(a) Income Tax Ordinance (XXXI of 1979)----

----Ss. 23(1)(v), 22, 38, 12(19) & Third Sched.---C.B.R. Circular No.20 of 1988, dated 8-10-1988, para. 2---C.B.R. Circular No. 6 of 1994, dated 10-7-1994, para. 2---Lease rental income---Income from other sources-- Gross receipts---Profit and gains---Depreciation allowance---Deduction of-- Depreciation allowance under S.23(1)(v), Income Tax Ordinance, 1979 should be deducted from profit and gains and not from gross receipts---While computing income under S.22, income Tax Ordinance, 1979 all allowances under S.23(1) of Income Tax Ordinance, 1979 had to be allowed first and depreciation from the residue, if any, or otherwise same should be carried forward to next year and same would be deemed to be allowance for that year and so on without any time limit---Other losses of business (besides unabsorbed depreciation) should be carried forward only for specified number of years.---[1999 PTD (Trib.) 1346 overruled].

1999 PTD (Trib.) 1346 overruled.

I.T.As. Nos. 1934 and 1935/KB of 1997-98, decided on 23-9-1998 ref

(b) Income Tax Ordinance (XXXI of 1979)---

----Ss.34 & 35---Set-off of losses---Carrying forward of business losses-- Lease business---Unadjusted depreciation allowance---Set-off---Depreciation allowance was adjustable against income from lease rentals and not against gross amount of such rentals---Unabsorbed depreciation allowance was to be carried forward and treated as a part of allowance for next year and then adjusted against "income" from lease rentals of that year and so on-- Question of set off of unadjusted depreciation allowance of any year against gross rentals of next year, therefore, did not arise as that was not ordained by any provision of Income Tax Ordinance, 1979.=--[1999 PTD (Trib.) 1346 overruled].

1999 PTD (Trib.) 1346 overruled.

I.T.As. Nos. 1934 and 1935/KB of 1997-98.

(c) Income Tax Ordinance (XXXI of 1979)---

----Ss. 12(19), 22, 23 & 30---C.B.R. Circular No. 20 of 1988, dated 8-10-1988---Leasing company---Lease rental income---Front-end fee, commitment charges on lease rentals and arrangement fee received with lease rent---Treatment---Income from business and profession---Income from other sources---Front-end fee, surcharge on lease rentals and arrangement fee had to be treated as lease rentals in presence of clear provision of S.12(19) of Income Tax Ordinance, 1979 which related to assessee's business and had to be assessed under S.22., Income Tax Ordinance, 1979 alongwith assessee's lease receipts income---No separate source of such receipts existed which could justify assessment of these receipts under S.30, Income Tax Ordinance.. 1979---Said receipts had, thus, to be taxed under S.22, Income Tax Ordinance, 1979 and expenses including depreciation had to be allowed as per provisions of S.23, Income Tax Ordinance, 1979.

1998 PTD (Trib.) 1962; I.T.As. Nos.-1347/KB of 1997-98; 1149/KB of 1996-97 and 519/KB to 521/KB of 1998-99 ref.

Zaki Ahmed, D. R., Tariq Masood, D.C.I.T. and Muhammad Farid, Advocate for Appellant.

Farrukh V. Junaidi, F.C.A. for Respondent.

Date of hearing: 14th September, 1999.

ORDER

MUHAMMAD DAUD KHAN (ACCOUNTANT MEMBER).-- This Full Bench was constituted to resolve the controversy regarding (i) the allowance of depreciation in case of leased assets i.e. whether same. is deductable from 'income' from lease rentals or gross amounts thereof and (ii) whether front-end fee, commitment charges, surcharge on lease rentals and arrangement fees etc. are to be treated as lease rentals and accordingly assessed (under section 22/23) or as income from other sources. There have been conflicting judgments of this Tribunal on these issues; some in favour of the view point of revenue, others against it. We have heard Mr. Zaki Ahmad, D.R. Mr. Tariq Masood, DCIT and Mr. Muhammad Farid, Advocate, who appeared for the appellant department and Mr. Farrukh V. Junaidi, F.C.A. who appeared for the respondent assessee. Both the parties argued at length and relied upon good many cases in support of their view points. The issues involved are decided as below:---

2. On issue of depreciation allowance against lease rentals, CIT(A) accepted assessee's plea in this case relying on this Tribunal's decision cited as 1999 PTD (Trib.) 1346 which was written by one of us. On the other hand, there is a decision on this specific issue in I.T.As. Nos.1934 and 1935/KB of 1997-98, dated 23-9-1998, which was also written by one of us sitting on this Full Bench in which exactly apposite view was taken and it was held that the depreciation allowance was to be allowed only against the income from lease rentals and not the gross amount thereof as advocated before the Tribunal by the D.R. whose plea was accepted. Both Mr. Tariq Masood and Mr. Farrukh V. Junaidi argued their respective cases at length and delved a good deal upon meaning, purport and connotation of the word 'income' as used. in sections 12(19), 22, 23, and 23(1)(v) to prove their view points. According to the Mr. Tariq Masood the word 'income' as used in 23(1)(v) connoted the gross receipts minus the related expenses while according Mr. Farrukh V. Junaidi the same meant 'gross receipt'. Both parties referred to the amendments brought about in law in 1988 (when subsection 12(19) was inserted and in 1994 when 23(1)(v), 34, 35 and 38 were amended. According to Tariq Masood, the purpose of these amendments was to tax all receipts related to leasing section 12(19) and to eliminate unfair competition between leasing companies having other income also and those whose only income was from leasing and those could under no circumstance be interpreted to be aimed at allowing other expenses (besides depreciation) against other income wherever it so suited the assessee. According to Mr. Farrukh V. Janaidi law as it stands permits deduction of depreciation in this case and other cases of this nature from gross lease rentals. References were also made to the instructions contained in Circular Nos.20 of 1988 (Para.2) and 6 of 1994. Both the parties claimed that these supported their respective view points. They also referred to the meaning of the term income as per standard dictionaries to press their arguments on this score. Both the parties have submitted voluminous material in shape of judgments, circulars etc. in support of their respective view points which remains on our record.

3. We have carefully considered argument from both the sides. In our opinion the controversy before us can be conveniently resolved with reference to provisions of sections 22, 23, 23(1)(v), 34, 35 and 38 of Income Tax Ordinance, 1979. The provisions of section 38(6) and (7) make the whole position absolutely clear on this behalf. As per provisions of these subsections, depreciation allowance under, section 23(1)(v) is deductable from profits and gains (emphasis added) and not gross receipts. Thus it is clearly implied that while computing income under section 22 all allowances under section 23(1) have to be allowed first and depreciation from the residue if any (profits and gains) or otherwise the same (unabsorbed depreciation allowance) is to be carried forward to next year and deemed to be allowance for that year and so on without any time limit. Other losses of business (besides unabsorbed depreciation) are carried forward only for the specified number of years. No specific exception has been made for persons carrying on business of leasing. and having other incomes. Assessee's A.R. Mr. Farrukh Junaidi's reference to words "restrict depreciation allowance to extent of lease rentals for the purposes of set-off and carry forward of leases" (under sections 34, 35, 38), as used in para.2 of Circular No.6 of 1994 is misplaced and meaningless in the context when we read this para. as a whole. Depreciation allowance of the year is, as per opening sentence of this para. adjustable against income from lease rentals and not against gross amount of such rentals. Unabsorbed depreciation allowance is to be carried forward and treated as a part of allowance for next year and then adjusted against 'income' from lease rentals of that year and so on. The question of set-off of unadjusted depreciation allowance of any year against gross rentals of next year, therefore, doesn't arise. It is not ordained by any provisions of Income-tax Ordinance, 1979. The whole purpose of amendment brought about in this law in 1994 in set out in this paragraph of Circular 6 of 1994 and it doesn't help respondent assessee. The words 'to the extent of lease rentals' in second sentence of this para. only appear to be restricting depreciation allowance to this source of income or business only. Anyhow we have to interpret law and not wording of C.B.R. Circular. We have to read 12(19), 23(1)(v) and 34, 35 and 38 together to arrive at true intention of law. We even find no need for polemics or semantics about purport of the word income in this context to resolve the controversy. We are, therefore, absolutely clear about the matter and of accuracy of the department's view point on the issue.. This Tribunal's judgment in (1999) 79 Tax 140 -particularly its operative part namely at Serial No. 16 para. marked B at 1999 PTD (Trib.) 1351 (I.T.A. No.349/KB of 1998-99) reading "Thus, the only method to compute/determine. the amount of allowance for depreciation that may remain unabsorbed against income from lease rentals, is to adjust the amount of such allowance for depreciation, first, against the amount of lease rentals received lay the assessee and then any other allowance or deduction provided under other clauses of subsection (1) of section 23 alongwith income from any other business so that any excess of admissible allowance for depreciation over the income from lease rentals is carried forward under section 35 to be adjusted against the income from lease rentals of the subsequent year or years as the case may be" is, therefore, overruled. We accordingly vacate the order of CIT(A) .on this issue and restore that of the DCIT as the same was according to law.

7. The last ground of appeal of the department is that CIT(A) was not justified to treat the lease incidental receipts i.e. front-end fee, surcharge on lease rental and arrangement fee as a part of lease rentals and allow these to be set-off against tax depreciation of leased assets. Dr. Tariq Masood arguing the department's case-invited our attention to the definition of the term rent as per Black's Law Dictionary and argued that rent was a periodical receipt, and therefore, these receipts such as front-end fee etc. mostly being one time receipts cannot be termed as rental receipts. He referred to two recent decisions of the CIT(A) dated 23-1-1999 and 28-1-1999 wherein DCsIT treatment on this behalf was upheld. Mr. Farrukh Junaidi, however, controverted his arguments and claimed that under the provisions of section 12(19) all the amounts received in connection with the leasing of the assets are to deemed as income of the assessee. Mr. Farrukh Junaidi also referred to various decisions of Tribunal i.e. 1998 PTD (Trib.) 1962 I.T.As. Nos. 1347/KB of 1997-98, 1149/KB of 1996-97 and 519 to 521/KB of 1998-99 which supported assessee as position on this point

8. We have carefully considered the arguments of both the sides. In our view the department has no good case to treat front-end fee, surcharge on lease rentals and arrangement fees as not being lease rentals in presence of the clear provision of law to this effect as per section 12(19). All these receipts are related to assessee's business and clearly fall to be assessed under section 22 alongwith assessee's lease receipts income. There is no separate source of these receipts which could justify assessment of these receipts under section 30 under the head income from other sources Same is the view of C.B.R. as elaborated in Circular 20 of 1988 (para.2) reproduced supra. These receipts have, thus, to be taxed under section 22 and expenses including depreciation have to be allowed as per the provisions of section 23 of Income Tax Ordinance, 1979, in the light of our decision above. Department's appeal on the issues is, therefore, rejected.

C.M.A./M.A.K./111/Tax(Trib.) Order accordingly.