income for any accounting year is assessed and thereafter other deductions as enumerated above are allowed and ultimately the total taxable income is computed. We do not find force in the contention of Mr. Pasha that the workers' welfare fund is to be charged on the total income after adjustment of loss brought forward or on the total taxable income. According to the clear provisions of law it is to be charged on the total income assessed and as explained above the total income assessed for any accounting year is determined prior to the adjustment of the brought-forward business losses. Consequent to above findings we do not find any reason to interfere with the impugned finding of learned CIT(A) which is hereby maintained.
21. The appeals for the assessment year 1984-85 stands disposed of as above.
22. The appeals stand disposed of as above.
M.BA./679/TOrder accordingly.