1996 P T D (Trib.) 1140
[Income-tax Appellate Tribunal Pakistan]
Before Hamidullah Malik, Accountant Member and Syed Gulzar Hussain Shah Q. Masoomi, Judicial Member
I.T.A. No. 1006/HQ of 1988-89, decided on 21/11/1995.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23(1)(xviii) & 59(3)---Self-Assessment Scheme, 1987-1988, para 4(b)(iv)---Self-Assessment Scheme---Deduction---Expenses involving personal or non-business elements are legally inadmissible and can be legitimately disallowed even under the Self-Assessment Scheme.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.23(2)---Deduction---Where any machinery, plant etc. are not wholly used for the purpose of the business or profession, any allowance or deduction admissible under S.73(2) of the Income Tax Ordinance, 1979 shall be restricted to the fair proportional part of the amount which would be allowable if such machinery or plant were wholly so used.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.23(2)---Deduction---Car expenses---Reasonable proportion of car expenses which is not used wholly for the purpose of business can be disallowed.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.23(2)----Deduction---Assessee a limited company---Telephone expenses, car running and maintenance expenses ---Allow ability---Extent---Personal element, held, could be involved in the expenses of a limited company run by its Directors and employees who do make use of facilities of phone and car in their personal capacity which tantamiounted to non-business use of such facilities-- Such non-business use of facilities by employees and Directors of a company was as much illegal as the personal use by a sole proprietor of a business or by a partner of firm and thus not allowable.
(e) Income Tax Ordinance (XXXI of 1979)---
----Ss.23(2) & 59---Self-Assessment Scheme---Deduction---Travelling and entertainment expenses---Admissibility---Personal element in such expenses is not ascertainable without examination of books which is not permissible under Self-Assessment Scheme---No acceptable pattern of addback has been evolved in respect of such expenses---Income Tax Appellate Tribunal declined interference in decision of Commissioner of Income-tax.
A. Aziz Memon, D.R. for Appellant.
Suleman Pasha for Respondent.
Date of hearing: 21st November, 1995.
ORDER
The appeal at the instance of the department is directed against the order, dated 10-5-1988 passed by C.I.T.(A), Zone-2, Karachi.
2. Relevant facts of the case are that the assessee, a Private Ltd. Company, filed return declaring income of Rs.3,61,017 under section 59(1) of the Ordinance. The I.T.O. while accepting the return under Self-Assessment Scheme, made following add backs out of P&L A/c expenses on account of the personal element involved in these expenses:---
| HEAD OF EXPENSES | CLAIM (Rs) | ADD BACK (Rs) |
| Telephone | 42,888 | 10,000 |
| Travelling & Conveyance | 3,63,363 | 72,000 |
| Vehicle running & Maint. | 80,083 | 20,000 |
| Entertainment | 29,187 | 7,000 |
3. In appeal, the learned C.I.T.(A) deleted all the abovementioned disallowances on the ground that the same were not authorised by the relevant provisions of the Self Assessment Scheme.
4. The department has come up in the instant appeal against this finding of C.I.T.(A). The learned D.R. submitted that expenses involving personal element were legally inadmissible. In this connection, he relied on the decision of the Tribunal in a case reported as PTD 1987 (Trib.) 526 in which the Tribunal in para.'4` of its decision held as under:
"We are clearly of the view that under the provisions of section 59(3), the Income Tax Officer had the powers to make necessary adjustments in some expenses like entertainment expenses, telephone expenses and car expenses as these admittedly involve the element of personal use which are legally inadmissible ... . "
5. The D.R. also placed reliance on the decision of this Tribunal in I.T.A. No. 2311/KB of 1987-88 (Assessment year 1986-87), dated 16-5-1995 m the case of M/s. Imran Salman (Pvt.) Ltd.. Karachi, in which the add backs in telephone and car expenses were upheld even under section 59(1) of the Ordinance. He, therefore, pleaded for the restoration of the add backs deleted by the learned C.I.T.(A). The learned A.R., on the other hand, contended that legally inadmissible expenses were only those which were mentioned in section 24 of the Ordinance. That personal element in the abovementioned expenses, even if it was there, could not be ascertained with certainty without examining the books of A/c which was not permitted under the Self assessment Scheme. In this connection, the A.R. placed reliance on another decision of this Tribunal in I.T.A. No. 657/HQ of 1987-88, dated 25-4-1995. He added that there could be no personal element in the expenses of a Limited Company.
6. We have heard both the parties. The provisions of section 59(3) and Para. 4(b)(iv) of the Self-Assessment Scheme for assessment year 1987-88 authorise the I.T.O. to make add backs of those expenses which are legally inadmissible. The expenses under the above heads are deductible from the income under the provisions of section 23(1)(xviii) of the Income Tax Ordinance which is reproduced below for ready reference:---
"(xviii) any expenditure (not being in the nature of capital expenditure or personal expense of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession. "
7. The perusal of above provisions clearly shows that expenses involving personal or non-business element are legally inadmissible and hence can be legitimately disallowed by the Assessing Officer even under the Self-Assessment Scheme. Section 23(2) of the Ordinance also provides that where any machinery, plant etc. are not wholly used for the purpose of the business or professions, any allowance or deduction admissible under this section shall be restricted to the fair proportional part of the amount which would be allowable if such machinery or plant were wholly so used. This provision of the law also authorises the assessing officer to disallow a reasonable proportion of car expenses, which is not used wholly for the purpose of the business. It is thus evident that the law definitely permits the Assessing Officer to disallow a part of the, expenses which involve personal or non-business element. Usually expenses involving non -business or personal element are claimed under the heads Telephone expenses, Car running and maintenance expenses. We do not subscribe to the view of learned A.R. that no personal element could be involved in the expenses of a Ltd. Co. A Ltd. Co. is run by its directors and employees who do make use of facilities of phone and car in their personal capacity, which is tantamount to non -business use of such facilities. Non-business use by the employees of a company is as much illegal as the personal used by sole-proprietor of a business or by a partner of a firm.
8. As regards the quantum of proportion of expenses which can be attributed to personal or non-business use of the facility, almost a consensus has been arrived at by the appellate authorities in terms of percentages. Moreover, sometimes the history of a case regarding these expenses also helps in arriving at a reasonable percentage. In a large number of cases, Telephone expenses are usually disallowed to the extent of 15 % and Car expenses @ 20 % of the respective claims without any serious protest by the tax-payers.
9. In the present case, the add backs out of Travelling and Entertainment expenses are not justified because the personal element in. such expenses is not ascertainable without examination of books which is not permissible under the Self-Assessment Scheme. Moreover, no acceptable pattern of add backs has been evolved so far in respect of the expenses under these head. The C.I.T's. decision on this point is, therefore, maintained. As regards the Telephone and Vehicle running and maintenance expenses, the add backs will be restricted to 15 % and 20% of the respective claims.
10. As a result, the department's appeal is allowed partially.
M.B.A./215/Trib. Order accordingly.