BEFORE INAM ELLAHI SHEIKH, CHAIRMAN AND MUNSIF KHAN MINHAS, JUDICIAL MEMBER VS BEFORE INAM ELLAHI SHEIKH, CHAIRMAN AND MUNSIF KHAN MINHAS, JUDICIAL MEMBER
2002 P T D (Trib.) 358
[Income-tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Chairman and Munsif Khan Minhas, Judicial Member
I.T.As. Nos. 726/KB, 1668/KB and 1669/KB of 2001-2002, decided on 13/10/2001.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.66-A---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Jurisdiction---Assessment modified under S. 66A of the Income Tax Ordinance, 1979 was cancelled by the Tribunal as the assessment was made by an officer of the same rank i.e. Inspecting Additional Commissioner.
2001 PTD 1467 rel.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss. 66-A, 62 & 34---Protection of Economic Reforms Ordinance (XII of 1992), Preamble---Set-off of loss---Foreign exchange gain and loss-- Assessee showed foreign exchange gains as exempt under the Protection of Economic Reforms Ordinance, 1992. and exchange loss was claimed as an expense which was allowed by the Assessing Officer---Inspecting Additional Commissioner modified the assessment on the ground that assessee had set off exchange gain and losses for the accounts purposes whereas for the income-tax purposes the assessee had claimed exemption on the exchange gain and had separately claimed the exchange loss and addition was made on account of exchange fluctuation ---Validity-- Assessee had made the payments from the foreign currency deposits the exchange gain from which had been covered against the exchange losses in the books of accounts---Since the notional exchange gain on transaction of payments due to time lag was emanating from the same source i.e. foreign currency deposits, the accounting treatment was accurate treatment and the assessee had no case for the allowance of exchange loss from such transaction separately---Exchange gain on foreign currency deposits should not be considered separately and independently as compared to the exchange loss incurred/recorded at the time of payments.
Naveed Haider, A.C.A. for Appellant.
Shaheen Aziz Niazi, D.R. for Respondent.
Date of hearing: 11th October, 2001.
ORDER
INAM ELLAHI SHEIKH (CHAIRMAN). ---These are three appeals of a public company directed against the orders one dated 26-4-2000 and two dated 11-5-2001, recorded by the learned I.A.C. of Income-tax, Range-IV, Companies-V, Karachi whereby the assessments originally framed under section 62 of the Income Tax Ordinance, 1979 (hereinafter called the 1979 Ordinance') were modified.
2. The relevant facts in brief are that in the assessment year 1995-96 the assessment was framed by the learned I.A.C., Range-III, Companies-V on 26-6-1996 at an income of Rs. 284,847,429. The main reason giving rise to the impugned order of such action under section 66A of the 1979 Ordinance was that the assessee has set-off exchange gain and losses for the accounts purposes where for the income-tax purposes the assessee had claimed exemption on the exchange gain and had separately claimed the exchange loss. Another reason given was the admissibility of head office expenses. After detailed proceedings, the learned I.A.C. added an amount of Rs. 5,835,539 on account of head office expenses and an amount of Rs. 2,694,941 on account of exchange fluctuation to the income already assessed vide the order 26-4-2000 under section 66A of the 1979 Ordinance.
3. In `the assessment year 1996-97 similar action was taken and an order under section 66-A of the 1979 Ordinance was passed on 11-5-2000 so as to modify an order already passed on 21-4-1998 under sections 62/ 132 of the 1979 Ordinance. In this year there was an addition of Rs. 6,358,000 on account of exchange fluctuation.
4. In the assessment year 1997-98 another order, dated 11-5-2000 was passed under section 66A of the 1979 Ordinance so as to make an addition of Rs. 10,913,000 on account of exchange fluctuation to the income assessed as per assessment order, dated 25-5-1998.
5. The learned A.R. of the assessee Mr. Naveed Haider, A.C.A. has raised legal preliminary objection in the first two years under consideration. It is submitted by the learned A.R. of the assessee that the learned I.A.C. was not empowered to invoke the provisions of A section 66A of the 1979 Ordinance as original assessments which have been modified presently, were made by an officer of the same rank i.e. I.A.C. the learned A.R. has relied on a decision of the Hon'ble Lahore High Court reported as 2001 PTD 1467 in support of his contention. The author of the impugned order has appeared in person and has submitted that he had been given the powers of Deputy Commissioner by the Commissioner of Income-tax vide a letter dated 4-10-1995: It was elaborated that such powers were conferred on various I.A.Cs. for making the assessments of special cases and that such arrangement continued till 28-4-1997. Thus 'according to the learned I.A.C. he had passed valid order exercising his powers as D.C.I.T. The learned I.A.C. also raised an objection that the assessee did not raise such legal objection on the question of jurisdiction at the time of proceedings under section 66A of the 1979 Ordinance.
6. In the assessment year 1996-97 an additional objection raised by the learned A.R. of the assessee is that the action of the learned I.A.C. was barred by limitation. It was elaborated by the learned A.R. of the assessee that the original assessment for the assessment year 1996-97 was framed on 30-4-1997 against which the assessee filed appeal before the First Appellate Authority on certain issues such as head office expenses, other expenses, travelling expenses and financial expenses and that such assessment was set aside by the First Appellate Authority. The re assessment was said to have been made on 21-4-1998 by curtailing the disallowance of head office expenses partly. The learned I.A.C., however, maintained that he had rectified the order passed under sections 62/132 of the 1979 Ordinance whereas the plea of the learned A.R. is that the issue of exchange fluctuation was not covered by such order under sections 62/132 of the 1979 Ordinance as the same had already been settled in the original assessment order. The learned I.A.C. has also raised an objection that the assessee was required to attend the proceedings under section 66A of the 1979 Ordinance and the case had been fixed for 12-3-2001 and that on such date the case had been adjourned to 11-5-2001 on the request of the learned A.R. of the assessee. Thus, according to the learned I.A.C., if there was any delay, then the same was caused by the action of the assessee and thus it cannot be held that the order under section 66A of the 1979 Ordinance was time-barred.
7. In the assessment year 1997-98 the abovementioned technical objections are not involved. However, the learned A.R. of the assessee has strongly argued the case in all the three years on the merits and legal question. The real issue involved in these appeals is whether the assessee could claim exchange losses, said to be notional losses, for tax purposes although it has set-off such losses against the exchange gain for the purpose of the accounts. As per the facts gathered from the learned A.R., the assessee had purchased foreign exchange in the shape of Dollars from the open market and placed the same in the foreign currency deposit account the income from which was exempt from tax under the Economic Reforms Order. The amounts lying in such foreign currency deposits were used by the assessee for making the payments on account of purchases made in foreign currency by it or incurring other foreign currency expenses. In other words the foreign currency deposits were maintained to hedge against any fluctuation in the value of Rupee. At the balance-sheet date there was a certain exchange gain on transaction of such foreign currency deposits into Pak Rupee, which was recorded in the books of account. While making the payments out of such foreign currency deposits, there was a certain exchange loss due to the time lag between the incurrence of expenditure/liability and the actual payment thereof from such foreign currency deposits. Such fluctuation was recorded -in the books of account as a loss. For accounting purposes such gain and loss referred to above is netted off and net amount was shown in the profit and loss account. However, for tax purposes the assessee showed gross exchange gains as exempt whereas exchange loss was claimed as an expense and allowed. The claim of the learned A.R. of the assessee is that the exchange gain on transaction of foreign currency deposits balances was exempt under the Economic Reform Order whereas the exchange loss on actual remittance was an allowable expense. The learned I.A.C., however, has not accepted such claim of exemption or grossing up and he has disallowed the exchange loss claim of the assessee in all the three years under consideration.
8. We have considered the submissions of both the parties and we have also summarized the facts of the case above. First we take up the objection of the learned A.R. of the assessee with regard to the jurisdiction of the learned I.A.C. in passing the order under section 66A of the 1979 Ordinance as the original assessments had been made by the learned I.A.C. in the first two years under consideration. We have perused the judgment of the Hon'ble Lahore High Court reported as 2001 PTD 1467 (supra). The facts and circumstances in the assessment year 1995-96 appear to be similar to those 'prevailing in the cited report. The Hon'ble Judges of the Lahore High Court have dealt with the issue at length and we find the following observation of the Hon'ble Judges to be of special interest:
"As assessment framed by an I.A.C. even though remains on the file of D.C.I.T., still it continues to be the one framed by an I.A.C. and therefore, a person equal in authority cannot call for the same. The title of the provisions supports our view that the power so conferred on I.A.C. is `to revise the Deputy Commissioner's order'. As observed earlier an order recorded by an I.A.C. on being authorized under section 5(1)(c) of the Ordinance continues to remain that of an I.A.C. though acting as an Assessing Officer. It is not comparable nor it can be stated to be that of Deputy Commissioner of Income-tax, The scheme of section 66A also gives an exceptional situation when an I.A.C. while revising the order of the Deputy Commissioner can himself pass an assessment order substituting the earlier order. This is in addition to his power to cancel the assessment and to direct a fresh assessment to be made by D.C.I.T. If the interpretation of the learned Tribunal is accepted then one will also accept the possibility that an I.A.C. could exercise revisional powers for the second time in respect of his own order, which he had earlier under subsection (1) of section 66A, that situation simply appears anomalous and outside the four corners of the assessment and other proceedings contemplated in the Ordinance. Therefore, we will agree with the appellants that powers conferred under section 5(1)(c) of the Ordinance simultaneously substitute an I.A.C. for the Commissioner of Income-tax. That transfer or substitution remains intact till the possibility of remains in fact. It does not and will the completion of assessment other proceedings undertaken by the I.A.C. as D.C.I.T..........
According to order, dated 23-8-1995 passed by. C.I.T. (Companies Zone), Faisalabad under section 5(1)(c) of the 1979 Ordinance (with prior approval of R.C.I.T. (Control Range) certain I.A.Cs. including the gentleman who framed the assessment in the case of the present appellant were directed to exercise powers conferred on Deputy Commissioner of Income tax in respect of the classes of persons specified in the Schedule. The notification so made it goes without saying, did make the I.A.C. a D.C.I.T. or an Assessing Officer but it did not divest him of his position in the hierarchy as an I.A.C. The power given is in addition to his status and not to its derogation.
Therefore, we will allow these appeals by holding that framing of an order under section 66A in the three assessment years involved in respect of the appellant on 29-6-1999 by the I.A.C. was not in accordance with the law."
9. In view of this judgment of the Hon'ble Lahore High Court we have no hesitation in accepting the assessee's appeal for the year 1995-96 and we cancel the order of the learned I.A.C.
10. In the assessment year 1996-97, however, the situation is somewhat different. The original assessment was made by an I.A.C. and the same was challenged before the First Appellate Authority we set aside the original assessment on the issues of financial charges, head office expenses etc. A perusal of the order under sections 62/132 of the 1979 Ordinance, however, shows that the Assessing Officer has completely overlooked the issue of financial expenses and he has simply dealt with the issue of head office expenses. The exchange fluctuations are normally a part of the financial expenses and the Assessing Officer while making the order under sections 62/ 132 of the 1979 Ordinance should have elaborated on this issue. It may also be mentioned that the assessment order under sections 62/132 of the 1979 Ordinance was passed by the D.C.I.T. Circle-08, Range-III, Companies V, Karachi and not by an I.A.C. The learned I.A.C. has revised the assessment order passed under sections 62/132 of the 1979 Ordinance vide his order dated 11-5-2001. Thus in our considered view it cannot be said that the learned I.A.C. has revised the order of another I.A.C. It would also not to be said to be hit by the limitation as the order under sections 62/132 of the 1979 Ordinance was passed on 21-4-1998.
11. Now coming to the main issue involved in these appeals we have already narrated the facts above. We are not convinced by the arguments of the learned A.R. of the assessee' that the exchange gain on foreign currency deposits should be considered separately and independently as compared the exchange loss incurred recorded at the time of payment. The assessee has admittedly made the payments in question from the same foreign currency deposits the exchange gain from which has been netted-off against the exchange losses in the books of accounts. Since the notional exchange gain on transaction of payments due to time lag is emanating from the same source i.e. foreign currency deposits, we feel, that the accounting treatment was accurate treatment and the assessee has', no case for the allowance of exchange loss from such transaction) separately.
12. As a result of the above discussions, the assessee's appeals for the years 1996-97 and 1997-98 are dismissed whereas for the assessment year 1995-96 is accepted as indicated above.
C.M.A./M.A.K./166/Tax(Trib.)Order accordingly.