Before Muhammad Tauqir Afzal Malik, Judicial Member and Mrs. Safia Chaudhry, Accountant Member VS Before Muhammad Tauqir Afzal Malik, Judicial Member and Mrs. Safia Chaudhry, Accountant Member
2002 P T D (Trib.) 900
[Income‑tax Appellate Tribunal Pakistan]
Before Muhammad Tauqir Afzal Malik, Judicial Member and Mrs. Safia Chaudhry, Accountant Member
I.T.A. No.2128/LB of 2000, decided on 03/02/2001.
Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss. 66‑A, 15, 24, 62 & Second Sched., Cl. (116)‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Disallowance of proportionate expenses against exempt income‑‑ Assessed was a company having income from various sources including exempt income of capital gains from the sale of shares of the quoted companies‑‑‑Total. expenses claimed was allowed by the Assessing Officer‑‑‑Inspecting Additional Commissioner modified the assessment on the ground that total expenses were to be apportioned towards expenses incurred for earning the exempt income ‑‑‑Validity‑‑‑Assessee intended to get the benefit of exemption on the gross capital gain receipts whereas the benefit was only admissible to the assessee to the extent of the net capital gain under the law‑‑‑Assessing Officer should have computed the net income under both the heads. separately after allowing the expenses against such incomes, but he erroneously assessed gross capital gain as exempt income instead of net gain, which resulted into the loss of revenue‑‑‑Assessment was proved to be erroneous and prejudicial to the interest of Revenue which assessment as modified was upheld by the Tribunal.
1992 PTD (Trib.) 1141; 1998 PTD 66; 1984 PTD 341; 1984 PTD 390; CIT v. PICIC (1965) 56 ITR 77 and Commissioner of Income tax v. Industrial Investment Trust Company Ltd. (1968) 67 ITR 436 distinguished.
(1984) 49 Tax‑ 35; (1984) 50 Tax 7 (Trib.); 1997 PTD 902; 1992 PTD 1610; 1996 PTD 750; ITA No. 1913/KB; (1993) 203 ITR 108; Palkhiw ala Page 482; (1976) 33 Tax 23 (Trib. ); 1992 PTD (Trib.) 1141; 1993 PTD (Trib.) 472; 1997 PTD 180; 1986 SCMR 1917; 67 ITR 436; 56 ITR 77; 1988 PTD 626; 6 ITR 636; 127 ITR 1; 42 Tax 122; 82 Tax 565 (SC India); 221 ITR 861; 1998 PTD 703; 1996 PTD 360 and 208 ITR 202 ref.
Siraj‑ul‑Haq and Yousaf Saeed, F.C.A. for Appellant.
Shafqat Mahmood Chohan, L.A., Farooq Tahir, D.R Safdar Hussain, .I.A.C. for Respondent.
Date of hearing: 3rd February, 2001.
ORDER
MUHAMMAD TAUQIR AFZAL MALIK (JUDICIAL MEMBER).‑‑‑This is an appeal by the assessee, a public limited company, who has challenged the action taken by IAC under section 66A vide order, dated 12‑4‑2000.
2. They have called in question that the order passed by DCIT was neither erroneous nor prejudicial to the interest of Revenue, hence there were no legal or factual grounds for amending the original order.
That the expenses claimed by the assessee‑Company cannot be allocated to income which was exempt from tax i.e. capital gains from the sale of shares of the quoted companies under clause (116) to Second Schedule to Income Tax Ordinance, 1979 as held in a number of cases by the learned High Court as well as learned ITAT.
That the administrative and other expenses and interest cannot be allocated to income which is exempt from tax and taxable income.
That without prejudice to the above grounds of appeal, section 28 of the Ordinance states that while computing the income under the head capital gain, the cost of acquisition of the capital asset and any expenditure incurred wholly and exclusively in connection with the transfer thereof shall be deducted. In view of this section administrative and other expenses cannot be allocated to capital gain.
3. Arguments heard and record perused.
4. The assessee is a public limited company. For the assessment year 1995‑96, assessment was completed under section 62 at an in coke of Rs.1,36,71,952. Subsequently, the IAC after going through the record observed as under:
"The examination of the record reveals that the following sources of revenue have been declared by the assessee:
| 1.BrokerageRs. 87,97,209 2.ConsultancyRs.2,00,49,375 3.UnderwritingRs. 34,85,473 4.Dividend incomeRs. 41,64,355 5.Capital gainRs.4,72,88,910 6.Total operative revenueRs.8,37,85;322 7.Less operative expensesRs.2,28,07,163 8.Net profitRs.6,09,78,159 9.Add othersRs. 40,10,580 10.IncomeRs.6,49,88,739 |
Out of the above income, the income offered for taxation is Rs.1,32,78,571. The major portion of revenue comprises gain on sale of shares in the extent of Rs.4,72,88,910 which has been claimed as exempt. Against this the total expenses of Rs.228,07,163 have been claimed which includes expenses incurred on earning exempt income.
The Assessing Officer at the time of framing the assessment failed to apportion expenses towards this exempt source in the following manner:
Exempt income
‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑ x Total expenses
Total receipts
47288910
‑‑‑‑‑‑‑‑‑‑‑‑x 22807163
87795902
Expenses relatable to exempt source ‑‑‑Rs.1,22,84,467
Out of the total expenses of Rs:2,28,07,163, a sum of Rs.1,22,84,467 was to be apportioned towards expenses incurred for earning exempt income. The Assessing Officer at the time of framing the assessment failed to take cognizance of this fact and allowed the total expenses against the taxable income. The above facts have rendered the assessment for the assessment year 1995‑96 erroneous insofar as prejudicial to the interest of Revenue".
The above said facts were confronted to the assessee through show‑cause notice under section 66A of the Income Tax Ordinance and the assessee was required to submit reply within seven days. After seeking adjournments Mr. Zahid Zia, Financial Controller and subsequently Mr. Yousaf Saeed, AR of the assessee attended the case and filed reply on 4‑4‑2000. Their main contention was that in the case of Punjab Bank Ltd. and in the cited judgment 1992 PTD (Trib.) 1141. In ITA No.1216/LB/1993, the learned Tribunal relying on an earlier decision of the High Court held that administrative expenses as well as interest cannot be allocated to income which is taxable and exempt income, The reported decisions cited supra in the case of Bank of Punjab has been relied in 1998 PTD 66 in PICIC's case which was further based on earlier decisions of 1984 PTD 341 and 1984 PTD 390. The IAC in his detailed order, at pages 3, 4, 5, 6, 7, distinguished the same and finally amended the assessment order with the following observations:
"None of the cases relied upon by the learned A.R. of the assessee set up a watertight formula that no matter whatsoever may be the ratio of income pertaining to different heads of income, expenses cannot be apportioned among different heads of income. The basic principle remains as ever that expenses have to be mandatorily debited to the income which has been earned through them. "
In the instant case the assessee declared the revenue from the following sources:
| 1.BrokerageRs. 87,97,209 2.Fee for financialRs.20,049,375 advisory certificates 3.UnderwritingRs. 34,85,473 4.Dividend incomeRs. 41,64,355 5.Capital gain netRs.47,288,910 6.Other revenueRs. 40,10,580 Total:Rs.8,77,95,902 |
The revenue earned in the nature of capital gain at Rs.4,72,88,910 works out to 53.86% of the total revenue at Rs.8,77,95,902. An analysis of the nature of business of the assessee clearly shows that earning of capital gain etc. is a major activity of the assessee and the computation of capital gain has to be made in accordance with section 28 of the Income Tax Ordinance, 1979. It is not an activity incidental to the business activity of the assessee which is mostly of providing financial advisory etc. to its clients. It has been held in a number of judgments of the superior Courts both of Pakistani and Indian jurisdiction that heads of income enumerated in section 15 of the Income Tax Ordinance, 1979 are mutually exclusive and it is mandatory provision of law that for the purpose of tax and computation of total income by chunk of income should be worked out under its specific head. Section 28 of the Income Tax Ordinance clearly provides that expenditure incurred wholly and exclusively in connection with such income shall be deducted there from. Thus the facts of this case are clearly distinguished from the cases of CIT v. PICIC, CIT Madras v. Indian Bank Ltd. (1965) 56 ITR 77 (supra) and Commissioner of Income‑tax v. Industrial Investment Trust Company Ltd. (1968) 67 ITR 436 (Bom.). The assessee does not have single activity rather it has two distinct and different businesses one yielding taxable profits and the other profits which are not subject to tax. The expenses claimed have been incurred for carrying on of both businesses, one of which produced taxable income whereas other yielded exempt income. Therefore, the assessee cannot be allowed to debit its total expenses to its taxable portion of income and book zero expenses to the exempt income in the form of capital gain.
The Honourable Sindh High Court at the time of adjudicating tile issue in the case of Messrs PICIC also relied upon the case decided by the superior Courts of India but the facts of the cases are not applicable and the issue adjudicated upon is quite different and distinct from the assessee's case. It has been held that if the income from business and profession is earned and one portion of it is exempt and the other portion of it is taxable, then in such situation administrative and other expenses cannot be allocated. But in case the income under different heads (sources) of income is declared as laid down under the Income Tax Law, then the situation would be quite different and the assessee would be only entitled to claim those expenses under clauses (vii) and (xviii) of section 23 of the Income Tax Ordinance, 1979, which have been wholly and exclusively incurred for earning business income under section 22 of the Income Tax Ordinance, 1979 Considering this fact that in the instant case the expenses claimed by the assessee have not been incurred wholly and exclusively for earning business income but certain percentage of expense is actually attributable to income under the head `capital gains'. Therefore, the whole expense claimed cannot be allowed against business income only.
In the case of Messrs PICIC (supra), business income was computed after deducting all kinds of expenses and after computation of business income the assessee included the dividend income in the total income but no expense against dividend income was claimed, whereas in the instant case, the company has declared income from different sources such, as brokerage, consultancy, underwriting, dividend and capital gains. It is pertinent to note here that expenses against all the operating revenue discussed above has been claimed which means that assessee himself has admitted that certain expenses have also been incurred for earning of income under the head `capital gains' but the Assessing Officer failed to compute the income under different heads and allocate expenses thereon under each head separately at the time of framing the original assessment. In addition to the above, the issue under consideration in the cited case is totally distinct and different as the income was assessed under the head business and profession and other source of income i.e. dividend income; whereas in this case 53.86% of the income has been declared under the head `capital gains'.
The nature and quantum of incurring expenditure for earning dividend income is usually very nominal as compared to the earning of income under the head `capital gain'. Extraordinary efforts are not required to be put in for earning of dividend income as it is received automatically after the purchase of shares of certain companies and expenses are not involved for earning the dividend income. Whereas to earn the income under the head `capital gain' a lot of efforts have to be put in by the purchaser and following activities are to be undertaken:
(1) Expert analysis of the current account of companies whose shares are intended to be purchased.
(2) Analysis of past history of the Company such like profit ability, retention of reserves, liquidity of the Company, payment of dividends of companies and utilization of the capital employed.
(3) Direct liaison with the different stock exchanges.
(4) Market information which includes financial viability future proposals of the Company, local and abroad contracts/ agreement signed by the Company with various business concerns before any transaction such as purchase/sale of its shares.
(5) Procurement of order of supply or execution of contracts etc.
It is beyond. any stretch of imagination that assessee has not incurred any sort of expenses for earning of the income from capital gains. It is just impossible to earn the huge income of Rs.4,72,88,910 under the said head without incurring any expenditure. One has . to employ/recruit the brilliant brain of the society to earn this type of income who can guide and assist investment in the capital market. Such experts also identify the appropriate time for investment in such companies wherefrom substantial capital gain is likely to be earned. The contention of the assessee that no expense was incurred to earn capital gain of an amount of above Rs.47 million is totally illogical, unjustified and unconvincing. The assessee has to incur some sort of expenses like salary, stationery, travelling, rent of office premises, payment of utility bills thereof, entertainment and other expenses related thereto etc. for earning of capital gains. Considering this fact that all activities of earning income under the head business and profession and capital gain are being undertaken in, the same business premises and all the persons employed by the Company are also rendering services for earning various types of income which come under the two heads of income i.e. the business and profession and capital gains. Therefore, the plea of the assessee that all expenses were incurred for earning of income under section 22 of the Income Tax Ordinance, 1979 and no expense whatsoever has been incurred for earning of capital gain is unbelievable. Man of a common prudence cannot 'accept this plea.
For the correct appraisal of the facts of the case, detail of capital gain for the year under consideration are reproduced as follows:
| HEAD OF ACCOUNTDEBITCREDIT Capital gain on Fund779,671.00 Management 1st Habib Madaraba4,272.50 First Leasing Corporation300,000.00 Askari Leasing26,704.00 Crescent Leasing Corporation622,620.00 Pakistan INDL Leasing Corporation627,500.00 Al‑Towfeek Investment1,746,575.50 Askari Commercial Bank35,544.50 Bank of Punjab1,350,264.00 Cress Musaraf105,820.00 MCB1,756,846.00 PICIC269.00 Union Bank37,098.40 Faisal Bank561.25 Gadoon Textile Mills1,280,480.00 Mohib Textile71,999.70 Saif Textile Mills Ltd.352,740.00 Taj Tex993,594.84 Elahi Spinning & Weaving1,142,617.75 Nishat Fabrics4, 824.60 Dewan Salman2,745,524.18 Pakistan Synthetic Ltd.814,331.00 DG Khan Cement63,300.00 Maple Leaf Cement62,475.00 Pak Land Cement Ltd.1,849,791.80 Pioneer Cement Industries450,000.00 Gener Tech Pakistan4,351,072.50 Karachi Electric Sup.949,100.00 Pak State Oil3,490.00 Sui Southern Gas Corp.451,000.00 Sui Northern Gas Pip.309,600.00 Hub Power Co. Ltd.10,285,590.00 Honda Atlas Cars Ltd.30,600.00 Pak Electron Ltd.1,692,989.26 PTC Vouchers9,423,930.00 ICI Pak Ltd.99,875.00 Diamond Industries Ltd.268,127.10 Total103,365.0046,258,207.08 Total as per Lahore:46,154,842.08 Total as per Karachi:1,134,068.00 Total as per accounts:47,288,910.00 |
The above detail clearly reveals that assessee has not booked any short of expenses as discussed in the preceding paragraph for earning of capital gain which is not understandable. The only yardstick available with the Department is to apportion the expenses or allow such expenses on the basis of receipts declared under different heads of income. i.e. income from business and profession and capital gain in this case.
In fact, the assessee intends to get the benefit of exemption on the gross capital gain receipts whereas the benefit is only admissible to the extent of the net capital gain under the law to the assessee. The Assessing Officer should have computed the net income under both the heads separately after allowing the expenses against such incomes, but he has committed the error and gross capital gain was assessed as exempt income instead of net gain, which resulted into the loss of revenue.
It is pertinent to mention here that no such case has been adjudicated upon by the highest judicial fora whose facts are exactly identical to the instant case.
Keeping in view the foregoing, the original assessment framed is proved to be erroneous insofar as it is prejudicial to the interest of revenue. Therefore, it is modified as under:‑‑
| Business IncomeCapital Gain Rs.Rs. Gross receipts36,496,41247,288,910 Less expenses allowed on the basis of gross receipts10,522,69612,284,467 Balance income25,973,74635,004,443 Add back made by the DCIT181,414211,786 Net income26,155,13035,216,229 |
The assessee has mainly repeated the arguments, which were advanced before the IAC. They have given the list of cases, which are given as below: ‑‑
(1) (1984) 49 Tax 35; (2) (1984) 50 Tax 7 (Trib.); (3) 1997 PTD 902; (4) 1992 PTD 1610; (5) 1996 PTD 750; (6) ITA No. 1913/KB, dated 26‑10‑1998 (unreported); (7) 1993) 203 ITR 108; (8) Palkhiwala, p.482; (9) (1976) 33 Tax 23 (Trib.); (10) 1992 PTD (Trib.) 1141; (11) 1993 PTD (Trib.) 472; (12) 1997 PTD 180; (13) 1986 SCMR 1917; (14) 67 ITR 436; (15) 56 ITR 77; (16) 1988 PTD 626; (17) 6 ITR 636; (18) 127 ITR 1; (19) 42 Tax 122 (H. C. Karachi); (20) 82 Tax 565 (SC India) and (21) 221 ITR 861.
The main stress was that business of the assessee is a taxable business and cannot be bifurcated into taxable and non‑taxable. On the other hand, the L.A./D.R. has relied:
1998 PTD 703; 1996 PTD 360 and 208 ITR 202.
They had further contended that according to the record there is no proof of assertion of IAC. I have gone through the citation. The A.R. of the assessee has also produced a copy of the assessment order for the charge year 1996‑97, which has been placed on record. They have drawn our attention to the following office note:
The. IAC Range‑III, has initiated proceedings under section 66A of the Income Tax Ordinance for assessment year 1995‑96 on the issue of disallowance or apportionment of claimed expense in the ratio of the income, claimed exempt and taxable income. The same issue was discussed with him with reference to current period and he directed the undersigned to proceed as per history of the case and the arguments/case‑laws produced by the A.R. in response to show‑cause notice under section 66A are convincing especially the following:
(i) P T D B 26 (High Court, Karachi) 1998 CIT v. PICIC
(ii) CIT (West), Karachi v. Adamjee Sons PTD 390 (H.C. 1984)
(iii) CIT, Karachi v. N. Futehally & C PTD 390 341 (H.C. 1984)
The IAC who is the author of the impugned order i.e. Ch. Safdar Hussain, IAC Income Tax Range‑III, Company Zone‑II, Lahore who was called to defend his order and is present in Court has denied that the DCIT has ever discussed the case with him before finalization of the assessment order for 1996‑97. Furthermore, the last page of the assessment order was not given to us nor produced. In view of the categorical statement of the IAC author of the impugned order and in the absence of the last page of the assessment order (assessment year 1996‑97), the date of which is not available on these photocopies given to us has no bearing on the impugned order as far as the case law relied by the A.R. of the assessee. It has already been discussed in the impugned order passed under section 66A. Therefore, we agreeing with the contention of the D.R./L.A. find that the order passed by IAC on 12‑4‑2000 which modified the assessment order passed on 17‑4‑1996 is upheld and dismiss the appeal of the assessee being without merit. The nutshell of the discussion is that the appeal of the assessee is dismissed and order of the IAC is upheld.
C.M.A./206 Tax (Trib.)Order accordingly