1996 P T D (Trib.) 890
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and S.M. Sibtain, Accountant Member
I.T.A s. Nos. 2195/KB and 4083/KB of 1987-88, decided on 31/01/1996.
(a) Income Tax Ordinance (XXXI of 1979)
----S. 23(xviii)---Drugs (Licensing, Registration and Advertising) Rules, 1976, R.33---Deduction---Assessee, a pharmaceutical manufacturing company-- Expenditure on advertisement, samples, salesmen's salary and other allowance-- Admissibility---Such expenses in excess of the limit prescribed in R.33, Drugs (Licensing, Registration and Advertising) Rules, 1976 are admissible expenses---Income Tax Department cannot restrict advertising expenses to 5 % of the sale of the pharmaceuticals.
1995 PTD 577; Commissioner of Income Tax v. Alpha Insurance Co. Ltd. PLD 1981 SC 293; M/s. General Tyre & Rubber Co. v. Commissioner of Income Tax, Central Karachi 1986 PTD 52 and 1995 PTD (Trib:) 421 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.23---Deduction---Expenses on rent rate, legal and professional charges, repairs and maintenance and miscellaneous expenses ---Admissibility-- Disallowance of such expenses and rent rate on reasons recorded on stock phrases is not justified---Rent rates and legal expenses if found unproved or non incidental to business are required to be specified---If entire claim remains unsupported and unsubstantiated despite specific opportunity having been given to do so, the entire claim has to be disallowed---Disallowance of such expenses on ad hoc estimates are unsustainable---If the claim for repair and maintenance and miscellaneous expenses is reasonable and warranted for business, Assessing officer should allow the same even if it is not ,properly vouched or verifiable.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 2(11) (24) & 22---Income---Gift/subsidy received-by assessee, from its parent non-resident company---Nature---Such a receipt acquired the characteristics of 'income' envisaged by law when there is a nexus between the gift/subsidy received by the assessee from its parent company and trading of the assessee---Where such payments were not entirely without consideration and these were traceable to a source which a practical man may regard as real source of income and there was enough evidence-to conclude that such receipts were in the nature of periodical monetary return coming in with an expected regularity from a definite source, such receipts were in the nature. of 'income' and these were not of casual and non-recurring nature and thus were liable to tax.
1995 PTD 577; Commissioner of Income Tax v. Alpha Insurance Co. Ltd. PLD 1981 SC 293; M/s. General Tyre and Rubber Co. v. Commissioner of Income Tax, Central Karachi 1986 PTD 52 and 1995 PTD (Trib.) 421; I.T.A. No. 355/KB of- 1971-72 = 1985 PTD 297; I.T.A. No.2306/KB of 1972-73; V.S.S.V. Meenakashi Achi and another v. CIT, Madras 60 ITR 253 (S.C. India); Smart (H.M. Inspector of Taxes) v. Lineolnshire Sugar Co. Ltd. 20 TC 643 (HL); PIA v. CIT PLD 1975 Kar. 924; CIT v. Smith Kline & .French of Pakistan Limited and others 1991 PTD 999 = 1991 SCMR 2374; Civil Appeals Nos. 119-K of 1985 and 32-K and 33-K of 1988 ref.
PIAC v. CIT PLD 1975 Kar. 924 and H.H. Moharani Shri Vigaykuverba Sahab of Morvi and another v. Commissioner of Income Tax, Bombay City II (1963) 49 ITR 549 distinguished.
PIAC v. CIT PLD 1975 Kar. 924 rel.
Abdul Matin, C.A. for Appellant
M. Ishaque, D.R. for Respondent
Date of hearing: 13th September, 1995
ORDER
These two appeals are instituted at the instance of the assessee: While a common ground is taken in the two appeals against upholding the impugned assessments bringing to tax Rs.4,881,000 in 1983-84 and Rs.6,701,760 in 1986-87 received as subsidy from the parent company and claimed as exempt under clause (65) of the Second Schedule to the Income Tax Ordinance, following separate grounds are taken in the appeal for Assessment year 1986-87.
2. Assessment year 1986-87.
"The learned Commissioner of Income-'tax (Appeals) has erred in maintaining the disallowances out of Advertisement,' Samples, Salesmen salary and other allowances, and salesmen travelling expenses. "
The learned Commissioner of Income-tax (Appeals) has erred in maintaining the ad hoc, disallowances out of the following expenses:
| | Percentage of total claimed | Rupees |
| (i)Rent and Rates | 10% | 45,009 |
| (ii) Travelling & Enter | 20% and | 281,210 |
| (iii) Postage, Telegram Telephone | 10 % | 24,144 |
| (iv) Legal and Professional charges | 10% | 19,075 |
| (v) Repairs and Maintenance | 10 % | 4,133 |
| (vi) Miscellaneous expenditure. | 10% | 3,426" |
3. Other grounds in the appeal for Assessment year 1986-87 stand dismissed as not pressed before us.
4. Regarding upholding of disallowance of advertisement, samples, salesmen salary and other allowances and salesmen travelling expenses amounting to Rs.1,301,680 in 1986-87, being in excess of 5% limited prescribed under rule 33 of Drugs (L.R. & A) Rules of 1976, we have heard the two sides and we agree with the learned counsel of the appellant that the decision of this Tribunal relied upon by the two learned officers below has been reversed by the judgment of the Honourable Sindh High Court in 1995 PTD 577:
"We would like to point out that the view taken by the learned Appellate Tribunal, on the face of it, seems to be erroneous. No doubt, Rule 33 of the Drugs (Licensing, Registration and Advertising) Rules, 1976 indicates that no person shall spend more than five percent. of his A, turn-over on advertising, sampling and other promotional activities in respect of drugs. And rule 12 provides for cancellation or suspension of a licence by the Central Licensing Board in case any provision of the Drugs Ordinance or the Rules framed thereunder is violated by a Licensee. But, the penalty provided by the said Rule cannot be extended to the provisions of Income Tax Ordinance as no such penalty has been provided by the provisions of the said Ordinance. Reference in this regard may be made to the case of Commissioner of Income Tax v. Alpha Insurance Co. Ltd. PLD 1981 SC 293 also referred to by the learned tribunal in its order. In this case, rule 40-C of the Insurance Rules provided a prohibition against exceeding the management expenses. Their Lordships of the Supreme Court held that such rule could not be extended to disallowance of excess management expenses by the assessing authority. Reference has also been made by Mr. Iqbal Naim Pasha to an earlier judgment of this Court in M/s. General Tyre and Rubber Co. v. Commissioner of Income Tax, Central Karachi 1986 PTD 52. In this case a distinction was clearly 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 a penalty has been imposed on him due to transmission of some law.
We are consequently of the view that the view taken by the learned Appellate Tribunal is unsustainable and the question is answered in the negative. The parties are left to bear their own. costs in view of the question referred. "
Earlier a Division Bench of this Tribunal has also held such expenditure admissible in the decision reported as 1995 PTD (Trib.) 421. Accordingly, we vacate the impugned orders of the two learned officers below, on this issue, and allow the entire expenditure claimed under this head.
5. Having heard the two sides on the issue of other add backs in Assessment year 1986-87, we find the disallowance of rent rates, legal and professional charges, repairs and maintenance and miscellaneous to be unwarranted because reasons recorded for disallowance are nothing but stock phrases. Rent and rates and legal expenses if found improved or non-incidental to business are required to be specified. If entire claim remains unsupported and unsubstantiated deposit specific opportunity having been given to do so, the entire claim should be disallowed. The learned I.T.O., however, has disallowed the claims on ad hoc estimates which are unsustainable; hence allowed. Similarly the disallowances out of repair arid maintenance and miscellaneous have been made without considering the reasonability of claims. If the claim is reasonable and warranted for business, the assessing officer should allow it, even if it is not properly vouched or verifiable. Accordingly, the add backs on these two counts as well are deleted. The add backs out of travelling and entertainment and postage, telegram and telephone are confirmed having been made on sound basis. .
6. We now come to the ground, common in the two appeals. Briefly the facts are that in 1983-84 the appellant received Rs.4,88,000 claimed to be by way of gift and in 1986-87 it received Rs.6,701,760 claimed to be by way of subsidy, from its n6n-resident parent company, said to be representing voluntary payments made by Organon International B.V. Holland to help improve the Company's financial position which had deteriorated due to accumulated losses.
7- The learned DCIT, has proceeded on the ground that the assessee has been regularly importing chemicals from the non-resident parent company in such a way as to transfer its profits to the principal; that the import of raw material from the parent company established a close business connection and by payment of much higher prices for such raw material to the parent company, the assessee has so arranged its dealings that the business transacted between them, either produces to the assessee no profits or less than the ordinary profits. He therefore, has inferred that the so-called 'gift' or 'subsidy' being given from year to year are the amounts being paid in order to replenish, partly, the funds so siphoned off the assessee' s legitimate income and has held that the receipts thus have a direct nexus, with the assessee' s business; hence in the nature of income. He has tried to distinguish the facts in the cases decided in I.T.A. No.355/KB of 1971-72 = 1985 PTD 297 and I.T.A. No.2306/KB of 1972-73, in the assessment order for 1983-84 and has placed reliance in support of his conclusions on the ratio of decisions in the cases reported as V:S.S.V. Meenakshi Achi and another v. CIT, Madras 60 ITR 253 (S,C. India) and Smart (H.M. Inspector of Taxes) v. Lineolnshire Sugar Co. Ltd. 20 TC 643 (HL) in the assessment order for 1986-87.
8. The learned CIT(A) has upheld the conclusions of the learned DCIT in 1983-84 without recording .any further reasons and in 1986-87 by placing reliance on the decision in PIA v. CIT PLD 1975 Kar. 924 wherein subsidy given by the Federal Government to make good the losses sustained by the PIAC was held to be income liable to tax.
9. The learned counsel of the appellant is placing reliance on the judgment of the Honourable Supreme Court of Pakistan in the case of CIT v. Smith Kline and French of Pakistan- Limited and others 1991 PTD 999 = 1991 SCMR 2374 wherein their Lordships while considering the concept and scope of "total income" as well as that of the "income of a casual and non-recurring nature", as per provisions of section 4(1) and section 4(3)(vii) of the Income-tax Act, 1922 observed:
"However, before proceeding further, we may state that the burden of proof of the fact that any receipt by a person is an 'income' is on the Revenue. But, if the Department establishes that it is 'income' then the onus that such a receipt is exempt under section 4(3)(vii) of the Act is on the assessee claiming exemption; Mrs. Samina Shaukat Ayub Khan v. Commissioner of Income Tax, Rawalpindi PLD 1981 SC 85. "
"However, a question does arise what is 'income'? The term 'income' is not precisely defined in the Act. However, it came up for consideration in the well-known case of Commissioner of Income tax, Bengal v. Shaw Wallace & Company AIR 1932 PC 138, wherein at page 140 of the Report it was held as follows:---
The object of the Indian Act is to tax 'income' a term which it does not define. It is expanded, no doubt, into 'income, profits and gain', but the expansion is more a matter of words than of substance. Income, their Lordships think in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus, income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as ' capital' . But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production. "
The termincome' as defined in the above cited case was followed by this Court in the case of Mrs. Samina Shaukat Ayub Khan v. Commissioner of Income Tax, Rawalpindi PLD 1981 SC 85 two cases of Privy Council, namely, with a reference to Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax, Bihar and Orissa (1943) 11 ITR 513 and Commissioner of Income Tax, Bengal v. Mercantile Bank of India Limited AIR 1936 PC 238 and it was observed as follows:
This view was reaffirmed by the Privy Council in the subsequent case of Commissioner of Income Tax, Bengal. v. Mercantile Bank of India Limited AIR 1936 PC 23 and it was held that where a company by resolution capitalised accumulated profits by issue of fully paid-up shares to shareholders pro rata, the transaction does not amount to dividends or income, gains or profits. Again in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income Tax, Bihar and Orissa (1943) ITR 513, the Privy Council referred with approval to this definition of the term 'income', but added that picturesque similes cannot be used to limit the true character of income in general ... .... ... ... ... .... ....Income is not necessarily the current return from a definite source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicit of forms which 'income' may assume is beyond enumeration. Generally, however, the mere fact that the income flows from, some capital assets, of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogous case the true view may be that the payments, though spread over a period, are not income, but instalments payable at specified future dates of a purchase price
And finally it was concluded at page 91 of the report as follows:
"It will be seen that the term 'income' as used in the Income Tax Act is, indeed, a term of wide significance, and generally and ordinarily it connotes a periodical monetary return, coming in with sort of regularity or expected regularity, from a definite source; but as observed by the Privy Council, the multiplicity of forms which income may assume is beyond enumerations; and income need not necessarily be the recurrent return from a definite-source, though it is generally of that character. It may consist of a series of separate receipts, as for instance happens in the case of professional earnings. In the last analysis, the question whether a particular kind of receipt is income or not would depend for its answer on the peculiar facts and circumstances of the case. If the nature of the receipt and its source are not satisfactorily explained by the assessee, facts which are generally within his peculiar knowledge, the Income Tax Officer may legitimately presume that the amount in question is an income of the assessee from an undisclosed source. "
10. Their lordships considered three Civil Appeals Nos. 119-K of 1985 and 32-K and 33-K of 1988 in the judgment ibid wherein facts are narrated as under:--- .
"The facts giving rise to the First Appeal, as stated in the statement of facts, are that the respondent-company was incorporated in December, 1949 under the name of Pharma Company Limited. However, in June, 1964 the name of the Company was changed to the present one. The respondent's paid-up capital up to 30-11=1963 was Rs.1,00,000 and was wholly owned by M/s. Smith, Kline USA Laboratories.
On 30-11-1963 the respondent had a net accumulated loss of Rs.78,776 and was mostly dealing in foreign goods which were indented. At this point of time the respondent decided to start manufacturing activities with foreign participant. The capital of the company was, therefore, raised to Rs.16,00,000, of which shares worth Rs.11,75,000 were to be issued to the foreign participants while those amounting to Rs.4,25,000 were to be allotted to local shareholders, It was also decided that as the company was running into losses the accumulated losses up to 29-2-1964 may be absorbed by the foreign shareholders. After working the loss up to.29-2-1964, the losses to be borne by the foreign' shareholders were determined by the auditors of 116.1,38,867, The foreign participants, therefore, remitted amounts to-'this extent to the respondent and the same were duly shown in the accounts drawn up. This amount was credited in the respondent's account as miscellaneous income in the profit and loss statement.
After realising the implication of this credit entry the respondent contended before the Income Tax Officer that this amount received from the foreign participants Was not income at all, and if it was income, it was of a casual nature and as such exempt from the provisions of section 4(3)(vii) of the Income-tax Act, 1922. The Income Tax officer, however, rejected both these contentions and taxed the amount of Rs.1,38,867 as income in the hands of the respondent.
The facts of the second appeal, as taken from the statement of facts, are: that the respondent is a private limited company, 71 % of whose share capital is held by M/s. Sandoz Limited (Basle) and the balance by the general public. During the Assessment year 1970-71 the respondent received a sum of Rs.16,00,000 from M/s. Sandoz Limited, (Basle) as promotion allowance. The respondent excluded this amount from the total income claiming that it was 'not income' and even if it was income, it was of casual and non-recurring nature and hence exempt under section 4(3)(vii) of the Income-tax Act, 1922. The Income Tax Officer did not accept the respondent's contention and included the amount in the total income of the respondent. The Income. Tax Appellate Tribunal has, however, deleted the said amount from the total income of the respondent.
The facts of the third appeal, as taken from the statement of facts, are that the respondent is a subsidiary non-resident company. Its majority shares are held by the non-resident parent company. During the Assessment year 1975-76 the respondent received a sum of Rs.12,42,000 from M/s. Ciba Gaigy Limited as promotion allowance. The respondent excluded this amount from the total income claiming that it was not income and even if it was, it was of a casual and non recurring nature and was, therefore, exempted under section 4(3)(vii) of the Income-tax Act, 1922. The Income Tax Officer, however, did not accept the respondent's contention and included the amount in the total income of the respondent. On appeal, the Income Tax Appellate Tribunal, however, deleted the amount from the total income of the respondent. Thereafter, the questions mentioned in paragraph 3 of this judgment were referred to the High Court which were all answered in the affirmative giving rise to this appeal. The Honourable Supreme Court of Pakistan has held:
"Examined in the light of the above definition or description of the term 'income', we find that the amount of Rs.1,38,867 remitted by the foreign shareholders as donation/gift in first appeal and credited in the respondent's account as miscellaneous income in the profit and loss statement, the two amounts of Rs.50,000 and Rs.16,00,000 remitted by the foreign company as promotion allowance in the two assessment years under appeal in second appeal and the amount of Rs.12,40,000 remitted by the foreign company as promotion allowance in third appeal, do not, in our opinion, satisfy the test as laid down in the abovementioned cases, as they could be termed as mere windfall, for, the foreign shareholders/companies were under no obligation to remit these amounts or to make good the losses incurred by the Pakistani companies and for the further reason that they could contribute these amounts as capital if there was no prohibition in increasing the capital. Even if we assume that these receipts satisfied some of the aspects which could approximate to the definition or description of the term 'income', still the receipts in the first and the third appeals were exempt under section 4(3)(vii) of the Act, for they were, in each of these cases, a single casual receipt not recurring in nature. "
11. Regarding the case relied upon by the learned CIT(A) in her impugned order for 1986-87 the Honourable Supreme Court of Pakistan have observed:
"Now, Pakistan International Airlines Corporation's case requires consideration. Facts of this case were that Pakistan International Airlines Corporation, the assessee, was created by Pakistan International Airlines Corporation Ordinance, which was subsequently replaced by the Pakistan International Airlines Corporation Act. Under section 26 of the said Act, the Central Government undertook to make good any losses sustained by the Corporation during the three years next after 30th September, 1963. In the account period relevant to charge years 1956-57 the Central Government paid a sum of Rs.1,05,13,609 in terms of the said section 26 of the Act. The assessee claimed this payment as a replenishment of its capital which according to the assesee stood reduced to the extent of the amount received by the assessee from the Central Government. This plea of the assessee was rejected by the Income Tax Officer, who treated the receipt the said amount as revenue amount and brought it to tax. The assessee filed direct appeal before the Tribunal against the decision of the Income Tax Officer and the Tribunal upheld the order of the Income Tax Officer. It was contended by the learned counsel for the Corporation that on a plain reading of this section, the replenishment of the losses could take place only after the loss had actually accrued, and been determined as such, the capital of the assessee by that time had already diminished. According to him, a loss always results in diminishing the capital, and Corporation, while running 'its business at a loss, could incur expenditure only by utilising its capital. He further contended that making good of a loss was even different from the subsidy, which in the case of the Corporation was also being' paid by the Central Government at that time on every ticket from Karachi to Dacca at Rs.50 and for Lahore to Dacca at Rs.75. The whole object of the Government, according to the learned counsel, was expected to run at a loss in the initial stage; the object of the section was that the capital of the Corporation should not be diminished and that it should be kept . intact, and a guarantee to make good the losses, already accrued, was in effect, to make the payment towards reduction of capital that took place during the' three years. In his submission the working expenses of the Corporation were more than the receipts earned, and the Corporation had of necessity to depend on its capital and in effect the Government by making good the losses only supplemented the deficiency in capital. On the other hand learned counsel for the Department contended that the mount in question was paid by the Central Government. To the assessee in order to offset the trading losses of the assesee and, thus the receipts are in the nature of revenue receipts and, therefore, liable to be considered for tax purposes. On these facts it was held by this Court that the view canvassed by the learned counsel for the assessee could not be sustained upon consideration of the facts, of this case and the interpretation of section 26 of the P.I.A.C. Act and in the result, the amount of Rs.1,05,13,609 paid by the Government to the assessee for making good the loss sustained by the assessee was found to be in the nature of income receipts liable to tax under the Income-tax Act, 1922. Now, it will be seen from the above facts and findings that a nexus was found between the receipt and the trading of the Corporation while in the present appeals there was no nexus between the payments made by the foreign shareholders/company to the business done by the Pakistan companies. The payment made by the Government under the Statute, made or could make no difference."
12. The learned D.R., however, submits that on fact and circumstances of the appellant's case it is distinguishable from the facts and circumstances of the three appeals decided by the Honourable Supreme Court of Pakistan in the case reported as CIT v. Smith Kline and French of Pakistan Limited and others 1991 PTD 999 = 1991 SCMR 2374 and relied upon by the learned counsel of the appellant. He further submits that on the other hand the facts and circumstances in the case of PIAC v. CIT PLD 1975 Kar. 924 are more or less similar to the facts and circumstances of the appellant's case; hence the reliance placed by the learned CIT(A) on the ratio of later case. Elaborating his point the learned D.R. submits that the learned D.C.I.T. has found nexus between the impugned receipts and the business of the appellant which the Honourable Supreme Court found missing in the cases of M/s. Smith Kline and French of Pakistan Limited and others (ibid). In this connection he refers to the finding of the learned DCIT that the appellant has been regularly importing chemicals for manufacturing of medicines from the non-resident parent Company mentioned in paragraph 7 hereof. The learned D.R. further refers to the following observation of the appellant's Auditors in their report for the year ending December 31, 1985, to assert that the so-called financial support (gift/subsidy) is a periodical monetary return coming in with some sort of regularity or expected regularity from a definite source, hence falling under the definition of income:---
"during the year the company suffered a loss before extraordinary item of Rs.5.96 million which was offset by a grant of Rs.6.7 million received from the parent company, resulting in a net profit of Rs.0.48 million. Long-term loans as at December 31, 1985 amounted to Rs.29.5 million which include an amount of Rs.25.9 million to be repaid by obtaining another loan from the parent company as described in note 3.1 to the accounts. The overdraft as at December 31, 1985 amounted to Rs.10.44 million. As in previous years the company has been able to sustain the adverse liquidity situation with financial support from the parent company, and management has assured us that such support will be forthcoming whenever required and continuity of operations will not be affected."
13. The learned D.R. further contends on the basis of the Auditor's foregoing report, that the amount in question has been paid by the Parent Company to the appellant/assessee in order to offset the trading losses of the assessee/appellant and, thus the receipts are in the nature of revenue receipts and, therefore, liable to be considered for tax purposes. He submits that an identical view submitted on behalf of the Department has been recorded with approval in their decision by the Honourable Supreme Court in the case of P.I.A.C. (ibid).
14: We find, on the foregoing facts and circumstances of the case and the conditions under which, according to the findings of the Superior Courts, a receipt acquires the characteristics of income envisaged under the provisions of the Income Tax Ordinance, when there is a nexus between the gift/subsidy received by the appellant from its Parent Company and the trading of the appellant.
15. We also find that unlike the case of H.H. Moharani Shri Vigaykuverba Sahab of Morvi and another v. Commissioner of Income Tax. Bombay City II (1963) 49 ITR 549, the impugned payments by the Parent Company to the appellant are not entirely without consideration and these are traceable to a source which a practical man may regard as real source of income. In our view, there is enough evidence to conclude that the impugned receipts are in the nature of periodical monetary return coming in with an expected regularity from a definite source. It has been established before us that on its facts and circumstances, the appellant's case is distinguishable from the facts and circumstances of the cases decided vide the decision reported as 1991 PTD 999 = 1991 SCMR 2374 and that the ratio of the decision reported as PIAC v. CIT PLD 1975 Kar. 924 is applicable to the facts of appellants' case.
16. We, accordingly, held that the impugned receipts in each of the two years are in. the nature of income and that these are not of a casual and non-recurring nature; hence liable to tax. Consequently the impugned order of the learned CI1`(A) is confirmed and the appeals are dismissed.
M.B.A./210/Trib.Order accordingly.