I.T.A. NO.332/KB OF 1998-99, DECIDED ON 21ST NOVEMBER, 1998. VS I.T.A. NO.332/KB OF 1998-99, DECIDED ON 21ST NOVEMBER, 1998.
1999 P T D (Trib.) 3880
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and Muhammad Mahboob Alam, Accountant Member
I.T.A. No.332/KB of 1998-99, decided on 21/11/1998.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.80CC(1)---C.B.R. Circular No. 12 of 1991, dated 30-6-1991---C. B. R. Circular o.14 of 1993, dated 18-9-1993---Export sales---Local sales-- Expenses exclusively related to export sales ---Treatment---Assessee prorated all profit and loss account expenses in the ratio of sales covered under normal law and -sales, covered under presumptive tax regime---Assessing Officer disallowed expenses under the head "ocean freight" and "shipping and others" exclusively related to export covered under S.80CC, Income Tax Ordinance, 1979---First Appellate Authority directed to prorate all the profit & loss expense's in terms of method provided in C.B.R. Circular No.12 of 1991, dated 30-6-1991 in the ratio of sales covered under presumptive tax regime and sales covered under the normal law---Validity---Reliance on C.B.R. Circular No. 12 of 1991 was misplaced as it was issued for explaining the provisions contained in S.80C of the Income Tax Ordinance, 1979 which was inserted in the Ordinance by Finance Act, 1991 while S.80CC was inserted by Finance Act, 1992 and C.B.R. Circular No. 14 of 1993, dated 18-9-1993 was issued in this behalf---Normal assessment and presumptive tax regime were basically different and were poles apart in their concepts, implications, procedure and consequences---Expenses exclusively relatable to export were not to be allowed against the income assessed under normal law for the simple reason that income covered under presumptive tax regime and income assessed under normal law were to be treated as separate block of income and any expenses relatable/attributable to income from one source was not to be allowed against income from other sources---Formula of peroration is a law of prudence and has been evolved by taking pragmatic view of the facts but the basic idea underlying is that only such expenses are to be allowed which are worked out to be attributable to income covered under normal law---Direction to prorate expenses which could directly be allocated to export and to allow such expenses against the income assessed under normal law was vacated and the treatment given by the Assessing officer was restored.
(b) Income Tax Ordinance (XXXI of 1979)--
----Ss.80C & 80CC(l) ---C.B.R. Circular No. 12 of 1991, dated 30-6-1991-- C.B.R. Circular No.14 of 1993, dated 18-9-1993---C.B.R. Circular No.20 of 1992, dated 1-7-1992--- Presumptive tax regime---Income assessable under normal law---Expenses which could not be bifurcated and which could be bifurcated---Proration of---Principles.
(c) Income Tax Ordinance (XXXI of 1979)---
--Ss.80CC & 50(5A)---C.B.R. Circular No.20 of 1992, dated 1-7-1992-- Export sales---Local sales---Expenses exclusively related to export sales were disallowed by Assessing Officer as these expenses were prorated to sales covered under normal law---Assessee as an alternative plea contended that expenses on account of "ocean freight" and "shipping and others" were reimbursable, therefore, it ought to have been deducted from the export sales---Validity---Contention of assessee was rejected by Appellate Tribunal with reasoning that it was provided in subsection (2) of S.80CC of the Income Tax Ordinance, 1979 that no allowance or deduction against income as determined under subsection (1) of S.80CC was to be allowed.
Mrs. Shaista Abbas, D. R, for Appellant.
Salman Pasha for Respondent.
Date of hearing: 21st November, 1998.
ORDER
MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). ---This appeal at the instance of department is directed against the order, dated 30-6-1998 by the learned CIT(A) in I.T.A. No. 243 relating to the assessment year 1997-98. The sole objection raised on behalf of the department is to the direction prorate to profit and loss account expenses in the ratio of sales covered under presumptive tax regime and sales covered under normal law. In fact the dispute relates to the expenses under the head, "ocean freight and shipping and other".
2. The relevant facts are that the respondent is public limited company quoted on stock exchange engaged in the manufacture and sale of yarn and cloth. In the assessment year 1997-98 the appellant declared total sales of yarn and cloth at Rs.90,87,39,406 and gross profit before depreciation at Rs.16,54,80,310 and after depreciation at Rs.13,22,59,513. The declared result was accepted. The assessee supplied further break up of the sales. According to the figures supplied by the appellant the export sales were at Rs.60,05,86,312 and the local sales 'were at Rs.30,81,53.094. As the assessee had maintained combined account, therefore, the Assessing Officer worked out the ratio of export sales and the local sales, which was in the proportion of 66.9% and 33.91 % respectively. The Assessing Officer further worked out proportionate G. P. @ Rs.4,48,49,204 as attributable to local sales. The administration expenses were claimed at Rs.1,42,91,834. After various disallowances the allowable expenses were worked out at Rs.1,24,17,762 and proportionate expenses attributable to local sales were allowed at Rs.52,10,863. The selling expenses were claimed at Rs.2,21,26,090. The Assessing Officer held that the expenses exclusively related to export covered under section 80-CC were not admissible. He, therefore, deducted the selling expenses under the head ocean freight at Rs.1,60,17,476 and under the head shipping and other at Rs.14,69,924 totalling at Rs.1,74,87,391 from the total selling expenses and the remaining expenses under the head local freight and octri at Rs.46,38,699 were allowed against income assessable under normal law. The assessee felt aggrieved with the treatment whereby the selling expenses claimed under the heads ocean freight and shipping and other totalling at Rs.1,74,87,391 were held exclusively attributable to the export covered under section 80-CC were not allowed. According to first appellate order, the assessee was confronted on the point as to why the selling expenses under the heads "ocean freight and shipping and other expenses" should not be treated as debatable to export sales because these expenses are separable from other expenses. It was contended on behalf of assessee that all profit and loss account expenses were to be prorated in the ratio of sales covered under normal law and sales covered under presumptive tax regime. In the alternative it was urged that these expenses be deducted from the gross export value because the same were included in the export figures declared, whereas local sales did not include any such expenses. The contentions were not accepted by the Assessing Officer. Being aggrieved the assessee preferred first appeal, contending that presumptive tax regime has been explained by C.B.R. in Circulars issued from time to time. Reliance was placed by the A.R. of the appellant on Circular No. 12 of 1991 which inter alia provided the method of allocation of profit and loss expenses. It was argued that the Assessing Officer allocated the remaining profit and loss expenses on the basis of Circular No. 12 of 1991. -It was submitted that the action of Assessing Officer simultaneously applying method of prorating of certain profit and loss expenses according to the Circular No. 12 of 1991 and considering some of the profit and loss- expenses (export related expenses) as directly debitable to export sales was not correct. It was pleaded that the profit and loss expenses ought to have been prorated ca the basis of method given in Circular No. 12 of 1991, because the production of local sales and export sales were inter related functions and inter alia expenses were incurred collectively and could not be separated. It was further contended that incurrence of certain profit and loss expenses directly in connection with exports did not make any material change in the overall picture. The A.R. of the assessee further stated that there was certain expenses, major portion of which were related to normal sales. However, the same were allocated in the ratio of local sales and export sale as staff salaries, office rent, vehicles running and depreciation. The learned CIT(A) accepted the contention and observed that the Assessing Officer has not given due consideration to the view point of the A.R. of assessee in reply to show-cause notice. The learned CIT(A) further observed that the profit and loss expenses have to be prorated in terms of method provided in C.B.R. Circular No. 12 of 1991 where all the expenses are not completely bifurcatable. He further observed that considering certain expenses as directly allocable to export and considering certain other expenses as proratable would result into in-equitable determination of income assessable under normal law. The learned CIT(A) further observed that he was in agreement with the plea of learned A.R. that all the profit and loss expenses should be prorated in the ratio of sale covered under presumptive tax regime and sales covered under normal law. He accordingly ordered that all the profit and loss expenses be so prorated.
3. Heard Mrs. Shaista Abbas, learned representative for the department and Mr. Salman Pasha, learned counsel for the respondent. The learned D.R. has supported the treatment given by the Assessing Officer and has submitted that the expenses under the heads, "ocean freight and shipping and other," were exclusively export related and, therefore, by virtue of the provisions contained in subsection (2) of section 80-CC the expenses were not admissible.
4. On the other hand Mr. Salman Pasha during the course of argument before us conceded that the expenses under the heads "ocean freight and shipping and other's were exclusively related to export. He further conceded that no expenses pertaining to the export could be allowed against the presumptive income determined under subsection (1) of section 80-CC. He, however, submitted that the assessee has not claimed the expenses against income covered under section 80-CC, but was claiming expenses on prorate basis against the income determined under normal law, as the respondent was earning income covered under presumptive tax regime and income assessed under the normal law. He has submitted that the assessee declared total sales including export sales and local sales at Rs.90,87,39,406 and declared the combined G.P. at Rs.16,54,80,310 before the depreciation and at Rs.13,22,59,530 after depreciation. For the purposes of proration of expenses the Assessing Officer prorated the export sales and local sales and then prorated the gross profit in the same proportion: Thus according to him the expenses under the heads ocean freight and shipping and other at Rs.1,74,87,391 were also required to be prorated as done in the case of other expenses and the expenses so prorated ought to have been allowed against the income of assessee under normal law. Mr. Salman Pasha was asked as to how, after conceding that the selling expenses under ocean freight and shipping and other were exclusively export related could be allowed against the income assessed under normal law. He took refuge in the C.B.R. Circular and attempted /to make a distinction on the export on F.O.B. and C.I. & F. basis. Mr. Salman Pasha was specifically asked to address argument on the basic question, if the expenses directly attributable to export covered under presumptive tax regime under section 80-CC were admissible, and all other questions including method of accounts and the issue relating to F.O.B. and C.I.&. F. shall be subsidiary. Mr. Salman Pasha was specifically intimated that the method of account, and the questions, as well as the issues relating to the export on F.O.B. or C.I. & F. basis were immaterial as no expenses, allowances and deductions were admissible by virtue of provisions contained in subsection (2) of section 80-CC. Mr. Salman Pasha on confrontation of this question changed his instance and stated that if it so, then the Assessing Officer ought to have excluded the selling expenses on account of ocean freight and shipping and other from the total export sales, because these expenses are reimbursed to the appellant and, therefore, it did not form part of export sales. He submitted that a mistake has taken place in the figures of export sales with the result that ratios of export sales has been worked out on higher side and this mistake may be corrected. Obviously it is new plea of fact and, therefore, we asked Mr. Pasha that if he was of the view that any calculation mistake has taken place he ought to have submitted rectification application before the Assessing Officer which has not been done. However, we would like to observe that we did not agree with the contention of Mr. Pasha that the figures of export sales are incorrect or any mistake has taken place in working out the ratio of the export sales and local sales. These figures were provided by the respondent/assessee itself.
5. We have very carefully considered the contentions raised by the ,learned representatives for the parties and the orders of the learned two officers below. At the very out set we would like to observe that reliance on Circular No. 12 of 1991 is misplaced. Circular No. 12 of 1991 was issued by the C.B.R. for explaining the provision's contained in section 80=C, giving A guidelines for the departmental officers., Section 80-C was inserted in the Income-tax Ordinance, 1979 by Finance Act, 1991 w.e.f. assessment year 1991-92 while section 80-CC was inserted by Finance Act, 1992 w:e.f. assessment year 1993-94 and the C.B.R. issued Circular No. 14 of 1993, dated 18-9-1993 in this behalf. Moreover, we are constrained to observe that neither the learned A.R. of the assessee nor learned CIT(A) took trouble of going through even Circular No. 12 of 1991. The learned CIT (A) has A further failed to realise the implications of the provision relating to the normal assessment and pertaining to the presumptive tax regime. The two systems of assessment are entirely different basically and are poles apart in their concept, implications, procedure and consequences. The result is that the learned CIT(A) fell in error and has given contradictory findings. The learned CIT(A) has observed on one hand that in terms of method provided in C.B.R. Circular No. 12 of 1991 whether all the expenses are not completely bifurcatable, the profit and loss expenses have to be prorated. On the other hand he has directed to prorate the expenses which are not only bifurcatable and separable but are admittedly related to export and have nothing to do with the local sales covered under the normal law. Mr. Salman Pasha, learned counsel for the appellant has been pointed out that if his contention is accepted and the impugned direction of learned CIT(A) is confirmed, it is likely to cause grave injustice and prejudice to such assessee who are deriving income assessable under normal law and are deriving income covered under presumptive tax regime also. There may be cases in which some of the expenses such as staff salary, rent, electricity charges, telephone expenses etc. are not bifurcatable but other expenses are identifiable and are exclusively related to the income assessable under normal law and have no nexus with the export covered under the presumptive tax regime. The Assessing Officers applying the principle conversely may, start disallowing the later expenses on proportionate basis. It would be case of great hardship to such assessee and the expenses which should be allowed to them being admissible in law shall be disallowed. Thus, the principle that only such expenses which are not bifurcatable should be prorated and the expenses which are clearly identifiable and exclusively related to the income covered -under presumptive tax regime and the income covered assessable under normal law should be attributed to the presumptive tax regime and income assessable under normal law respectively, shall be the only method in 'consonance with the justice and law. A perusal of C.B.R. Circular No. 12 of 1991, dated 30-6-1991 shows that the supplies covered by section 80-C shall be treated as separate block of income and the over head expenses as related to income from other sources shall be allocated on prorata basis. In this e Circular only such expenses have been discussed which are-not capable of bifurcation, It is more explicitly provided in C.B.R. Circular No. 14 of 1993 and C.B.R. Circular No. 20 of 1992, dated July 1, 1992 that exporters maintaining books' of account may be given special treatment to the effect 'that where income from exports is inseparable from commission, brokerage and, other receipts and the assessee can not prove the extent of overhead expenses relating to non-export receipts, allocation of expenses may be made on a prorata basis in the same ratio as the receipts not covered by section 80CC bear to the gross profit on the export sales. Thus, it is very clear that the formula of proration will apply to only such expenses which could not be bifurcated, However, if the assessee maintained separate account for the income covered under presumptive tax regime and the income assessable under normal law there would be no question of proration of expenses. Likewise when no separate accounts are maintained but the expenses by their very nature are identifiable, separable and attributable to the income covered under presumptive tax regime and the income covered under normal law, there should be no question of proration of such expenses and such expenses shall be debitable to the source of income to which they relate. The formula of proration shall apply in respect of those expenses only which related to both the sources and at the same time are not separable. This view is in consonance with the principles contained in section 80-CC as it is specifically provided in' subsection (2) of this section that nothing contained in the Income-tax Ordinance shall be so construed as to authorise any allowance or deduction against the income as determined under subsection (1) of section 80-CC. The contention of Mr. Salman Pasha that expenses which are exclusively relatable to export admittedly, shall be allowed against the income assessed under normal law, is not tenable for the simple reason that the income, covered under presumptive tax regime and the income assessed under normal law are to be treated as separate blocks ofincome and any expense relatable/attributable to income from one source is not to be allowed against the income from the other sources. The formula of proration is a law of prudence and has been evolved by taking pragmatic view of the facts but the basic idea underlying it is that only such expenses are to be allowed which are worked out to be attributable to income covered under normal law.
6. The contention that the expenses on account of ocean freight and shipping and others are reimbursed to the appellant, therefore, it ought to have been deducted from the export sales, is also not tenable in law for the simple reason that it is provided in subsection (2) of section 80-CC that no allowance or deduction against income as determined under subsection (1) of section 80-CC is to be allowed and it is provided in subsection (1) that where any amount referred to in subsection (5A) of section 50 is received by any person, the whole of such amount shall be deemed to be the income of the said person and tax thereon shall be charged at the rates specified in , the First Schedule. It is provided in subsection (3) that the deduction under subjection (5A) of section 50 shall be deemed to be final discharge of tax liability on the income referred to in subsection 80-CC and it is further provided in subsection (6) of section 80-CC that in a case to which such subsection (3) applied, an order under section 59-A shall be deemed to have been made in respect of income referred to in subsection (1). Thus, the combined reading of these provisions shows that in respect of export sales declared by the respondent/assessee at Rs.60,05,86,321 the assessment is already deemed to have been made under section 59A, by the operation of law itself, as soon as deduction is made under subsection (5A) of section 50. When we refer to subsection (5A) of section 50, we find that according to this provision any person, being an authorised dealer in foreign exchange, shall at the time of realisation of foreign exchange proceeds on account of export of goods by a person, being an exporter, deduct tax at the rates specified in the First Schedule. It is clarified in CRR. Circular No.20 of 1992 that tax is to be deducted under subsection (5A) of section 50 froth all proceeds realised without any monetary threshold and that the foreign exchange proceeds will comprise invoice value of goods exported; customs duty, freight and insurance and other charges collected from the foreign buyer to the credit of the exporter's bank account. The whole of such amount received by the exporter shall be deemed to be his income chargeable to presumptive tax with effect from assessment year 1993-94. We do not find any reason to differ with the above views contained in C.B.R. Circular No.20 of 1992 and, therefore, it is held that once tax is deducted under section 50(5A) on total foreign exchange proceeds as defined above, no further deduction is to be made from the deemed income under subsection (1) of section 80-CC. The contentions of Mr. Salman Pasha are, therefore, repelled for the above reasons.
7. Consequent to the above discussions and findings it is held that the learned CIT(A) clearly fell in error in directing to prorate the expenses directly allocable to the export and to allow such expenses against the income assessed under normal law on prorata basis. The findings and directions of learned CIT(A) are, therefore, vacated and the treatment given by the Assessing Officer is hereby restored
The appeal at the instance of department is allowed accordingly.
C.M.A./M.A.K./82/Tax(Trib.) Appeal allowed.