I.T.As. Nos.585/KB and 586/KB of 2002, decided on 30th January, 2003. VS I.T.As. Nos.585/KB and 586/KB of 2002, decided on 30th January, 2003., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1464 (2003)

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss. 38(6) & 35---Limitation as to set off any carry forward of losses in the case of, firms, partners, etc. ---Unabsorbed depreciation would be available for set off against any income of the assessee in subsequent year under S.38(6) read with S.35 of the Income Tax Ordinance, 1979.

(b) Income Tax Ordinance (XXX1 of 1979)---

----Ss. 66-A, 38(6), 35 & 23(1)(v)---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Rental income-- Unabsorbed depreciation---Brought forward losses---Set off-- Cancellation of assessment on the ground that Assessing Officer had erroneously set-off the income chargeable under head `other income' and house property against the brought forward losses ---Assessee contended that Assessing Officer had not set off the property income or the alleged income from other sources against the brought forward losses but that the set-off had been correctly made against the unabsorbed depreciation and produced a working of unabsorbed depreciation, brought forward from the subsequent years---Validity---Losses of the current year were to be set off against other income of the assessee before unabsorbed depreciation of earlier year which' would protect the unabsorbed depreciation from becoming part of losses under S.35 of the Income Tax Ordinance, 1979 which would lapse after a period of six years---Set-off of rental income against depreciation' of the earlier year was allowed-- Order of the Inspecting Additional Commissioner passed under S.66-A of the Income Tax Ordinance, 1979 was annulled and appeal of the assessee was accepted by the Appellate Tribunal.

1996 PTD (Trib.) 292 and (1964) 51 ITR 693 rel.

Amin Malik, A.C.A. for Appellant.

Ali Hasnain, D.R. for Respondent.

Date of hearing: 26th October, 2002.

ORDER

INAM ELLAHI (CHAIRMAN).----By this -consolidated order, we proceed to decide two appeals of public sector corporation deriving income from shipping business. These two appeals are directed against two separate orders of the Inspecting Additional Commissioner of Income Tax, Range-II, Cos. IV, Karachi, both, dated 28-3-2002, recorded under section 66-A of the Income Tax Ordinance, 1979 (hereinafter called 1979 Ordinance) whereby the original assessments made under section. 62 of the 1979 Ordinance were revised after holding the same to be erroneous insofar as prejudicial to the interest of Revenue.

2. The relevant facts in brief are that the IAC, on perusal of the assessment records for tile two years under consideration, found that the Assessing Officer had erroneously set off the income chargeable under the head `other income' and, house property against the brought forward losses. He, therefore, confronted the assessee with the proposal to revise .the assessments on these accounts. The-assessee agreed that, the rental income or income chargeable under head `income from other sources could not be set off against the brought forward losses. However, the assessee disputed the proposal on various other grounds. The first and the foremost objection of the assessee was that the DCIT had not set off the property income or the alleged income from other sources against the brought forward' losses but that the set off had been correctly made against the unabsorbed depreciation. The assessee produced a working of the unabsorbed depreciation, brought forward from the assessment years 1993-94, and 1994-95, showing the partial adjustment against the assessment for the year 1997-98 and showing the balance available for adjustment against the assessment year 1998-99 income. The assessee also referred to a provision of subsection (6) of section 38 and also a judgment of the Honourable High Court of Sindh, a copy of which was said to have been enclosed with the assessee's reply, although the citation of such case was not available in the impugned orders. The assessee further contended that out of the income shown by the assessee as income from other sources in Note 26 of the audited accounts, Rs.41,567,000 was income from business as the same was related to the assessee's activities. The assessee further elaborated that agency commission (Rs.5,662,000 in the assessment year 1997-98) represented receipts on port handling on various ships which was said to be the business of the corporation. Sundries, shown at Rs.13,887,000 in the assessment year 1997-98 were said. to include documentation charges, cost of tender documents, services rendered to National Tanker Company, income from workshop etc. The assessee disputed that such items could not be treated as income from other sources. Nevertheless; it was reiterated that such sundries had been set off against the brought forward unabsorbed depreciation by the Assessing Officer. The IAC, however, rejected such explanations and his reasons for such rejections may be summarized as below:--

(i)First of all, the IAC justified his action under section 66-A of the 1979, Ordinance, overruling the objection of the assessee with regard to change of opinion.

(ii)The assessee's reliance on subsection (6) of. section 38 of the 1979 Ordinance was rejected with the observation that section 38 of the 1979, Ordinance related to limitation in set off of losses in the case of firms and was not applicable to companies.

(iii)The IAC also opined that nevertheless , the unabsorbed depreciation could only be set off profits and gains, which are only taxable as income from business or profession and under no other head of income the term profit and gain has been used.

(iv)The IAC also referred to subsection (7) of section 38 of the 1979, Ordinance which itself refers to section 35 and section 36 of the 1979, Ordinance.

(v)The case relied-upon by the assessee was. also distinguished. The assessee's contention with regard to the treatment of agency commission as business income was accepted but the other items were held to be not related, to business. The contention with regard to interest income was also not accepted as the assessee itself had excluded such income from the business turnover. Thereafter, the income and tax thereon were determined in the following manner:--

"Income assessed as per order

Under section 62, dated 30-6-1998Rs.211,613,668

Less:Income being assessed separately

1.Rental IncomeRs.50,984,725

2.Other Income under section 30Rs.35,905,000

3.Dividend Income

already separated

Under section 62Rs.Rs.86,89,725

Income under section 22Rs.124,723,943

B/F LossesRs.124,723,943

N.D.

SEPARATE BLOCK OF INCOME

Rental Income assessed under section 19--Rs.50,984,725

Tax on Rs.50,984,725 @ 33%Rs.16,824,959

OTHER INCOME UNDER SECTION 30

1.Interest income on loansRs.04,919,000

2.Interest on banks depositsRs.17,099,000

3. .Sundries .Rs.13,887,000

Total income assessed under, section 30Rs.35,905,000

DIVIDEND INCOME

As declaredRs.124,000

Tax @ 5%Rs. 6,200

TOTAL TAX PAYABLE

Tax payable under section 22NIL

Tax payable under section 19Rs.16,824,959

Tax payable under section-30Rs.11,848,650

Tax payable on dividend incomeRs. 6,200

TotalRs.28,679,809

Tax under section 80-D worked out atRs.39,239,445

Total TaxRs.67,919,254

Less Tax deduction under section 50Rs.8,637,343

Tax deduction under section 54Rs.22,500,000

Tax deduction under section 85Rs.40,000,000Rs.71,137,343

Balance tax payableRs.(3,218,089)

Add Refund already adjusted for the years as detailed under:

(a)Adjusted against advance tax

under section 53 for first and second

instalments for the assessment

year 1999-2000 vide C.B. No.60/234

dated 25-1-1999Rs.8,500,000

(b)Adjusted against demand for the

assessment year 1995-96 as per

order under section 66-A, dated 3-8-1998

vide C. B. No.110/238, dated 9-4-1999Rs.23,397,898Rs.31,897,898

Balance PayableRs.28,679,809"

3. A similar treatment was accorded for the assessment year 1998-99 and income taxable under section.30 of the 1979, Ordinance was determined at Rs.30,275,000 and section 19 of the 1979, Ordinance at Rs.38,741,000 Tax payable on business income was again determined at nil and total tax including minimum tax was determined at Rs.45,943,555 for the year 1998-99.

4. The leaned A.R. of the assessee has strongly argued that the IAC was not justified in holding that the provisions of section 38 were not applicable to a company and contends that only the provisions of subsection (1) of subsection (5) of section 38 of the 1979, Ordinance were applicable to a registered firm whereas the provisions of sub section (6) of the same' section are applicable to all assessees. The learned A.R. of the assessee has relied on a decision reported as 1996 PTD (Trib.) 292 to support this contention. The reliance has also been placed on a decision of Indian jurisdiction reported as (1964) 51 ITR 693. The learned D.R. on the other hand, defended the orders of the IAC: It has been submitted that the order of the Gujrat High Court as produced by the learned A.R. is not applicable as the distinction between subsection (1) to (5).of section 38 and subsection (6) of the same section have been made by the Honourable Court.

5. We have considered the arguments and we have also perused the impugned order. The most serious allegation of the IAC which in our view, deserves consideration is that, according to him, unabsorbed depreciation not-being available for set off against a business which is not assessable as income from business or profession. The provisions regarding carry forward and set off of losses, including deprecation, are laid down in sections 34 to 38 of the 1979, Ordinance. Section 34 deals with losses, other than speculation losses (section 36) and capital losses (section 37) and permits the set off of such losses, subject to clause (v) of subsection (1) of section 23 of the 1979 Ordinance against his income under any other head assessable for that assessment year subject to certain exclusions which are not relevant presently. Section 34A deals with the losses of subsidiary companies which again is not relevant presently. Section 35 of the 1979 Ordinance permits carry forward of business losses and we find it useful to reproduce the relevant part of this section which read as follows:---

"(35) Carry forward of business losses.---Where an assessee sustains a loss in any assessment year under the head `Income from business or profession' (not being a loss to which section 36 applies) and the loss cannot be wholly set off under section 34, so much of the loss as has not been set off, or the whole of the loss where the assessee has no income under any other head, shall be carried forward subject to clause (v) of subsection (1) of section 23, to the following assessment year and set off against the profits and gains, if any, of such business or profession assessable for that year if such business or profession continues to be carried on by the assessee for that assessment year; and if the loss cannot be wholly set off in this manner, the amount of the loss not so set off shall be carried forward to the following assessment year, and so on, but no loss shall be carried forward to more than six assessment years immediately succeeding the assessment year for which the loss was first computed."

As already said above, section 36 deals with speculation losses and section 37 deals with capital losses which again are not pertinent. The major dispute revolves around the provision of section 38 and we reproduce the same below for ease of reference:--

"(38). Limitations as to set off and carry forward of losses in the case of firms, partners, etc.---(1) Where the assessee is a registered firm, any loss which cannot be set off against,, any other income of the firm shall be apportioned among the partners of the firm and they alone shall be entitled to have the amount of the loss set off and carried forward for set off under sections 34, 35, 36 and 37.

(2)Nothing contained in section 35, subsection (2) of section 36 or section 37 shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the aforesaid section.

(3)In the case of the unregistered firm assessed as a registered firm under the provisions of sub-clause (ii) of clause (b) of subsection (1) of section 69 in respect of any assessment year, its losses for that assessment year shall be dealt with as if it were a registered firm.

(4)Where the assessee is an unregistered firm which, has not been assessed as a registered firm under the provision of sub clause (ii) of clause (b) of subsection (1) of section 69, any loss of the firm shall be set off or carried forward and set off only against the income of the firm.

(5)Nothing contained in sections 34, 35, 36 and 37 and sub-section (1), (2), (3) and (4) of this section shall entitle-

(a)any partner of an unregistered firm which has not been assessed as a registered firm under the provisions of sub-clause (ii) of clause (b) of subsection (1) of section 69, or any member of an association of persons to set off any loss sustained by such firms or associations of persons, as the case may be, or have it carried forward and set off against his income; or

(b)any firm in the constitution of which any change has occurred to have carried forward and set off so much of the loss proportionate to the share of a retired or deceased partner computed in accordance with the provisions of subsection (4) of section 69 as exceed his share of profits, if any, of the income year in the firm, or entitle any partner to the benefit of any portion of the said loss which is not apportionable to him under section 69; or

(c)any person who has succeeded, in such capacity, any other person carrying on any business or profession, otherwise, than by inheritance, to carry forward and set off against him income, any loss sustained by such other person.

(6)Where, in making an assessment for any year, full cannot be given to the allowances referred to in clause (v) of sub section (1) of section 23 owing to there being no profits or gains chargeable for that year or such profits or gains being less than the allowance, then, subject to clause (v) of subsection (1) of section 23 and the provisions of subsection (7) the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and be deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year and so on for succeeding years.

(7)Where, under subsection (6), depreciation allowance is also to be carried forward, effect shall first be given to the provisions of section 35 and subsection (2) of section 36.

(8)Notwithstanding anything contained in this Ordinance, no loss which has not been determined in pursuance of an order made under section 59, 59A, 62, 63 or 65 shall be carried forward and set off under section 35, subsection (2) of section 36 or section 37. "

6. We have also considered the decision of the Tribunal reported as (1995) 71 Tax 221 (Trib.) on a similar issue. In that case, the First Appellate Authority had directed the Assessing Officer to set off the property income of the same year against the brought forward unabsorbed depreciation and the Tribunal upheld such finding. However, in that case, the issue of set off of property income against the unabsorbed depreciation of the earlier years was less important as compared to certain other issues. Nevertheless, the learned Bench at that 'time considered the provision of section 38 of the 1979, Ordinance and dispelled the departmental contention that such provisions of section 38 of the 1979, Ordinance ware applicable only to the firms and not to the companies. To that extent, we find ourselves in full agreement with the learned Bench that decided the matter earlier. The relevant provisions for carry forward and set off of losses have already been discussed above and we do not find any other provision with regard to the set off of unabsorbed depreciation against any income of the assessee for the year subsequent to the determination of the unabsorbed depreciation. No doubt, subsections (1) to subsections (5) of section 38 of the 1979 Ordinance deal only with the firms, registered or unregistered, the partners thereof and certain other persons, we find that subsection (6) and subsection (7) deal only with the allowance of unabsorbed depreciation against the income of the assessee. If. the departmental contention with regard to the application of section 38 of the 1979. Ordinance to only firms was accepted, then there would be no provision for allowance of unabsorbed depreciation against the income of the other assessees which is not the contention of the Department. However, we feel that in such decision of the Tribunal, due emphasis was not given to the limitation prescribed in subsection (6) of section 38 of the 1979 Ordinance which makes set off of unabsorbed depreciation against the income of the other assessees subject to clause (v) of subsection (1) of section 23 of the 1979, Ordinance. This brings us to clause (v) of subsection (1) of section 23 of the 1979, Ordinance, which reads as follows:---

"(23) Deductions.-(1) In computing the income under the head "Income from business or profession", the following allowances and deductions shall be made, namely:--- .......

(v)in respect of depreciation, including First Year Allowance or Reinvestment Allowance or Industrial Building Allowance, of any such building, machinery, plant, furniture or fittings, being the property of the assessee, the allowance admissible under the Third Schedule, except depreciation or First Year Allowance on assets given on the lease shall be allowed against income from lease recitals only."

7. Clause (v) of subsection (1) of section 23 of the 1979 Ordinance as already reproduced in the preceding paragraph lays down that depreciation shall be allowed as admissible under the Third Schedule to the 1979 Ordinance. This clause also finds reference in section 35 and 38(6) of the 1979, Ordinance. The Third Schedule to the 1979, Ordinance contains the rates of depreciation and various rules and conditions for the allowance of depreciation, The only provision for carry forward of depreciation is contained in subsection (6) of section 38 of the 1979 Ordinance which, inter alia, stipulates that where depreciation cannot be set off against income of the assessee for a particular year, it shall be carried forward and shall be deemed to be part of the allowance of the succeeding year and there is no time limit prescribed for such carry forward. A question may arise as to whether the mention of clause (v) of subsection (1) of section 23 of the 1979 Ordinance in sections 35 and 38(6) could restrict the set off of unabsorbed depreciation of the earlier years, which is deemed to be part of allowance of the succeeding years under subsection (6) of section 38 of the 1979 Ordinance. In other words, would it become a loss of the business and thus only available for set off against the income of the assessee from the same business in the succeeding years? We do not find any reference to the limitation of carry forward of depreciation or set off thereof in the Third Schedule to the 1979 Ordinance which contains only reference to the year of use in an income year for allowance of depreciation clause (v) of subsection (1) of section 23 of the 1979 Ordinance, thus, in our view, would mainly govern the rates of depreciation and would not affect the carry forward allowed under section 38(6) of the 1979 Ordinance, which also stipulates that it shall be deemed to be allowance of a succeeding year. If this provision of subsection (6) of section 38 is read with the provision of section 35 of the 1979, Ordinance, one can safely conclude that the unabsorbed depreciation would be available for set, off against any income of the assessee in subsequent year.

8. We have also considered the provision of subsection (7) of section 38 of the 1979 Ordinance already reproduced in Para 5 above. We feel that departmental contention in this regard is misplaced. This provision simply states that losses of the current year are to be set off against other income of the assessee before unabsorbed depreciation of earlier years in set off against such income. This appears to be to protect the unabsorbed depreciation' from becoming part of losses under section 35 which lapse after a period of six years. Thus, for these reasons, we are; inclined to agree with the finding of the learned Bench that allowed the set off of rental income against depreciation of the earlier years in the decision reported as 1996 PTD (Trib.) 292 supra. A similar finding has been given by the Gujrat High Court in the case reported as (1964) 51 ITR 693 which we need not discuss in detail.

9. We have already given our finding on the issue whether unabsorbed depreciation of. the earlier years can be set off against any income of the assessee in a subsequent year. Since this was the only cause of action by the IAC in both the years under consideration, we are inclined to accept the appeals of the assessee in both the years under consideration and we annul the orders of the IAC under dispute. The assessee's appeals are allowed accordingly.

C.M.A./654/Tax(Trib.)Appeals allowed.