ANSAR EXPORT ENTERPRISES LTD. VS COMMISSIONER OF INCOME-TAX, ZONE-B, LSHORE
2001 P T D 1649
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
Messrs ANSAR EXPORT ENTERPRISES LTI).
versus
COMMISSIONER OF INCOME‑TAX. ZONE‑B, LAHORE
P.T.R. No.42 of 1988, heard on 07/02/2001.
(a) Income‑tax‑‑
‑‑‑‑Income‑‑‑Customs rebate was direct income of the assessee‑‑‑Principles‑‑ Rebate, discount and commission‑‑‑Connotation.
A rebate of tax when made with reference to actual amounts earlier paid by a taxpayer is different from the one given with reference to the exports made of specified goods and quantity. In the latter case it is more in nature of subsidy while in the former it is a drawback proper. Though the purpose to give incentive to exports remains the same, their treatment in accounts is not similar. While the revenue is traditionally hesitant to accept a declared version, the assessees also do not appear consistent. A custom rebate, which is returning of duties of certain kinds earlier entering into the cost of production, is normally treated by the exporters in two manners. In very few cases they deduct it from the cost of production and in that case it is a debit entry to purchase account. Others treat it a credit to sale account. In practical significance it also amounts to taking the rebate as income with the only difference that by adding it to sales only a part of it is offered for tax through application of a gross profit rate. Adding an amount of Rs.100 of rebate to sales will amount to offering for tax a sum of Rs.25 only if the gross profit rate is applied at 25%. Adamant revenue will, however, invariably insist. upon taking it to profit and loss account as direct income. A deduction from cost though increase gross profit rate is most realistic and correct manner to treat the rebate of the kind. Adding it to sales account or treating it as an item of profit and loss account is not warranted for at least two reasons. Firstly, it has no direct nexus with the sales or actual exports. Secondly no profit is earned by an assessee on a rebate. A compensatory rebate which is meant to "compensate" and is a lump sum amount bearing no direct connection with the cost of sales can fairly be taken to profit and loss account as income. Treatment of a rebate becomes a moot point only where accounts have been rejected for one reason or the other. In case of acceptance of accounts the issue that custom rebate was a direct income will not arise at all because then treating the rebate in trading account or an item of profit and loss account will not affect the gross profit figures.
Therefore, only the first kind of assessees treats the rebate and reflects its real impact in the books of accounts. The international accounting standard also supports the view that all taxes recoverable by the enterprise from the taxing authorities do not form part of cost of inventories. Therefore, these will have to be shown as deduction from cost.
The difference in treatment obviously affects the part of the balance sheet when it comes to compute the net profit. However, except for being a deduction to purchases, the other two treatments do not show a correct picture. To that extent the issue is clear as in final analysis it is the exact nature of the rebate which will determine its place in the accounts. Though some confusion or uncertainty may well‑remain in case of other kinds of rebates like compensatory etc. taking a rebate either to sales account or to an item of profit and loss account where it is only a return of duties already paid, is not in accordance with any recognized accounting principle.
However, in any subsequent year if the assessee can establish the nature of rebate to be different from the one found by the Tribunal in the year under‑consideration, it can very well‑treat it accordingly.
The word "rebate" is used in a number of situations to. indicate the return of a sum as a commercial practice It is a specific or unspecific amount which either reduced from the payment to be received or is handed back topayer after he had paid the total stipulated sum. In the former case it, is notional in the latter it is real. Though it has a colour of discount but can easily be distinguished. The term "rebate" is used more in relation to the taxes than in cases of dealing between an enterprise and its customers. Rebate means discount, deduction or refund of money. However, be it a transaction between two private parties or refund made by Taxing Authorities after the taxpayer had discharged his total liability towards payment of tax, the underlying idea of incentive remains common to both of them. In cases of buyers and sellers, the idea is either to attract advance payment or to compensation for full payment having already been made. Also it is an incentive to purchase more. The rebate of tax, however, contemplates a situation which invariably means return of the whole or part of the tax paid.
The term "rebate, discount and commission" are common usages of trade and commerce. These are frequently used to express the same meaning i.e. a concession given to a person to persuade. This persuasion is mostly motivated by the expected or realized benefit for the giver. In recent years, however, the term "rebate" is being used with a particular reference to taxes already paid while "commission" and "discount" have maintained an interchangeable identity.
The expression "commission" is understood as an allowance for service or labour in discharging certain duties such as for instance of an agent, 'factor, broker or any other .person who manages the affairs or undertakes to do some work or renders some service to another. Mostly, according to the learned Judge it is a percentage on price o y value or upon the amount of money involved. A "rebate" on the other hand, was explained to be a remission or payment back and of the nature of a deduction from the gross amount. In that sense, it can be equivalent to a discount or a draw back. Further, a rebate is not confined to a transaction of sale and includes any deduction or discount from a stipulated payment, charge or rate. It need not necessarily be taken out in advance of payment but may be handed back to the payer after he has paid the stipulated sum. The repayment need not be immediate. It can be made later and in case of persons who have continuous dealing with one another it is nothing unusual to do so.
The term "rebate" was first used with specific reference to re payment of direct taxes entering into cost of production through a scheme introduced in U.K. in 1964. Ever since it has almost assumed a definite reference to repayment of direct taxes already paid for the purpose of making an expert a more attractive buyer. This, does not, however, mean that the word "rebate" can no more be used in its conventional meaning as an alternate for discount.
Black's Law Dictionary, 6th Edn.; A Dictionary of Economics and Commerce by J. L. Hansan and Harihar Cotton Pressing Factory v. Commissioner of Income‑tax, Bombay North (1960) 39 ITR 594 ref.
(b) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S.136‑‑‑Reference to High Court‑‑‑Scope‑‑‑High Court cannot go beyond the finding of facts as recorded by the Tribunal except when these are ex facie against the record.
Dr. Ilyas Zafar for Appellant.
M. Ilyas Khan for Respondent.
Dates of hearing: 6th and 7th February, 2001.
JUDGMENT
NASIM SIKANDAR, J.‑‑‑This petition under section 136(2) of the Income Tax Ordinance, 1979 was admitted for regular hearing on 15‑10‑1988 framing following question of law for consideration and reply: ‑‑
Question of Law:
"Whether the Tribunal was justified to treat the Customs rebate as direct income of the assessee‑appellant?"
2. The appellant is a Private Limited Company and during the three assessment years involved, 1981 to 1983‑84 derived income from manufacture and export of tents. The Assessing Officer while framing assessment noted that the assessee had not declared export rebate in profit and loss account in accordance with C.B.R. instructions as also a decision of the Income‑tax Appellate Tribunal. Instead it was found credited to sales account to reach the total which accordingly comprised of both the actual imports as well as the amount of custom rebate. Rejecting the method he allocated the rebate to profit and loss account and re‑cast the trading account to reach a substantial difference in gross profit.
3. The learned First Appellate Authority CIT (Appeals) Zone‑I, Lahore endorsed the treatment meted out to the assessee. On further appeal, by a consolidated order recorded on 12‑3‑1986, the Lahore Bench of the Income Tax Appellate Tribunal maintained the view of the Revenue that customs rebate had to be treated as an outright receipt of income to form part of the profit and loss account and not of the trading account.
4. Heard. Learned counsel claims that the appellant is almost the only exporter throughout the Income Tax Region which had been given a discriminatory treatment inasmuch as all the assessees engaged in exports invariably treated the custom rebate as a credit entry to the trading account and include it in total sales. To support his contention he has mentioned at least 5 cases of exporters from Sialkot Region in which the inclusion of custom rebate in sales was not objected to by the Revenue. It is stated that custom rebate allowed to exporters is basically a return of various duties and taxes which they had earlier paid while importing raw material or purchasing the same from local market. Reference in this regard is made to section 21 of the Custom Act, 1969 providing for a power to the Central Board of Revenue to deliver certain goods without payment of duty or to re‑pay duty on certain goods. Mention is also made of subsection (2)(A) of section 27 of the Sales Tax Act, 1951 providing for refund and of clause 12(A) of the Central Excise Rules, 1944 providing for rebate of duty on exported goods which were made from exciseable goods. Learned counsel also refers to dictionary meaning of word "rebate" and to the International Accounting Standards 2 (revised 1993) which states that "the cost of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the enterprise from the taxing authority) and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services". The standard further goes to state that "trade discounts, rebates and other similar items are deducted in determining the cost of purchase".
5. Learned counsel for the Revenue, however, supports the view adopted by the Tribunal that custom rebate cannot form part of sales and that it is an outright income as it does not correspond to the reduction allowed in the sale price of exports by the exporters.
6. The word "rebate" is used in a number of situations to indicate the return of a sum as a commercial practice. It is a specific or unspecific amount which is either reduced from the payment to be received or is handed back to payer after he had paid the total stipulated sum In the former case it is notional in the latter it is real. Though it has a colour of discount but can easily be distinguished. The term "rebate" is used more in relation to the taxes than in cases of dealing between an enterprise and its customers. A According to the Black's Law Dictionary 6th Edition, it means discount, deduction or refund of money. However, be it a transaction between two private parties or refund made by Taxing Authorities after the taxpayer had discharged his total ability towards payment of tax, the underlying idea of incentive remains common to both of them. In cases of buyers and sellers, the idea is either to attract advance payment or to compensation for full payment having already been made. Also it is an incentive to purchase more. The rebate of tax, however, contemplates a situation which invariably means return of the whole or part of the tax paid.
7. Before the Tribunal, the present petitioner relied upon the definition of "rebate" by J.L. Hanson in "A Dictionary of Economics and Commerce". The definition was made in the background of export rebate introduced in the U.K. "A scheme introduced in 1964 to re‑pay to exporters some amounts of specified indirect taxes, entering into cost of production such as purchase tax, petrol tax, motor vehicle licence as a means of stimulating exports". The learned Tribunal, however, brushed aside this definition on the ground that the custom rebate in issue before them though given for stimulating exports was not with reference to any taxes which entered into cost of production. According to them custom rebate before them was given to the assessee to compensate to some degree if his export goods did not permit him any profit or if he exported them at a rate below the cost. A definition of the term rebate as given in Income‑tax Dictionary was also not found to be applicable. The Tribunal also did not consider relevant the definition of the term "rebate allowance and exchange profits" as referred to from the Laws of England by Halsubry. However, the learned Members did not record the true nature of distinction between various rebates to identify their proper place in accounts.
8. The terms rebate discount and commission are common usages of trade and commerce. These are frequently used to express the same meaning i.e. a concession given to a person to persuade. This persuation is mostly motivated by the expected or realized benefit for the giver. In recent years, however, the term "rebate" is being used with a particular reference to taxes already paid while "commission" and "discount" have maintained an interchangeable identity. Tandulkar, J. of Bombay High Court in re: Harihar Cotton Pressing Factor. v. Commissioner of Income Tax, Bombay North (1960) 39 ITR 594), explained the three terms commission, discount and rebate. According to him, the expression "commission" is understood as an allowance for service or labour. in discharging certain duties such as for instance of an agent, factor, broker or any other person who manages the affairs or undertakes to do some work or renders some service to another. Mostly, according to the, learned Judge it is a percentage on price or value or upon the amount of mote involved. A "rebate" on the other hand, was explained to be a remission or payment back and of the nature of a deduction from the gross amount. In that sense, the learned Judge found to be equivalent to a discount or a drawback. Further according to him, a rebate is not confined to a transaction of sale and includes any deduction or discount from stipulated payment, charge or rate. It need not necessarily be taken out in advance of payment but may be handed back to the payer after he has paid the stipulated sum. The repayment need not be immediate. It can be made later and in case of persons who have continuous dealing with one another it is nothing unusual to do so".
9. The term "rebate" as earlier noted was first used with specific reference to re‑payment, of direct taxes entering into cost of production through a scheme introduced in U.K. in 1964. Ever since it has almost assumed a definite reference to repayment of direct taxes already paid for the purpose of making an expert a more attractive buyer. This, Goes not, however, mean that the word "rebate" can no more be used the its conventional meaning as an alternate for discount as explained by the learned Judge in the above‑mentioned case.
10. A rebate of tax when made with reference to actual amounts earlier paid by a taxpayer is different from the one given with reference to the exports made of a specified goods and quantity. In the latter case it is more in nature of subsidy while in the former it is a drawback proper. Though the purpose to give incentive to exports, remains the same, their treatment in accounts is not similar. While the Revenue is traditionally hesitant to accept a declared version, the assessees also do not appear consistent. A custom rebate, which is returning of duties of certain kinds earlier entering into the cost of production, is. normally treated by the exporters in two manners. In very few cases they deduct it from the cost of production and in that case it is a debit entry to purchase account. Others., as in the case of present assessee petitioner, treat it a credit to sale account. In practical significance it also amounts to take the rebate as income with the only difference that by adding it to sales only a part of it is offered for tax through application of a gross profit rate. Adding an amount of Rs.100 of rebate to sales will amount to offering for tax a sum of Rs.25 only if the gross profit rate is applied at 25%. Adamant Revenue will, however, invariably insist upon taking it to profit and loss account as direct income. A deduction from cost though increases gross profit rate is, most realistic and correct manner to treat the rebate of the kind. Adding it to sales account or treating it as an item of E profit and loss account is not warranted for at least two reasons. Firstly, it has no direct nexus with the sales or actual exports. Secondly no profit is earned by an assessee on a rebate. A compensatory rebate which is meant to "compensate" and is a lump sum amount bearing no direct connection with the cost of sales can fairly be taken to profit and loss account as incomeneeds to be emphasised here that treatment of a rebate becomes a moot point only where accounts have been rejected for one reason or the other. In case of acceptance of accounts the issue in hand will not arise at all because then treating the rebate in trading account or an item of profit and loss account . will not affect the gross profit figures.
11. In our considered opinion, therefore, only the first kind of assessee treats the rebate and reflects its real impact in the books of accounts. The international accounting standard as referred to above also supports our view that all taxes recoverable b; the enterprise from the taxing authorities do not form part of cost of inventories. Therefore, these will have to be shown as deduction from cost.
12. The difference in treatment obviously affects the part of the balance sheet to compute the net profit. However, as said above, except for being a deduction to purchases, the other two treatments do not show a correct picture. To that extent the issue is clear as in final analysis it is the exact nature of the rebate which will determine its place in the accounts. Though, some confusion ox uncertainty may well‑remain in case of other kinds of rebates like compensatory etc. taking a rebate either to sales account or an item of profit and loss account where it is only a return of duties already paid, is not in accordance with any recognized accounting principle.
13. The assessee before us is in a pitiable condition. All its emphasis is on the rebate which is claimed to be the sums earlier paid as customs, excise or sales tax levies. There is, however, no evidence at all to support the plea. Instead, throughout the proceedings the claimed amount of rebate was taken to be of compensatory nature. The Tribunal rather recorded an express finding that the claimed sum was a compensatory rebate, and therefore, an item of profit and loss account. It is not the case of the assessee that the findings of the Tribunal are either unfounded or are against the material on record. This Court in a reference under section 136 of the Income Tax Ordinance cannot go beyond the finding of facts as recorded by the Tribunal I except when these are ex facie against the record. In the assessment year under review, therefore, our answer has to be against the assessee. However, in any subsequent year if the assessee can establish the nature of rebate to be different from the one found by the Tribunal in the year under consideration, it can very well treat it accordingly.
14. Question answered in the affirmative.
M.B.A./A‑199/LQuestion answered.