I.T.A. NO. 320/KB OF 1991-92, DECIDED ON 24TH DECEMBER, 1992. VS I.T.A. NO. 320/KB OF 1991-92, DECIDED ON 24TH DECEMBER, 1992.
1996 P T D (Trib.) 197
[Income-tax Appellate Tribunal Pakistan]
Before Syed Kabirul Hassan, Judicial Member, Naseem Sabir Syed and S.M.
Sibtain, Accountant Members
I.T.A. No. 320/KB of 1991-92, decided on 24/12/1992.
Per Syed Kabirul Hasan, Judicial Member---
(a) Precedent---
---- Decisions of Income-tax Appellate Tribunal are binding on Income-tax Authorities unless they are varied or reversed by superior Courts.
Per Nasim Sabir Syed Accountant Member; S.M. Sibtain Accountant Member, agreeing---
(b) Income Tax Ordinance (XXXI of 1979)---
----Second Sched. cl. (199), Ss.14 & 35---Loss, carried forward ---Exemption-- When the income of a business unit is exempted under Second Sched. of Income Tax Ordinance, 1979 then the loss determined cannot be carried forward for adjustment in subsequent years when the income becomes taxable after the expiry of the time limit laid down in the exemption granted in the Second Sched.
The carrying forward of business losses relates only to such cases where the income is assessable under the Income Tax Ordinance and is not exempt under Second Schedule to it. This can be rationally understood by supplementing it with the argument that loss determined in the case of a taxable unit is negative income and it is to be set off against the income of the subsequent years if the income for the year against which it is to be adjusted is taxable under the Ordinance. The carrying forward loss of the preceding years to be adjusted in subsequent years when the income is exempted under the Second Schedule of the Ordinance is not called for in any way. The carry forward loss does not stand in vacuum. It involves the motion of set off. Its sole purpose is to set off the loss against the profits of a subsequent year. Set off implies that the tax is leviable and the assessee wants to adjust the loss against profits to reduce the tax demand. It follows that if such set off is not permissible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no-point in allowing the loss to- be carried forward. Even if the carried forward losses of an exempted case are carried forward in the years for which the income is still exempt the accumulated loss so arrived at will not be adjustable against the income of a year, which becomes taxable. One cannot blow hot and cold at the same time by saying that even when the income of a business concern is exempt under Second Schedule the loss "in the" exempt years can be carried forward which is nothing else but carrying forward of negative income. Reference can be made to section 22 of the Income Tax Ordinance, 1979 under which income from business or profession is determined and this determination includes a loss. The terms used in clause (a) of this section that is profits and gains of any business or profession carried on refers to the word "income" in the opening part of section 22. When the income of a business unit is exempt under Second Schedule to the Income Tax Ordinance then the loss determined cannot be carried forward for adjustment in subsequent years when the income becomes taxable after, the expiry of the time limit laid down in the exemption granted, in the Second Schedule.
(1989) PTD 1199 (Trio.) distinguished.
CIT v. Harprasad & Co. (P.) Ltd. (1975) 99 ITR 118 (SC) ref.
Per S.M. Sibtain, Accountant Member agreeing with Nasim Sabir Syed, Accountant Member---
(c) Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Cl. (119), Ss:14 & 35---Loss, carrying forward of-- Exemption---Industrial undertaking---Income of assessee from industrial undertaking specified in Second Sched., Cl. (119), Income Tax Ordinance, 1979, being exempted from tax under S.14(1)(a) of the Income Tax Ordinance, 1979 and excluded from the total income as defined in S.2(44) of the said Ordinance was not entitled to carry forward and set off of any loss of such income against any assessable income for such undertaking in any subsequent year under S.35 of the Income Tax Ordinance, 1979.
Income specified .in clause (119) of the Second Schedule of the Income Tax Ordinance, 1979 having no proviso to the contrary attached to it, is excluded from the computation of total income. Thus, any loss of such business income sustained in a 'year can neither be set off against assessee's income under any other head assessable for the assessment year nor it can be carried forward and set off against the profits and gains; if any, of such business assessable for any subsequent year.
Income from the industrial undertaking specified in clause (119) of the Second Schedule is exempted from tax under clause (a) of subsection (1) of section 14 and is excluded from the total income, ~ as defined under subsection (44) of section 2, vide proviso to subsection (1) of section 14 of the Income Tax Ordinance, 1979; hence not entitled to carry forward and set off any loss of such income against any assessable income from such undertaking in any subsequent year under section 35 of the Income Tax Ordinance, 1979.
M. Shakir, C.A. for Appellant.
Afzal Nau Bahar, D.R. for Respondent.
Date of hearing: 25th October, 1992.
ORDER
This appeal relating to assessment year 1990-91 is directed against the order of the learned CIT(A) Zone-VI, Karachi, dated 28-10-1991. The main grievance of the respondent is against the refusal of the I.T.O. to allow carry forward of the loss accrued during the year. '
2. The necessary facts are that during the assessment year the assessee declared loss and claimed exemption under clause (119) of the Second Schedule to the Income Tax Ordinance, 1979. The assessing officer disallowed the said claim by observing as under:
"Since the income of the assessee is exempt from tax, hence the determination of quantum of income/loss is not called for."
3. The above finding was confirmed by the learned CIT(A) by observing the following:---
"This is already a decided issue in terms of the learned Tribunal order in I.T.A. No. 1221/KB of 1982/KB of 1980-81, dated 10-9-1984 wherein it was held that determination of income or loss of an assessee enjoying income from an exempt source was extra jurisdictional. In this view of the matter since loss claimed has not been determined by I.T.O's. application. of mind to the facts of the case, the same cannot be carried forward within the meaning of section 35 of the Ordinance.
This matter also came up for discussion in the Indian Supreme Court who have observed as follows:---
-----------The concept of carry forward of loss does not stand in vacant. It involved the motion of set off. Its sole purpose to set off the loss against the profits of a subsequent year it presupposes the permissibility and possibility of the carried forward loss being observed or set off against the profit and gains of any of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profits to reduce the tax demand. It follows that if such set off is not permissible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing loss to be `carried forward'. Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source: Decision of the Delhi High Court reversed CIT- v. Harprasad & Co. (P.) Ltd. (1975) 99 ITR 118(SC) .
Consequently, since also the losses have not been determined, then cannot be carried forward for the claims suffer from the disability of being amorphous."
4. After hearing both the representatives, we are of the view that the learned CIT(A) has misdirected himself by placing reliance on a decision of this Tribunal in I:T.A. No. 1221/KB of 1982-83 as it did not consider the computation of loss accrued to a person claiming exemption under certain clauses of the Second Schedule to the Income Tax Ordinance; 1979. He has further misdirected, himself on relying on an Indian Supreme Court case when there was sufficient case-law of this Tribunal available on this point. We can refer to a Single Bench decision reported as (1989) PTD 1199 (Trib.)" which was confirmed by various Division Benches very recently being order, dated 10-11-1991 in I.TA. No. 1017/HQ of 1990-91 (Assessment year 1988-89) In our view, the decision of this Tribunal are binding on Income Tax Authorities unless they are varied or reversed by our superior Courts.
5. In view of above we vacate the order of the learned CIT(A) and direct the I.T.O. to allow carry forward of loss under section 35 of the Ordinance by following the above decisions.
6. The above appeal is disposed of in the manner indicated as above.
(Sd:)(Sd:)
(Nasim Sabir Syed)(Syed Kabirul Hasan)
Accountant Member Judicial Member
NASIM SABIR SYED, ACCOUNTANT MEMBER.---I have perused the order of my learned brother. I have certain reservations about the findings given by my learned brother that loss has to be carried forward in this case under section 35 of the Income Tax Ordinance. My point of view is based on the following reasons.
The term income has been defined under section 2(24) of the Income Tax Ordinance and accordingly to clause (b) of this subsection income including any loss of such income profits or gains. From this one can conclude that when determining income under Income Tax Ordinance any loss so determined can be said to be negative income.
The facts of the case are that the appellant enjoyed exempted income from Battery Manufacturing under clause (119) of the Second Schedule to the Ordinance. So, what is of crucial importance is that one has to bear in mind that income if any, determined in their case is exempt. Now coming to the point of carrying it forward as a business loss under section 35 of the Ordinance which reads that "where an assessee sustains a loss in any assessment year under the head `Income from business on profession' (not being a loss to which section 36 applies) and the loss cannot be wholly set off under section 34 so much of the loss as has not been set off, or the whole of the loss where the assessee has no income under any other head, shall be carried forward to the following assessment year and set off against the profits and gains, if any, of such business or profession assessable for that year if such business on profession continues to be carried on by the assessee for that assessment year; and if the loss cannot be wholly set off in this manner, the amount of the loss not set off shall be carried forward to the following assessment year, and so on, but no loss shall be carried forward to more than 6 assessment years immediately succeeding the assessment year for which the loss was first computed." From this it is absolutely clear that the carrying forward of business losses relates- only to such cases where the income is assessable under the Income Tax Ordinance and is not exempt under Second Schedule to it. This can be rationally understood by supplementing it with the argument that, loss determined in the case of a taxable unit is negative income and it is to be set off against the income of the subsequent years if the income for the year against which it is to be adjusted is taxable under the Ordinance. The carrying forward loss of the preceding years to be adjusted in subsequent years when the income is exempted under the Second Schedule of the Ordinance is not called for in any way. The learned Commissioner of Income Tax Appeal has rightly referred to the decision of the Indian Supreme Court wherein it has been held "the carry forward loss does not stand in vacuum. It involves the motion of set off. Its sole purpose is to set off the loss against the profile profits of a subsequent year ... ... ... Set off implies that the tax is exigible and the assessee wants to adjust the loss against profits to reduce the tax demand. It follows that if such set off is not permissible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be carried forward". The reference of my learned brother to a subsequent case decided by our Tribunal reported as "1989 PTD 179 (Trib.)" is not of any real consequence because even if the carried forward losses of an exempted case are carried forward in the years for which the income is still exempt the accumulated loss so arrived at will not be adjustable against the income of a year which becomes taxable. One cannot blow hot and cold at the same time by saying that even when the income of a business concern is exempt under Second Schedule the loss "in the" exempt years can be carried forward which is nothing else but carrying forward of negative income. I will like to further supplement this argument by reference to section 22 under which income from business or profession is determined and this determination includes a loss. The terms used in clause (a) of this section that is profits and gains of any business or profession carried on refers to the word "incomes" in the opening part of section 22. To sum up I am of the considered opinion that when the income of a business unit is exempt under Second Schedule to the Income Tax Ordinance then the loss determined cannot be carried forward for adjustment in subsequent years when the income becomes taxable after the expiry of the time limit laid down in the exemption granted in the Second Schedule. So, my point of view is that loss of Rs.1,33,76,292 including depreciation of Rs.82,66,607 cannot be carried forward for adjustment in the years under consideration.
(Sd.)
(Nasim Sabir Syed)
Accountant Member
In view of difference of opinion the following issue is referred to the learned Chairman for reference to other Member or Members for their opinion:
"Whether the assessee being an undertaking enjoying exemption under Income Tax Ordinance, 1979 would be entitled to set off of carried forward loss under section 35 of the Ordinance."
(Sd.)
(Syed Kabirul Hasan)
Judicial Member
S. M. SUBTAIN, ACCOUNTANT MEMBER: ---I have the benefit of going through the divergent findings of my learned brothers Mr. Syed Kabirul Hassan, the J.M. and Mr. Nasim Sabir Syed, the A.M., regarding the question of entitlement of the appellant, an industrial undertaking enjoying exemption under clause (119) of the Second Schedule to the Income Tax Ordinance, 1979 to carry forward the loss incurred during the period of exemption and to set it off against the income of the year or years subsequent to the exemption period.
I have also heard Mr. Muhammad Shakir, the learned A.R. of the appellant and Mr. Basharatullah, the learned D.R.
While the learned Judicial Member has held that the learned CIT(A) has misdirected himself by placing reliance firstly on the unreported decision of this Tribunal in I.T.A. No. 1221/KB of 1982-83 and secondly on the decision of the Supreme Court of India in CIT(Central) Delhi v. Harprasad & Co. D. Ltd. 99 ITR 118 overlooking the decision of the Single Bench of this Tribunal reported as (1989) PTD 1119, confirmed in their decisions by various Division Benches, latest being in I.TA. No. 1017/HQ of 1990-91 (Assessment year 198&89), dated 10-11-1991. He has accordingly directed the I.T.O. to allow carry forward of loss under section 35 of the Ordinance by following the above decisions.
The learned Accountant Member, on the other hand has held that according to the provisions of section 35 of the Ordinance carrying forward of business losses relates only to such cases where the income is assessable under the Income Tax Ordinance and is not exempt under the Second Schedule. He has upheld the reliance placed by the learned CIT(A) on the decision of the Supreme Court of India ibid; wherein his view is upheld. He has held that the Single Bench decision of Tribunal reported as (1989) PTD 179 (Trib.) is not of any real consequence because even if the carried forward losses of an exempted case are carried forward in the years for which the income is still exempt the accumulated loss so arrived at will, not be adjustable against the income of a year which income becomes taxable.
However, with due deference to both, none of my learned brothers has attempted to dilate upon the relevant legal provisions, their application to the relevant facts of appellant's case as well as the relevance of the decisions of the reported and unreported cases being relied upon, for and against the appellant.
I shall begin to dilate upon relevant provisions of law from the provisions of section 14 of the Income Tax Ordinance and the Second Schedule that deal with exemptions from Income Tax. Subsection (1) of section 14, its clauses (a) to (d) and the proviso as it stands amended upto 1988 read as under:---
"14. Exemptions.-(1) The income or classes of income or persons or classes of person's specified ' in the Second Schedule shall be---
(a) Exempt from tax under this Ordinance, subject to the conditions and to the extent specified therein; or
(b) liable to tax at such rates, which are less than the rates specified in the First Schedule, as are: specified therein; or
(c) Allowed a reduction in tax liability, subject to the conditions and to the extent specific therein; or
M
(d) Exempt from the operation of any provision of this Ordinance, subject to the conditions and to the extent specified therein. Provided that, where any income which is exempt from tax under any provision of the Second Schedule, such income, as may be specified in the said Schedule and subject to such conditions as may be speed therein, shall be included in the total income, so however, that the tax shall not be payable in respect of such income."
While the words "Notwithstanding anything contained in this Ordinance", at the beginning of the subsection (1) were deleted a proviso was inserted by the Finance Act, 1988.
Simultaneously the word "Exclusions" was substituted by the word "Exemptions" used in the Caption "Exemptions from total Income" of Part I of the Second Schedule in to Income Tax Ordinance and two promos were inserted in its clause (1) after the words Agricultural Incomes which read as under:----
"Provided that, in case an assessee has, in any income year, any income (other than the agricultural income) which is chargeable to tax (hereinafter called `chargeable income') the agricultural income shall be included in the total income, so however, that the tax payable on the chargeable income shall be an amount which bears the same proportion to the chargeable income as the tax on total income bears to the total income:
Provided further that nothing contained in the first proviso shall apply in the case of an individual, not being a director of a company, whose chargeable income does not consist of, or include, income chargeable under the head `income from business or profession'."
As evident, the aforementioned changes brought about by the Finance Act 1988 are in order to provide for inclusion of Agricultural Income in the total income of the assessees enjoying income from other sources as well, for tax rate purpose only, otherwise after the insertion of proviso in subsection (1) of section 14 income or classes of incomes specified in other clauses of the Second Schedule where no provisos like the provisos in clause (1) have been inserted remain excluded from inoperative in respect of incomes or classes of income specified under the Second Schedule unless specifically provided otherwise. Thus, have no hesitation in holding that income specified in clause (119) of the Second Schedule having no proviso to the contrary attached to it, is excluded from the computation of total income. Thus, any loss of such business income sustained in a year can neither be set off against assessee's income under any other head assessable for the assessment year nor it can be carried forward and set off against the profits and gains, if any, of such business assessable for any subsequent year.
On the basis of my understanding of the foregoing provisions of law and with due deference to the opinion of my learned brother Mr. Syed Kabirul Hassan as well as with utmost deference to the view held by my learned brother in the case reported as 1989 PTD (Trib.)1199. I am convinced that the arguments that prevailed over my learned brothers or by the arguments made on the same basis before me by Mr. Muhammad Shakir, the learned counsel of the appellant, do not take into consideration the specified provisions of law applicable to the issue involved in this appeal.
Accordingly, for the foregoing reasons, I find that the appellant's income from the industrial undertaking specified in clause (119) of the Second Schedule is exempted from tax under clause (a) of subsection (1) of section 14 and is excluded from the total income, as defined under subsection (44) of section 2, vide proviso to subsection (1) of section 14 of the Income Tax Ordinance, 1979; hence not entitled to carry forward and set off any loss of such income against any assessable income from such undertaking in any subsequent year under section 35 of the Income Tax Ordinance.
M.BA./139/T
Order accordingly.