I.T.A. NO. 1973/KB OF 1993-94 VS I.T.A. NO. 1973/KB OF 1993-94
2001 P T D (Trib) 1988
[Income-tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Chairman and
S. Hasan Imam, Judicial Member
I.T.A. No. 1973/KB of 1993-94, decided on 22/02/2001.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 25(a), (b) & 23-----Deduction---Amount subsequently recovered in respect of deduction etc.---Addition---Assessee a public sector. Corporation had declared loss---Amount credited in the profit and loss account in the heads, GOP loans, interest, dividend amount reimbursable to Government for guarantee and redemption were added in the total income of the assessee by the Assessing Officer being adjusted against losses of the earlier years which arose from the expenditure allowed under S.23 of the Income Tax Ordinance, 1979---Addition was upheld by the First Appellate Authority on the ground that assessee had already availed benefits in the past in respect of interest on foreign loans and guarantee commission paid by the Government---Contention of the assessee was that credits had been made in pursuance of the financial re-structuring of the Corporation in accordance with the recommendations of the Ministry of Communication and amounts of ,interest on loan as well as exchange losses had already been disallowed in the past while making the assessment---Validity---Amounts had been waived in pursuance of a re-structuring formula as approved by the ECC---Neither the Government was obliged to make good losses of the Corporation nor the Corporation was providing subsidised passage on the instructions of the Government--Amounts/credits received could not be held to be income or the assessee in circumstances as, amounts in question did not fall within the definition of "income" as generally understood---Some of the expenses, though had been allowed in the past-and the assessee had derived some benefit by way of waiver of the liabilities and possibility of application of S.25 of the Income Tax Ordinance could not be ruled out completely--- Appellate Tribunal remanded the case for reconsideration with the instruction that no bald estimate may be made and provisions of S.25 of the Income Tax Ordinance, 1979 may be followed strictly.
CIT v. Stewart and Lloyds 165 ITR 416; Mehboob Productions (Private) Limited v. CIT, Bombay 106 ITR 758 and CIT v. S.K.&.F. and 2 others (1991) 64 Tax 37 [SC (Pak)] ref.
Addl. CIT, Delhi-II v. Handicraft and Handloom Export Corporation 133 ITR 590 rel.
(2001) 83 Tax 17 distinguished.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss.25(a)(b) & 23---Deduction---Amounts subsequently recovered in respect of deductions, etc.---Invoking of provisions of S.25 of the Income Tax Ordinance, 1979---Conditions--While invoking the provisions of S.25 of the Income Tax Ordinance, 1979, the Assessing Officer should have established as to the losses, bad debts, expenses or trading liabilities which had been incurred by the assessee, and allowed in the past, under S.23 of the Income Tax Ordinance, 1979.
(c) Income Tax Ordinance (XXXI of 1979)------
----Ss.25 & 23---Provision of S.25 of the Income Tax Ordinance, 1979 was quite specific and required the addition to the income in respect of recoveries, in cash or kind, where such expenses of deductions had been allowed under S.23 of the Income Tax Ordinance, 1979.
Muhammad Hassan Alam for Appellant.
Vishno Raja Qavi, D.R. for Respondent.
Date of hearing: 1st February, 2001.
ORDER
INAM ELLAHI SHEIKH (CHAIRMAN). ---This is the further appeal of a public sector corporation arising out of an order, dated 14-11-1993 recorded by the learned CIT(A), Zone-I, Karachi whereby the addition of a sum of Rs.3,974,455,000 has been upheld.
2. The relevant facts in brief, are that the assessee is a public sector corporation and derives income from shipping business. The-assessee filed a return to declare a loss of Rs.10,596,000. The Assessing Officer discovered that the assessee has credited an income of Rs.3974.455 millions in the profit and loss account in respect of the following credits:--
| "GOP LOANS3223.398(Rs. in millions) Interest1214.802 Dividend55.393 Amount Reimbursable to Government for Guarantee Redemption123.966 Total: 4617.553 Less reserved for643.098 Issue of share capital____________________ 3974.455 (Rs.in millions)" |
3. It was found that the assessee has not offered such receipts for tax purposes and the assessee was confronted with the proposal to the taxation of such amount. The assessee disputed the taxability of such amount on various grounds. It was explained by the assessee that these credits have been trade in-persuance of the financial re-structuring of the corporation in accordance with recommendation of Ministry of Communication. The Assessing Officer again confronted the assessee on the following specific points:---
(a)An income of Rs.4,617,563,000 has been credited in the amount including interest of Rs.1,214,302 which has been waived off and hit by the provisions of section 25 of the Ordinance.
(b) An amount of Rs.123,960,000 in respect of guarantee redemption is hit by the provisions of section 25(a) of the Ordinance.
(c)An amount of Rs.2,635,693,000 has been adjusted against losses of the earlier years which arose from the expenditure allowed under section 23 of the Ordinance in the earlier years. Hence the same was said to be taxable under section 25(a) and (b) of the Ordinance.
(d)Even if such receipts treated as subsidies would be taxable unless specifically exempted.
(e)The claim of exemption on account of casual and non-rec1rrinj nature could only be allowed before the limit of Rs.25,000 as peg clause (65) of the Second Schedule to the Ordinance.
4. The assessee explained that the liabilities of Rs.4,617,553,000 had been converted into capital and the total paid up capital has been declared at Rs.5:117,553,000 as against the earlier capital of Rs.500,600,000. This contention was not found to be correct as per record). The application of section 25 was disputed with the argument that there was no benefit for reimbursement either by the corporation or the Government. The assessee was again asked specifically to quote any provisions of law to claim the exemption. The assessee relied on following four judgments of the Superior Courts:
"(i)CIT v. Stewart and Lloyds 165 ITR 416,
(ii)Mehboob Productions (Private) Limited v. CIT, Bombay 106 ITR 758,
(iii)CIT v. S.K.& F. and two others (1991) 64-Tax-37(SC of Pakistan) and
(iv)Addl. CIT Delhi II v: Handicraft and Handloom Export Corporation 133 ITR 590."
The assessee also explained that there was no prior understanding, undertaking or guarantee given by the Government to the Corporation for making up the accumulated losses nor there was any legal obligation upon the Government in this regard. The assessee further explained that the adjustments in question were voluntary in nature and these were not in the ordinary course of business of the assessee.
5. The Assessing Officer rejected the case law with the observations that the same dealt with the provisions of section 4(3)(vii) of the Indian Income-tax Act which has since been repealed and that the casual and non recurring receipts had been made taxable subsequently. The Assessing Officer also specifically referred to the case of Smith Kline and French (SKF) and to the case of PIA referred to in the same case to reject the assessee's claim as according to the Assessing Officer, the payments made by the Government to make good the losses sustained by the PIA were held to be taxable. After sumarising the reason for the rejection of the assessee's claim the Assessing Officer decided to make, and made the addition of Rs.3974.455 millions to the total income of the assessee under sections 25(a) and 25(b) of the Ordinance. The learned CIT(A) after a detailed discussion of the case and arguments upheld this treatment of the Assessing Officer, again mainly relying on the case of Smith Kline and-French of Pakistan reported as (1991) 64-Tax-37 (supra).
6. The 'main argument of the learned A.R. of the assessee is that the amounts taxed by the Assessing Officer are not in the nature of income. Another argument of the learned A.R. of the assessee is that the amounts of interest on loan as well as exchange losses had already been disallowed by the Assessing Officer in the past while making the assessment. Hence he disputed the application of section 25 of the Ordinance. The learned D.R. on the other hand supported the orders of the departmental officials relying on a decision of the Tribunal reported as (2001) 83 Tax 17.
7. The submissions of both the parties made before us brief though they were, have been considered by us and we have also perused the relevant orders before us. The Assessing Officer has taxed the amount in question under the provision of subsection (a) and subsection (b) of section 25 of the Ordinance after holding such sums to be income in view of a judgment of the apex Court in Smith Kline & French. While rejecting the contention of the assessee the Assessing Officer has observed as follows:---
"In fact in case Smith Kline & French and two others the Honourable Supreme Court of Pakistan has discussed the case of the Pakistan International Airline Corporation v. CIT (1975) 32-Tax 225. The ratio of decision in the case is applicable to the case of the assessee. It was held that payments made the Government to make good the losses sustained by the Corporation were taxable receipts and were chargeable to tax."
8. The learned CIT(A) has also proceeded on the basis of the same order of the Hon'ble Supreme Court of Pakistan and, also upheld the application of section 25(a) and (b) of the Ordinance in respect of interest on foreign loan and guarantee commission after holding that the assessee had already availed benefits in the past in respect of interest on foreign loans and guarantee commission paid by the Government. A perusal of the judgment in the case of CIT v. Smith Kline & French of Pakistan Limited and two others however, shows that Honourable Judges of the Supreme Court of Pakistan had pot followed the ruling given in the case of Pakistan International Airline Corporation (PIA)-. The facts of Smith Kline & French (SKF) have been summarised in the judgment in Paragraphs 9, 10 and 11 in the following manner:--
"(9)That 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.
10. 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 born by the foreign shareholders were determined by the auditors at Rs.1,38,867. The foreign participants, therefore, :emitted 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 the 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.138,867 as income in the hands of the respondent."
9. After discussing the term income as dealt with in a number of cases, the Hon'ble Supreme Court of Pakistan gave the following finding in Paragraph 25 of the same judgment in respect of SKF:--
(25)Examined in the light of the above definition of the term 'income' we find that the amount of Rs.138,867 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, causal receipt not recurring in nature.
10. The Hon'ble Judges of the Supreme Court also distinguished 'the case of PIA from SKF in sub-para. (viii) of para.31 in the following manner:---
"(viii) Now, Pakistan International Airlines Corporation's case requires consideration. Facts of this case were that Pakistan International Airline Corporation, the assessee was created by. Pakistan International Airline Corporation Ordinance, which was subsequently replaced by the Pakistan International Airline 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 assessee, 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 of the same 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 as 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 state, 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 this submission the working expense's 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 amount in question was paid by the Central Government to the assessee in order to offset the trading losses of the assessee 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 if 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 Pakistani companies. The payment made by the Government under the Statute made or could make no difference."
11. It appears that the departmental officials have failed to appreciate that the Hon'ble Supreme Court of Pakistan did not find the ratio settled in the case of PIA to be applicable to the facts of SKF. In the present case the amounts have been waived in pursuance of a re-structuring formula, as approved by the ECC. There is no allegation that the Government was obliged to make good losses of the Corporation in the present case. There is no allegation that the Corporation was providing subsidised passage on the instructions of the Government. There is a great deal of similarity between the facts of present case and those of SKF in that case also the parent company which had 100% shares contributed certain amounts to make up the losses incurred up to the date it remained 100% subsidiary before some other shareholders were inducted as Members of the company. However, to our mind this distinction is not significant. We also find that in the case of SKF, the assessee had shown such receipts from the parent company as miscellaneous income which appears to be the same treatment as given the Corporation in the present case. In Paragraph 25 of the order, the Hon'ble Judges of the Supreme Court of Pakistan have held that the receipts in question did not satisfy the test as laid down in the various cases as it could be termed as mere windfall. It was further observed by the Hon'ble Judges that even if such receipts, satisfied some of the aspects which could approximate definition or discussion of the income, such receipts were exempt under section 4(3)(vii) of the Repealed Act being single casual receipt and not recurring in nature. It hardly requires an emphasis that any receipt or credit which is brought to charge of income tax must be 'income' of the case has not been examined by the departmental officials. We also find that the order of the Delhi High Court in Additional Commissioner of Income-tax Delhi-II V. Handicrafts and Handloom Export Corporation reported as (1982) 133 ITR 590 has not been considered. In that case the assessee corporation had been established by the Government of India and subsequently it had been taken over by the 'STC. The assessee in that case requested the STC to make up the losses suffered in the earlier years and such request was granted. As a result, the losses of such assessee for the period when it was in the Government control were wiped out. The Delhi High Court confirmed the following observations/findings of the Indian I.T.A.T. as reproduced in the same judgment:--
"The position regarding the amount received from State Trading Corporation, however, is quite different. In general law as well as for income-tax law each company has separate personality and the subsidiary company has to be treated as distinct and separate from the parent or holding company. While it is true that in considering the nature and scope of business of a public sector undertaking, the special circumstances on its origin and functioning can be taken into account, the distinction between the holding company and the subsidiary company cannot in any manner be diluted or watered down. Judged from that point of view, all that had happened in the present case was that the holding company had made good the losses suffered by the subsidiary company. These losses had not occurred or at any rate there is nothing to show that these losses had occurred due to transactions undertaken by the assessee-company on behalf of the holding company. There was also nothing to show that the reimbursement was made by the holding company under any basic arrangement whereby the holding company was bound to reimburse and the subsidiary company could anticipate such reimbursement. The indication, on the other hand, was that the question of reimbursement of the loss of the assessee-company was under discussion between the Government of India and the. assessee company should make the consequential arrangement as an internal matter. In effect, therefore, what happened was that the assessee company's capital was eroded by the loss and that erosion was rectified by a contribution from the holding company. It would be analogous to a sole proprietor introducing additional capital in a business which had been losing or more particularly analogous to a holding company in a private sector diverting some of its surplus funds to the subsidiary to enable it to tide over the loss of capital. The contribution made in such circumstances could not be treated as the income of the recipient. The amount of Rs.6,27,000 could not, therefore, be taken into account as part of the assessee's trading receipts or for that matter as a part of its total income.
We feel that the facts of this case are similar to those of the assessee in th4 present case. On such analogy the amounts/credits received by the appellant in the present case could not be held to be income of the assessee. The observation of the learned CIT(A) that the case of the appellant is different from the above case is not found to be judicious.
13. The facts obtaining in the case reported as (2000) 83 Tax 1', (Tribunal) (supra); as relied upon by the learned D.R., are quite different a; in that case the assessee was a Director and employee of the same company which had waived some of the loan at the time of retirement of the Director So, obviously a nexus existed between benefit received by the employee and the services rendered in the past to the donor company. No such allegation has been made in the present case. Considering these facts and circumstance: we are of the considered view that the amounts in question do not fall within the definition of 'income' as generally understood. However; the question still remains whether this could be wholly or partly taxed under section 25 of the Ordinance as no doubt some of the expenses have been allowed in the past and the assessee has derived some benefit by way of waiver of the liabilities.
14. While invoking the provisions of section 25 (a) and (b) of the Ordinance, The Assessing Officer should have established as to the losses, bad debts, expenses or trading liabilities which have been incurred by the assessee, and allowed in the past, under section 23 of the Ordinance before applying such provisions. The claim of the assessee before us is that the Assessing Officer had not allowed interest charges as well as exchange losses in the past. Before the learned CIT(A), the claim of the assessee was that a suit of Rs.2739.187 millions had already been added back in the past on account of various additions. According to the learned CIT(A),-the Assessing Officer had rightly repelled this contention on the ground that against such additions or various provisions etc., the appellant had been claiming and would claim actual expenditure, as and when they materialise, and, in respect of excess perquisites the arguments of the Assessing Officer that this was not legally admissible item was also upheld. We are afraid such reasoning is not convincing as the provisions of section 25 are quite specific and require the addition to the income in respect of recoveries, in cash or kind, where such expenses or deductions have been allowed under section 23 of the Ordinance.
15. As the possibility of application of section 25(a) and section 25(b) of the Ordinance cannot be ruled out completely, we deem it appropriate to set aside the orders of the departmental officials on this issue and remand the same back to the Assessing Officer for reconsideration. The Assessing Officer may proceed afresh on this issue and ascertain the addition if any, required to be made under these provisions the assessee a proper opportunity of being heard. No bald estimate may provisions of section 25(a) and (b) may be followed strictly.
16. The appeal succeeds to the extent that the issue of addition under section 25(a) and (b) of the Ordinance is set aside.
C.M.A./M.A.K./76/Tax(Trib.) Order accordingly.