BEFORE S. HASAN IMAM, JUDICIAL MEMBER AND MUHAMMAD MEHBOOB ALAM, ACCOUNTANT MEMBER VS BEFORE S. HASAN IMAM, JUDICIAL MEMBER AND MUHAMMAD MEHBOOB ALAM, ACCOUNTANT MEMBER
2002 P T D (Trib.) 214
[Income-tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Chairman and Javaid Masood Tahir Bhatti, Judicial Member
I.T.A. No. 1933/KB of 1999-2000, decided on 02/06/2001.
Income Tax Ordinance (XXXI of 1979)---
----Ss. 30, 22 & 72---Income from other sources---Interest income---No business income---Business expenses---Set-off against interest income-- No notice for discontinuation of business---First Appellate Authority found that business expenses could be set-off against income under S.30 of the Income Tax Ordinance, 1979---Validity---Assessing Officer without issuing notice to the assessee under S.72 of the Income Tax Ordinance,. 1979 was not justified in not setting off the business loss on account of expenses against the other income because the assessee had not discontinued its business but was under temporary lull in the business and the expenditure incurred by the assessee were incurred in carrying on the business, and were allowable and the Assessing Officer had erred in not assessing business loss under the provision of S.22 of the Income Tax Ordinance, 1979---First Appellate Authority rightly directed to allow all the business expenses which were verifiable and necessary to maintain registered office of the assessee and had been incurred in execution of statutory obligation of the company---Order of the First Appellate Authority was upheld and the departmental appeal was dismissed by the Tribunal.
Kirk & Randle Limited v. Dunn 8 TC 663 and (1969) 72 ITR 114 ref
(1935) 3 ITR 350 rel.
(1996) 73 Tax 10 (Trib.) and Messrs Zaheer Sancho (Pvt.) Ltd.'s case I. T. As. Nos. 1669 to 1671 /KB of 1998-99 distinguished.
Zaki Ahmad, D.R. for Appellant.
Naveed Hyder, A.C.A. for Respondent
Date of hearing: 26th May, 2001.
ORDER
JAVAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).-- The Department through this appeal has objected to the order of the learned CIT(A), dated 7'-4-2000, on the sole ground that the learned CIT(A) was not justified in holding that the business expenses can be set off against income under section 30 of the Income Tax Ordinance, 1979.
2. Mr. Zaki Ahmad, learned representative of the appellant department has contended that the assessee was previously acting as shipping agent and derived commission income from handling vessel of the American President Lines of Oklohama USA, the agency agreement was subsequently terminated with effect from October 1997. As a result of agency termination no agency fee was realized during the period 1-7-1997 onward. On termination of agency agreement, a suit and a Constitutional petition were filed by the assessee in the Hon'ble High Court of Sindh. However, subsequently these were withdrawn as the assessee was advised that agency agreement were validly terminated. To compensate the assessee, its foreign principal agreed to pay the assessee US Doller 70,000 equal to Pak Rupees 36,33,000 as exgratia payment. This entire amount was taxed in the hands of assessee in the immediately preceding assessment year on accrual basis. According to the learned D.R. the assessee has abandoned the business of shipping agency and has no other source of income in the year under review except interest income on bank deposits taxable under section 30 of the Ordinance and the Assessing Officer, therefore, computed the total income under section 30 of the Ordinance in accordance with the gross interest income earned. But the learned CIT(A) has directed to allow the business expenses without any justification.
3. On the other hand, Mr. Naveed Hyder, A.C.A., learned representative of the appellant is supporting the impugned order of the learned CIT(A). According to him, the assessee has never sent to the Assessing Officer any notice under section 72 of the Ordinance regarding the discontinuation of business and neither the Assessing Officer under subsections (2) and (3) of section 72 has served any notice to the assessee requiring to furnish return which is the mandatory provision under the law. He has contended that the D.C.I.T. on a misconception `that the assessee has discontinued its business on termination of shipping agency' has not assessed business loss for the year. According to him, the assessee-company was very much in existence, although there was a temporary lull in the business, and therefore, all bona fide expenditure incurred was allowable. As the assessee had performed all its internal functions of maintaining its registers, keeping accounts and had also performed its statutory obligation under the Companies Ordinance, 1984 and the Income Tax Ordinance. According to the learned counsel, the accounts were prepared and audited in respect of assessee's business and expenses were incurred, and therefore, learned CIT(A) has rightly directed to allow all the business expenses which are verifiable and necessary to maintain registered office of the assessee and have been incurred in execution of statutory obligation of the Company. Learned counsel in -support of his contention has placed reliance on the case reported as Kirk & Randle Limited v. Dunn (8 TC 663), wherein, it has been held by the King's Bench Division of the High Court of Justice that "notwithstanding the company's failure to obtain contracts for a number of years, there was no discontinuance of its trade. A company may not obtain or be able to execute a single contract for a period of months or even years, yet it may be deemed to carry on its business if during the period of lull or inactivity it performs its internal functions, that is to say, retains its registered office, holds its meetings, year after year, pays director's fee and incur other expenditures". Reliance has also been placed on the case-law reported as (1935) 3 ITR 350)(Madras H.C.) and (1969) 72 ITR 114 (Madras N.C.). Learned A.R. has also placed before us the Memorandum and Articles of Association of the assessee-company which shows that the company has been constituted for the multi purposes and no specific business has been specified in the Articles of Association. Learned counsel has also referred a decision of this Tribunal reported as (1996) 73 Tax 10 (Trib.) and order of this Tribunal, dated 12-6-1999 in I.T.As. Nos. 1669 to 1671/KB of 1998-1999 (assessment years 1994-95 to 1996-97) in the matter of Messrs. Zahecr Sancho (Pvt.) Ltd., but these cases are not directly relevant to the issue
4. We have heard learned representatives of both the parties and have also perused the impugned order of the learned CIT(A) and the assessment order. We are fully convinced with the submission made by the learned counsel for the assessee that the learned CIT(A) has rightly directed to allow all the business expenses, which are verifiable and necessary to maintain registered office of the assessee -and have been incurred in execution of statutory obligation of the company. While perusal of the cases referred by the learned counsel for the assessee, we have found that the cases referred are from the Indian High Court but the issue under consideration has been discussed in those judgments, therefore, for the facility of reference relevant parts of the decisions are reproduced hereunder:---
The decision reported as (1935) 3 ITR 350 is regarding a company which was formed for the purpose, inter alia, of searching for, winning, working and getting mica. In November, 1927, the production of mica was stopped owing to a cyclone. With a view to resume the production the company did some prospecting work in the year of account (1928-1929) keeping a reduced staff and incurred an expense of Rs. 5,420 by way of salary, wages, legal expenses, depreciation etc. The Income-tax Authorities refused to deduct this amount from the profits of the company's other business on the ground that, as the business of mining mica was stopped in 1927 and not resumed, the expenditure incurred was a capital.
In that case it was held by the Madras High Court that having regard to the circumstances of the present case, the expenditure incurred by the company was incurred in the carrying on of the mica business, and was allowable as a deduction against the profits and gains of the assessee's other business, even though there was a period of inactivity in the carrying on of the business and the business was not in fact resumed after the expenses had been incurred."
It was further held that the question whether "the business was being carried on must depend in each case on its own facts and not on any general theory of law".
In another case referred by the learned counsel for the assessee reported as (1969) 72 ITR 114, the Division Bench of Madras High Court has held that "the question whether a business was being carried on or was discontinued must depend in each case on its own facts. It is not necessary that a business to be in existence should have work all the time. There may be long intervals of inactivity and a concern may still be a going concern though it may for some time be quiet and dormant".
In this case, the assessee was having two businesses, one in arecanuts, and the other, a rice mill. He maintained separate accounts for the two business connected through a current account. They were inter-related and inter-connected with unity of control and common funds. The assessee temporarily suspended his arecanut business in the year of account relevant to the assessment year on account of unfavourable trade conditions and claimed a net loss of Rs. 14,059 in the assessment. The Income-tax Officer allowed a loss of Rs. 13,559 on this account. The Appellate Assistant Commissioner and the Tribunal held that the arecanut business was not carried on in the account year and the two succeeding years and, consequently, there was no profit or loss to be computed in respect of that business and disallowed loss of Rs. 13,559.
It was held by the Hon'ble Madras High Court that "the disallowance of the amount of loss claimed by the assessee to have been incurred .in his arecanut business during the year of account relevant to the assessment year was not valid in law.
As the assessee was maintaining the establishment and was waiting for improved market conditions in arecanuts and there was nothing to show that he completely abandoned or closed the business for ever, the business must be deemed to be continuing." It was further held that "if a person carries on two or more distinct businesses the profits or losses of all of them ought to be added together and the aggregate sum so arrived at would represent his profits or gains in the business. If the net result of this calculation shows a loss, such loss may, under section 24 of the Act, be set off against the profits or gains derived by the assessee from other heads of income of that year and the Income-tax Officer reached the right decision in law in the present case."
5. We have also gone through the provision of section 72 of the Income Tax Ordinance 1979, which is also incorporated hereunder for the facility of reference:---
"72. Assessment in the case of discontinued business or profession.---(1) Where, in any year, any business or-,profession is discontinued, the person discontinuing such business or profession shall give to the Deputy Commissioner a notice of such discontinuance within fifteen days of the date of such discontinuance (hereinafter referred to as the "said date").
(2) The person discontinuing such business or profession shall, under the provisions of this Ordinance or upon being required by the Deputy Commissioner by a notice in writing, furnish a return or returns of total income in respect of the period commencing from the end of the latest income year for which an order has been made under subsection (1) of section 59, sections 59A, 62, 63 or 65, or, where no such order has been made, a return has been made under sections 55, 56 or 57, as the case may be, and ending on the said date or where no such order or return has been made the income year or years, comprising the period ending on the said date; and the period commencing from the end of the latest income year to the said date shall, for purposes of this section, be deemed to be an income year (distinct and separate from any other income year) for the assessment year in which the said date falls.
(3) Notwithstanding anything contained in subsections (1) and (2), the Deputy Commissioner may serve a notice on any person who, in his opinion, has discontinued, or is likely to discontinue, in any year, any business or profession, to furnish, within such time as may be specified in such notice, a return or returns of total income for the income year or years for which the assessee is required to furnish such return or returns under subsection (2).
(4) The assessment shall be made at the rates applicable to the relevant assessment year and ail the provisions of this Ordinance shall, so far as may be, apply accordingly."
We have also gone through the Memorandum and Articles of Association of the assessee-company. We have found that the company has not been established solely for the purpose of shipping business but to invest and deal with the surplus moneys is also among the objects for the establishment of the company. Relevant Articles of Memorandum are reproduced hereunder:---
IIIThe objects for which the Company is established are:
(1) To carry on business either solely or in partnership with other companies, corporations, firms or individuals, as general merchants, agents, manufacturers, contractors, importers, exporters, factors, wharfingers warehousemen, bonded whare housemen, ship-owners, barge owners, lighter-men, forwarding agents and carriers by land, sea and air.
(2) To commence, acquire and carry on the business of stevedores, shipchandling and shiprepairs.
(3) To take part in -the promotion, supervision of the business or operation of any company or undertaking and for that purpose to appoint and remunerate any directors, trustees, accountants or other experts or agents.
(16) To enter into an agreement or into any arrangement for sharing profits, union of interest, joint adventure, reciprocal concessions or cooperation or otherwise with any person or company carrying on or engaged in or about to carry on or engage in any business which the company is authorised to carry on or engage in or any business or transaction, capable of being conducted so as directly or indirectly to benefit the Company, and to take, or otherwise acquire and hold, shares or stocks in or securities of any such company and to subsidise or otherwise assist, any such company or person as aforesaid and to sell, hold, re-issue, with or without guarantee, or otherwise deal with such shares, stock or securities, concerning the business of this company.
(17) To take, or otherwise acquire and hold, shares in any other company having objects altogether or in part similar to those of this Company or carrying on any business capable of being conducted so as directly or indirectly to benefit this Company.
(24) To invest and deal with the surplus moneys of the Company not immediately required upon such investments and in such manner as may from time to time be determined.
(26) To draw, make, accept, endorse, discount, execute and issue promissory notes, bills of exchange, bills of lading, warrants, debentures and other negotiable or transferable instruments concerning this Company:
(27) To advance money to such persons and on such terms as may be arranged and in particular to customers of and persons having dealings with the Company and to guarantee the performance of contracts by members of or persons having dealing with the Company.
(28) To borrow, or secure the payment of money in particular by the issue of debentures, perpetual or otherwise, charged upon all or any of the Company's property both present and future and to redeem or pay off any such securities."
6. After going through the facts of the instant case and perusal of the above referred cases and relevant provisions of law, we are of the considered view that the Assessing Officer without issuing notice to the assessee under section 72 of the Ordinance was not justified in not setting off the business loss on account of expenses against the other income because the assessee has not discontinued its business but was under temporary lull in the business and the expenditures incurred by the assessee were incurred in carrying on the business, and were allowable and the DCIT has erred in not assessing business loss under the provision of section 22 of the Income Tax Ordinance, 1979. We are of the considered view that the learned CIT(A) has rightly directed to allow all the business expenses which are verifiable and necessary to maintain registered office of the assessee and have been incurred in execution of statutory obligation of the company as the Assessing Officer was not justified in not setting off the business loss on account of expenses against the other income as the assessee has not discontinued its business on termination of shipping agency and there was temporary lull in the business which is evident from the fact that it is maintaining its registered office and performing its internal functions/statutory obligations under the Companies Ordinance, 1984 and Income Tax Ordinance 1979. We, therefore, find no warrant for interference in the impugned order of the learned CIT(A), which is upheld and the appeal by the department dismissed.
C. M. A. /M. A. K./156/Tax(Trib.)Appeal dismissed.