Income Tax Ordinance (XXXI of 1979)---

----S. 66-A, 31(1) (b) & 62---C.B.R. Circular No. 14 of 1989, dated 6-11-1989---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Income from dividend, share of profits and exempt income from Foreign Currency Bearer Certificates-- Assessment was modified by the Inspecting Additional Commissioner on the ground that expenses were incorrectly allowed under S.31 of the Income Tax Ordinance, 1979 against the income declared by the assessee/appellant from dividend a those expenses were not incurred wholly and necessarily for earning the dividend income--Validity-- Inspecting Additional Commissioner in her order under S.66-A of the Income Tax Ordinance, 1979 hail not established that the expenses claimed under S.31 of the Income Tax Ordinance, 1979 which were allowed by the Assessing Officer in the order framed under S.62 of the Income Tax Ordinance, 1979, were inadmissible for the reason that these were not incurred wholly and necessarily for earning the declared income---Inspecting Additional Commissioner's orders did not discuss separately the nature of expenses incurred and their irrelevancy to the income offered for tax under S.30 of the Income Tax Ordinance, 1979-- Orders being unsupported by any evidence or specific reasons, were unsustainable in law and the same ,were cancelled by the Appellate Tribunal.

1992 PTD 914; 1984 PTD 137 and I.T.A. No. 1501/KB of 1997-98 ref.

Z.H. Jafri for Appellant.

Inaytuallh Kashani, D.R. for Respondent.

Date of hearing: 25th April, 2003.

ORDER

SHAHEEN IQBAL (ACCOUNTANT MEMBER).---This order will dispose of the captioned appeals by the appellant-Company which are directed against the two separate orders of the IAC, Range-2, Companies Zone-III, Karachi, both, dated 21-3-2002, through which the IAC had modified the assessment orders, framed earlier in this case under section 62 by the Assessing Officer, for assessment years 1998-99 and 1999-2000 by disallowing the expenses allowed by the Assessing Officer under section 31(1)(b) of the Income Tax Ordinance, 1979.

2. The appellant agitates the orders of the IAC on the grounds that these are bad in law and on facts that and the assessment orders framed under section 62 earlier, which were the subject-matter of the IAC's order under section 66-A, were neither erroneous nor prejudicial to the interests of Revenue and thus out of the purview of action under section 66-A.

3. The respective representatives of the two sides have been heard. The relevant facts have been ascertained to be as follows:--

*The appellant is a private limited company and derived income from dividends, share of profit from registered firm in its capacity of a partner of a firm, and exempt income from Foreign Currency Bearer Certificates.

*The appellant had claimed expenses in respect of office maintenance, salaries of employees etc. as deductions against the income from the aforecited sources. The overall expenses incurred to the extent of 98.99 % and 99.93 % respectively for the two years under appeal were allocated by rue appellant towards the dividend income whereas balance was allocated to the other incomes. The Assessing Officer accepted the appellant's contention and allowed prorated expenses of Rs.399,173 and Rs.356,878 for the two yearsagainst the dividend income.

*The IAC subsequently observed that the emptiness were incorrectly allowed by the Assessing Officer under section 3 against the income declared by the appellant From dividend as these expenses were not incurred' wholly and necessarily for earning the dividend income.

*The IAC accordingly proceeded to confront the appellant through a show-cause for remedial action under section 66-A. And after finding the reply furnished by the appellant to be unsatisfactory she proceeded to modify the assessment orders under section 62 by disallowing the expenses allowed earlier under section 31 by the Assessing Officer.

*The appellant is in appeal before us against this action of the IAC.

4. The A.R. of the appellant assails the orders of the IAC on the basis of the following arguments:--

*Firstly it is contended that the IAC has not established that the assessment orders framed by the Assessing Officer under section 62 were erroneous or prejudicial " to the interests of Revenue. This action of the IAC is stated to be against the guidelines issued on this issue at the appellate level. Reliance for this contention is placed on the following judgments: 1992 PTD 914, 1984 PTD 137 and I.T.A. No.1501/KB of 1997-98, dated 1-4-1998.

*It is further contended that section 31(1)(b) of the Income Tax Ordinance, 1979, provides for allowance of those expenses which are incurred wholly and necessarily for earning the income from other sources declared under section .30. This provision, however, excludes expenses of capital and personal nature from the purview of this provision. Reliance in support of this contention is placed on C.B.R. Circular No.14 (Income Tax), dated 6-11-1989.

*It is further asserted that appellant-Company derives its income mainly from dividend earned on its share holding. The appellant Company has maintained an office for which it has to incur expenses on administration, rent etc. and these expenses are incurred wholly and necessarily for earning the income declared from the dividends and other sources. It is also pointed out that these expenses were allowed by the Assessing Officer in the past.

*It is further contended that the IAC has not established in her orders under section 66-A for the two impugned years that the expenses claimed by the appellant were not incurred wholly and necessarily for earning the dividend income. In the absence of a conclusive finding on the issue, supported by necessary evidence, no cause for action under section 66-A arose and the orders of the IAC under section 66-A, accordingly are unsustainable in law, liable for cancellation by this Division Bench.

5. The D.R. supports the order of IAC on grounds that for purposes of earning of dividend income nominal expenses are only required to be incurred.

6. The relevant aspects of the case as well as the arguments made before us have been duly considered and case-laws and C.B.R.'s Circular relied upon by the authorized representative of the appellant have also been perused. We are inclined to agree with the A.R. of the, appellant that the IAC in her orders under section 66-A has not established that the expenses claimed under section 31, which were allowed by the Assessing Officer in the orders framed by him under section 62, were inadmissible for the reason that these were not incurred wholly and necessarily for earning the declared income. The IAC's orders do not- discuss separately the nature of expenses incurred and their irrelevancy to the income offered for tax under section 30. The two orders of the IAC under section 66-A are unsupported by any evidence or specific reasons, and are therefore, unsustainable in law.

7. Both the impugned orders under section 66-A for the two years under appeal are accordingly hereby cancelled.

C.M.A./812/Tax (Trib.)Appeal accepted.