I.T.A. NO.291/1,13 OF 1988-89 VS I.T.A. NO.291/1,13 OF 1988-89
1997 P T D (Trib.) 43
[Income-tax Appellate Tribunal Pakistan]
Before Ch. Irshad Ahmad, Judicial Member and Hamidullah Malik, Accountant Member
I.T.A. No. 470(IB) of 1994-95, decided on 09/06/1996.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 23(l)(vii)---Business expenditure---Interest paid by an existing assessee on loan borrowed for the expansion of his business can, at his option, be claimed as capital expenditure or revenue expenditure---Interest paid on borrowing is revenue expenditure whether the borrowing was for a capital or a revenue purpose.
Law of Income Tax in India by V.S. Sunderam, 12th Edn., Vol.2, p.560; State of Madras v. G.J. Coelho (1964) 53 1TR 186; Indian Cement Ltd. v. CIT (1966 ) 60 ITR 52; Bombay Steam Navigation Co. v. CIT (1965) 56 ITR 52 and CIT v. Insotex Ltd. (1984) 150 ITR 195 (Knt.) ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 24(g)---Deduction---Provident fund---Disallowance---Held, only that sum was not to be allowed to be deducted as was expended by the assessee to pay to any provident fund not recognized---Contention that any sum in the account of provident fund which included the workers' share and the profit earned on that shall be added as income of the assessee was repelled---What was required to be disallowed was the expenditure incurred by the assessee by way of payment to the fund---Any sum which had not been expended by the assessee could not be added to his income.
Nemo for Appellant
Khawas Niazi, D.R. for Respondent.
Date 9th June, 1996.
ORDER
The assessee a State-owned Corporation which is incorporated as a private limited company is engaged in the business of exploration. Development and exploitation of mineral deposits of salt coal silica sand china and clay through various projects at various places. In its return of income for the Assessment year 1990-91 originally the income was declared at Rs.14,348,285 which were later on revised to Rs.10,638,285. The assessing officer accepted the trading results. He, however, made the following add backs out of the profit and loss account expenses:---
| 1.On account of specific provisions | Rs. 48,68,000 |
| 2. On account of mark-up on exploration projects | Rs. 73,20,000 |
| 3. On account of extraordinary | Rs. 8,56,000 |
| 4. On account of written off equity fund and coal washing plant | Rs.4,58,91,000 |
| 5. On account of provident fund and gratuity | Rs.4,89,51,000 |
| 6.On account of perquisites under section 24(i) | Rs. 17,75,000 |
2. Similarly the depreciation claim was curtailed by Rs.10,00,000. And an amount of Rs.14,93,000 on account of amortization expenses and an amount of Rs.21,59,000 out of the gratuity provision were disallowed and added.
3. On assessee's appeal the Appeal Commissioner has confirmed the additions on account of amortisation expenses on account of provision of Rs 4,868,000 as peace money payable to the workers. Markup on Government loan provident fund and, written off equity fund and has set aside the additions on account of provision for gratuity ad hoc addition under section 24(i) of the Income Tax Ordinance tax, depreciation, development expenditure and the addition due to the mistake in totalling the amount to Rs.10,00,000 for reconsideration by the assessing officer. The addition of Rs.8,56,000 as extraordinary expense has been deleted.
4. The assessee has objected to the orders of the tax authorities by which various add backs have been made/confirmed and set aside for reconsideration.
5. None appeared for the assessee when the appeal was called for hearing. The memo of appeal gives the address to which notice may be sent to the appellant as: Anjum Asim Shahid & Co., Chartered Accountants. 4th Floor. Dodhy Plaza, Blue Area, Islamabad. The notice-server of the Tribunal has reported that he tendered the notice of hearing of appeal to Mr. Anjum Asim Shahid, C.A for service. Mr. Anjum Shahid, however advised him to take the notice to the assessee, corporation. He took the notice to the head office of the assessee officers, however, advised him to take the notice back to Mr. Anjum Shahid who was their authorized representative. He brought back the notice to Mr. Anjum Shahid and asked him to accept it. Mr. Shahid accepted the notice and in token of the receipt signed the duplicate copy of the notice. When the notice-server set out with the duplicate copy of the notice he was called back by Mr. Shahid who returned the notice to the notice-server after scoring out his signature on the duplicate with the advice that it should be served on the assessee. Since the notice has been tendered at the address at which it was required to be served .as given in the memo. of the appeal we are satisfied that the notice has been duly served on the assessee. Accordingly we proceed to hear the appeal ex parte assessee.
Mr. Khawas Khan Niazi, D.R has been heard. The various additions contested in the grounds of appeal are discussed as under:---
(i) Amortization expenses Rs.14,93,000
It, is contended that the assessing officer has added back the amortization expenses without any reason and without understanding the basis of the expenditure. The tax authorities have disallowed the expense and made the addition as per history of the case. It is stated that in the immediate preceding year also an addition of this nature was made and no appeal, was filed by the assessee against the addition. In the absence of assessees representation we are unable to revise the nature of the claim in the context of its allowance or disallowance. The addition is accordingly confirmed.
(ii) Addition on account of specific provision of Rs. 4 868 000
The tax authorities have disallowed the expense because at the close of the years the claimed expense was only a provision and had not been actually disbursed. Where an expense has accrued the assessee can claim its deduction provided the amount is ascertainable. The expense appears to be deductible but only to the extent it was actually paid although in next years. This point too we would like to set aside and to remit to the assessing officer to allow that part of the provision which was actually payable by the assessee to the workers.
(iii) Mark-up on Government Loans Rs.73,20,000
The tax authorities have disallowed mark-up on the ground that since the loan was borrowed to incur expenditure of capital nature the mark up/interest paid on the loan was also an expenditure of capital nature and as such was not allowable as revenue expenditure of the business. In our view the above approach is not in accordance with the law. The interest paid by an assessee on loan borrowed for the expansion of his business can at the option of the assessee be claimed as capital expenditure or revenue expenditure. In this view we are supported by V.S. Sunderams' Law of Income Tax in India" (12th Edition Volume 2, page 560. It says interest on money borrowed for the purposes of expansion of the existing business of the assessee is allowable as business expenditure : The only rider is that the capital borrowed must be for or related to a business which is taxable. The A Supreme Court of India has held that it is not open to the revenue to dissect the properties into capital and revenue or to disallow interest if the capital asset was bought with the borrowing on the ground that the asset was not in use during the previous year. , The Court has held that it is immaterial whether the borrowing was for a capital or for a revenue purpose. The interest paid on the borrowing cannot be capital expenditure. See (State of Madras v. G.J. Coelho (1964) 53 ITR 186; Indian Cement Ltd. v. CIT (1966) 60 ITR 52; Bombay Steam Navigation Co. v CIT (1965) 56 ITR 52; CIT v. Insotex Ltd. (1984) 150 ITR 195 (Knt.)
(iv) Provident Fund Rs. 49,951,000
The assessing officer has disallowed the accumulated amount of provident fund amounting to Rs. 49;951,000 for the reason that the provident fund was not approved by the C.I.T. The tax authorities have disallowed the amount for the reason that under section 24(g) of the Income Tax Ordinance any sum ~ paid to the provident fund not being a recognized provident fund shall not be construed as to authorize the allowance or E3 deduction. It appears that the tax authorities are plainly mistaken in their view in the presence of the assessee's contention. Under section 24(g) of the Ordinance only that sum shall not be allowed to be deducted as is expended by the assessee to pay to any provident fund not recognized by the C.I.T. We are unable to subscribe to the tax authorities' view that any sum in the account of provident fund which includes the workers' share and the profit earned on that shall be added as income of the assessee. What is required to be disallowed is the expenditure incurred by the assessee by way of payment, 9 to the fund. Any sum that has not been expended by the assessee cannot be added to his income. On this issue too we would set aside the assessment requiring the assessing officer to disallow only that part in the fund as has been paid by the assessee.
(v) Written off Equity Fund Rs.9,997,000 and Coal Washing Plant Rs. 35,891,000
A disallowance has been made on the ground that the amount has not been accounted for in the accounts and that the accumulated losses of the preceding years had been retrieved by this much amount. Since the claim had not been charged in the P&L account the tax authorities were quite justified to disallow the sum. The Appeal Commissioner's order is confirmed on this point.
6. The assessee's, appeal is disposed of as indicated above.
M.B.A./221/TAppeal disposed of.