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

----Ss. 2(8), 2(26)(c) Expln., 9(1A) & First Sched., Part V, Para. B-- Modaraba Companies Rules, 1981, R.2---Assessment year---Income year---Determination of first assessment year---Exemption---Application of reduced rate---Minimum subscription certificate was obtained by the Modaraba as on 11th of April, 1990 and-closed its account for the first year on 30th June, 1991---Assessee contended that since the first account; were closed on 30th June, 1991 the first assessment year involved was the assessment year 1991-92 and no tax should have been charged on the Madaraba income for the assessment year 1993-94 as provided in S.9(1A) of the Income Tax Ordinance, 1979---Validity---First assessment year was the assessment year 1990-91---Income of Modaraba was exempt under specific circumstances for the assessment years 1990-91, 991-92 and 1992-93---First Appellate Authority rightly upheld the departmental view that income of the Modaraba for the assessment year 93-94 was taxable---Reduced rate of tax for the two years next to the exemption period was applicable in the assessment years 1993-94 and 1994-95 and the Modaraba was rightly charged to tax at the normal rate of 25% in the assessment year 1995-96 as held by the First Appellate Authority.

I.T.A. No. 944/KB of 1997-98 and I.T.A. No. 970/KB of 1997-98 distinguished.

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

----S. 23(1)(x)--Deduction---Bad debts, disallowance of---Provisions for bad debts were disallowed by holding that debts involved were not yet mature to be written off---Such treatment was confirmed by the First Appellate Authority ---Assessee had not brought any evidence before the Tribunal to convince that the conditions as provided in S.23(1)(x) of the Ordinance had been satisfied---Order of the Authorities below was maintained by the Appellate Tribunal.

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

----Ss. 22 & 23---Income from business or profession ---Deduction-- Computation of income or loss---Various activities---Allowability of proportionate expenses---Procedure---Income or loss of various businesses of assessee were to be computed independently keeping in view the provisions of Ss.22 & 23 of the Income Tax Ordinance, 1979-- Leasing of assets was one of the business of the assessee, its income was also to be computed by taking the receipt of lease rentals as revenue and after providing for allowances and deductions as laid down in S.23 of the Income Tax Ordinance, 1979---All those allowances and expenses which were directly relatable to earning of the lease' rentals income -and allowable under S.23 of the Income Tax Ordinance, 1979 were to be allowed and where there were certain expenses which although allowable under S.23 of the Income Tax Ordinance, 1979 were relatable to various activities of the assessee were to be proportionately allowed against each activity of the assessee---All provisions of law applicable to an assessee in respect of each business activity were to be considered under S.22 of the Income Tax Ordinance, 1979 for the purpose of taking revenue and under S.23 of the Income Tax Ordinance, 1979 for the purpose of allowance and deductions.  

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

----Ss. 23(1)(v), 34, 35 & 38---Deduction---Depreciation allowance-- Lease rentals---Loss---Set off---Procedure---In case of loss there may be two situations viz. when the loss calculated is due to deductions and allowances under S.23 of the Income Tax ordinance, 1979 other than the depreciation allowance under S.23(1)(v) of the Income Tax Ordinance, 1979, this will happen when the depreciation allowance gets fully absorbed against revenue receipts or in other words the depreciation allowance is less than the revenue receipts of these rentals---In such a situation the loss will have to be adjusted against incomes assessable under other heads of incom6 as provided in S.34 of the Income Tax Ordinance, 1979 and if it is not fully set off against the income of the year under other heads of income, it may be carried over for set off in the succeeding years in accordance with the provisions of Ss. 35 & 38 of the Income Tax Ordinance, 1979.

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

---Ss. 23(1)(v), 34, 35 & 38---Deduction---Depreciation allowance-- Lease rentals-- Loss---Set-off---Procedure---Resultant loss calculated due to deductions and allowances under S.23 of the Income Tax Ordinance, 1979 including the depreciation allowance under S.23(1)(v) of the Income Tax Ordinance, 1979---Such loss will occur when the depreciation allowance permissible is not fully absorbed against the revenue receipts of these rentals---Loss excluding the loss due to depreciation, will have to be adjusted against income of the year under other heads as provided in S.34 of the Income Tax Ordinance, 1979 or will have to be carried forward in accordance with the provisions of Ss.35 & 38 of the Income Tax Ordinance, 1979---Loss pertaining to depreciation allowance will not be set-off against income under any other head or even against the business income from any other activity and will have to be carried forward for adjustment against business income of lease rentals in subsequent years and in accordance with the provisions of Ss.35 & 38 of the Income Tax Ordinance, 1979.  

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

----Ss. 23(1)(v), 34, 35 & 38---C.B.R. Circular No. 6 of 1994, dated 10-7-1994---Deduction---Lease rental income and other income-- Proportionate allocation of expenses---Assessing Officer allocated the admissible expenses against lease rentals and receipts other than lease rentals on proportionate basis instead of allowing all such expenses against receipts from sources other than lease rentals which was confirmed by the First Appellate Authority---Validity---Action of the First Appellate Authority was not in interference with the order of the Assessing Officer and was justified and the same was maintained by the Appellate Tribunal.

Income Tax Appeal No.66 of 1999 and 2000 PTD (Trib.) 474 ref.

1999 PTD (Trib.) 1346 rel.

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

----S. 23(1)(vii)---Deduction---Financial charges---Loan was received in Foreign Currency Account---Such account was further used for obtaining loans in Pak Rupees for purpose of Modaraba business---Interest paid on foreign currency loan was disallowed because same was a charge against the interest income received from foreign currency account---Assessee contended that since the loan had been obtained for the purpose of business of Modaraba, the financial charges paid in respect of said foreign loan were allowable against business income of Modaraba-- Validity---Undisputedly the foreign currency loan had actually been utilized for earning interest income and these financial charges were nothing but the expenditure incurred or which were laid out wholly and exclusively for the purpose of earning interest income---Authorities below were justified in considering these financial charges against the income generated from the source where the said loan was actually utilized.  

Asif Zia, ACA for Appellant.

Khawar Saeed, D.R. for Respondent.

Date of hearing: 7th August, 2003.

ORDER

MUHAMMAD AKHTAR NAZAR MIAN (ACCOUNTANT MEMBER).---The learned A.R. has at the very outset stated that appeals for the assessment years 1993-94, 1994-95 and 1995-96 on issues where the matters had been set aside by the learned CIT(A) have become infructuous before this Tribunal because the set aside issues have already been read-judicated upon by the department. In respect of assessment year 1996-97, the learned A.R. has requested to be allowed not to press these issues which stand set aside by the learned CIT(A) so that the department may proceed on adjudicating those matters in accordance with the directions of the learned CIT(A). We accordingly have agreed with these submissions of the learned AR and therefore, we are left with the following questions to be adjudicated upon by us in the respective assessment years noted below:--

Assessment year 1993-94

(1) That the learned Commissioner of Income Tax (Appeals) erred in disallowing exemption of income claimed under proviso to section 9(1A) of the Income Tax Ordinance, 1979.

(2) Without prejudice to the ground No. 1 the learned Commissioner of Income Tax (Appeals) erred in holding that the assessment year of operations of Modaraba was the assessment year 1990-91 and further holding that exemption under proviso to section 9(1A) of the Income Tax Ordinance, 1979 was available during assessment years 1990-91, 1991-92 and 1992-93 only.

(3) Without prejudice to the ground No. 1 and 2 the learned Commissioner of Income Tax (Appeals) erred in holding that the first income year of Modaraba cannot exceed a period of twelve months although the Modaraba (Floatation and Control) Ordinance, 1980 allows that the first accounts can be prepared for a period exceeding twelve months.

Assessment Year 1994-95

(1) The learned Commissioner of Income Tax erred in confirming the disallowance instead of allowing the amortization of deferred cost claimed at Rs.430,869 stating them to be pre-operating in nature.

(2) The learned CIT(A) erred in confirming the disallowance of provision for bad and doubtful debts claimed at Rs.4,258,872.

Assessment Year 1995-96

(1) The learned Commissioner of Income Tax erred in confirming the disallowance of the amortization of deferred cost claimed at Rs.430,869 stating them to be pre-operating in nature.

(2) The learned Commissioner of Income Tax erred in confirming the disallowance of provision for bad and doubtful debts claimed at Rs.12,407,088.

(3) The learned Commissioner of Income Tax erred in, confirming the decision of DCIT of holding that the first assessment year for which income of the Modaraba was chargeable to tax was the assessment year 1993-94. The learned Deputy Commissioner of Income Tax further erred in levying tax on income for the year under appeal (i.e. assessment year 1995-96) @ 25 % instead of tax rate of 12.5% applicable under section 9(1A) read with proviso to para. B of part V of the First Schedule to the Income Tax Ordinance, 1979.

Assessment year 1996-97

(1) The learned Commissioner of Income Tax (Appeals) erred in confirming the action of the DCIT of allocating the admissible expenses against "lease rentals" and receipts other than "lease rentals" on proportionate basis instead of allowing all expenses against receipts from sources other than lease rentals.

(2) Ground No.5 which pertains to financial expenses cannot be adjudicated upon by us as no finding has been given by the learned CIT(A) on this issue and the learned A.R. concedes that the matter would be decided by the learned CIT(A) before whom application under section 156 of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) is pending.

Assessment Year 1997-98

(1) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of financial charges on loan amounting to Rs.12,168,345.

2. We have heard both the representatives and perused the orders of the authorities below. The matters are decided as under:--

DISALLOWANCE OF EXEMPTION UNDER SECTION 9(1A) OF THE ORDINANCE IN THE ASSESSMENT YEARS 1993-94 AND 1995-96

3. The learned A.R. has stated that the Modaraba obtained minimum subscription certificate on 11th of April, 1990 and closed its account for the first year on 30th June, 1991 i.e. for a period exceeding 14 months. Since the first account, were closed on 30th June, 1991 the first assessment year involved was the assessment year 1991-1992 and therefore, income of the Modaraba was exempt for the three assessment years 1991-92, 1992-93 and 1993-94. He asserts that no tax, should have been charged on the Modaraba income for the assessment year 1993-94 as provided in section 9(1A) of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance). With reference to assessment year 1995-96 it is submitted that if the commencement of the business of Modaraba is referred to the income year 1990-91 And 1991-92 is considered to be the first assessment year then no tax would be payable for the assessment years 1991-92, 1992-93 and 1993-94 as the Modaraba had distributed 90% of its profits in each year to the Modaraba certificate holders and for the next two yeas 1994-95 and 1995-96 the rate of tax should be 12.5 % instead of 25% i.e. for the assessment year 1995-96 the tax should be charged at the rate of 12.5% instead of 25%. The learned A.R. states that the income year may consist of period exceeding 12 months and in this connection he has referred to rules made under Modaraba Companies Ordinance, Companies Ordinance and a decision of this Tribunal in I.T.A. No. 944/KB of 1997-98 (Assessment Year 1995-96) and I.T.A No.970/KB of 1997-95 (Assessment year 1996-97) decided on 19-2-2003 where to the light of Explanation to section 2(26)(c) of the Ordinance, income year for a period exceeding 12 months was considered to be a valid income year. The learned D.R. on his turn opposes the-arguments of the learned A.R on the lines that the first assessment year in this case was the assessment year 1990-91 and not 1991-1992 on the basis of the income year as defined in the Ordinance.

4. We have considered the arguments of both the learned A.Rs. In order to resolve the controversy we will have to refer to clauses (8) and (26) of section 2 and section 9 of the Ordinance. Section 9 is the charging section which provides that for each assessment year, income tax is to be charged in respect of total income of the income year. Clause (8) of section 2 defines assessment year to mean the period of 12 months beginning on the first day of July next following the income year and clause (26) of section 2 defines income year in relation to any assessment year to mean:-

(a) The financial year next preceding the said assessment year or;

(b) At the option of the assessee, the calendar year next preceding the said assessment year (this provision was on statute till June, 1995); or

(c) Such period as the Central Board of Revenue may specify by notification in the official Gazette.

5. In the present case the situation (c) supra does not arise because no income year has been specified for B.B.R. Second Modaraba by the Central Board of Revenue through a notification in the official gazette. This means that the Explanation to section 2(26)(c) of the Ordinance becomes inapplicable in the instant case and we need not refer to the case decided by this Tribunal as referred to by the learned A.R. Since here the business had commenced before June, 1995, the appellant was required under the law to have financial year as income year if it had not opted in the first year of assessment to have calendar year as the income year. This means that the first income year of the appellant had ended on 30th June, 1990 as the business had commenced with effect from 11th April, 1990.

6. The learned A.R. then argued that under rule 2 of Rules 1981 of the Modaraba Companies Ordinance, the first accounts could be closed for a period exceeding twelve months but we need not go into these details for the reason that when the income year has been defined in the Income Tax Ordinance which we are administering we cannot go to any other definition specially when the learned A.R. has failed to produce any evidence that the said definition has to take effect notwithstanding the provisions contained in the Income Tax Ordinance. Then the learned A.R. stated that financial year had not been defined in the Income Tax Ordinance whereas in Companies Ordinance a definition of the financial year is given. He read over the definition of the financial year to understand therefrom that the period of more than 12 months could be considered a financial year. With due respect to the learned A.R., we cannot agree to this understanding "Financial year" is a term commonly known and defined in Pakistan to mean the period starting from first July of a calendar year and ending on 30th June of the next calendar year. What the Companies Ordinance prescribes is that any period of a financial year (if so happens for some purposes) will be construed to be the financial year. This rather supports the departmental point of view that the period starting from 11th April, 1990 and ending on 30th June, 1990 will be the financial year in this case which will be the first income year in which the business income was earned and therefore, this first financial year will be construed to be the first income year to which the relevant assessment year is the assessment year 1990-91.

7. For all the reasons given above, we have no hesitation in confirming that the first assessment year in this case was the assessment year 1990-91. This being the position income of the Modaraba was exempt under specific circumstances for the assessment years 1990-91, 1991-92 and 1992-93. The learned CIT(A) has therefore, rightly upheld the departmental view that income of the Modaraba for the assessment year 1993-94 is taxable. This being the position the reduced rate of tax for two years next to the exemption period was applicable in the assessment years 1993-94 and 1994-95 and the Modaraba was rightly charged to tax at the normal rate of 25% in the assessment year 1995-96 as held by the learned CIT(A).

AMORTIZATION OF DEFERRED COST (ASSESSMENT YEARS 1994-95 AND 1995-96)

8. The learned A.R. conceded that the Tribunal has in many cases decided this issue against the appellant. We accordingly decline to interfere with the orders of the authorities below and the appeals therefore, fail on this issue.

PROVISION FOR BAD DEBTS (ASSESSMENT YEARS 1994-95 1995-96 AND 1996-97).

9. Provisions for bad debts in .the assessment years 1994-95, 1995-96 and 1996-97 were disallowed by the Assessing Officer by holding that debts involved were not yet mature to be written off. This treatment has been confirmed by the learned CIT(A). The learned A.R. has not brought any evidence before us to convince that the conditions as provided in section 23(1)(x) had been satisfied. This being the position, we maintain the orders of the authorities below and the appeals on this issue consequently fail.

ALLOCATION OF EXPENSES AGAINST LEASE RENTAL INCOME AND OTHER INCOME (ASSESSMENT YEAR 1996-97).

10. It is agitated by the learned A.R. that the learned CIT(A) erred inconfirming the action of the DCIT of allocating the admissible expenses against lease rentals and receipts other than lease rentals on proportionate basis instead of allowing all such expenses against receipts from sources other than lease rentals. It is argued that in view Of amendments made in section 23(1)(v) and corresponding amendments in sections 34, 35 and 38 and in the light of clarification contained in 'C.B.R.'s Circular No.6 of 1994, the depreciation is restricted to be allowed against lease rentals and therefore, where the depreciation exceeds the lease rentals no other expenses remain allocable against income from lease rentals. In order to support his point of view he has produced before us a decision of the Hon'ble High Court of Sindh in Income Tax Appeal No.66 of 1999 decided on 26-5-2000. We have gone through the decision of the Hon'ble High Court and the two decisions referred to by the Hon'ble High Court in the said decision and cited as 1999 PTD (Trib.) 1346 and 2000 PTD (Trib.) 474, the last decision of the Tribunal being that of Full Bench in which earlier decision in (1999) 79 Tax 140 (Trib.) was reversed. The Hon'ble High Court of Sindh found that the findings of the Appellate Tribunal in the case reported as (2000) 81 Tax 29 (Trib.) were neither proper nor based on correct appreciation of the provisions of sections 23, 34, 35 and 38 of the Ordinance. The findings of the Tribunal in the case reported as (1999) 79 Tax 140 (Trib.) have been approved by the Hon'ble High Court. The law after amendments made in 1994 in sections 23, 34, 35 and 38 has been explained in the case cited as (1999) 79 Tax 140 (Trib.) referred supra and we would like to reproduce paras 13 to 17 of the said order:--

"(13) We have considered the foregoing facts as well as the relevant provisions of law as laid down under subsection (19) of section 12, section 22, section 23 with specific reference to the rider added to C. (v) supra, sections 34, 35 and sub-rule (1) of rule 1 of the Third Schedule to the Income Tax Ordinance, 1979, keeping in view the submissions made by the learned representative of the two sides.

(14) We find that there is no dispute between the learned Assessing Officer and the assessee over the admissibility of allowances and deduction, including the allowance for depreciation, to be made under clause (i) to (xx) of subsection (1) of section 23 to compute the income from business including the income from lease rentals. The only issue sought to be resolved is the determination/computation of the amount of allowance for depreciation that shall remain unabsorbed against the income from lease rentals and shall be allowed, as per rider supra, against income from lease rentals only.

(15) It transpires on consideration of the facts supra that respondent's income both from banking as well as leasing of assets is chargeable to tax and both operations are controlled and managed jointly requiring no prorating of operational expenses. The only exception provided in law for computing income from lease rentals, in cases of assessees who have income from business operations other than leasing business as well as have incomes under other heads also during the year, is that the allowance for depreciation to be made on any machinery or plant given on lease by such assessee shall be allowed against its income from lease rentals only. It shall neither be set off against income from either any other business or under any other head during the year nor against income from any other business on any succeeding year.

(16) Thus the only method to compute/determine the amount of allowance for depreciation that may remain unabsorbed against income from lease rentals is to adjust the amount of such allowance for depreciation first against the amount of lease rentals received by the assessee and then any other allowance or deduction provided under other clauses of subsection (1) of section 23 alongwith income from any other business so that any excess of admissible allowance for depreciation over the income from lease rentals is carried forward under section 35 to be adjusted against the income from lease rentals of the subsequent year or years as the case may be.

(17) Accordingly, we confirm the impugned orders of the learned CIT(A) and dismiss the appeals."

11. It is thus clear that the income or loss of various businesses or the appellant are to be computed independently keeping in view the provisions of sections 22 and 23 of the Ordinance. Leasing of assets is one of the businesses of the appellant; its income is also be computed by taking the receipt of lease rentals as revenue and after providing for allowances and deductions as laid in section 23 of the Ordinance. All those allowances and expenses which are directly relatable to earning of the lease rentals income and allowable under section 23 will have to be allowed and where there are certain expenses which although allowable under section 23 are relatable to various activities of the assessee, these expenses are to be proportionately allowed against each 'activity of the appellant. In simple words it can be said that all provisions of law applicable to an assessee in respect of each business activity are to be considered under section 22 of the Ordinance for the purpose of taking revenue and under section 23 of the Ordinance for the purpose of allowance and deductions.

12. When the income (loss) is computed in the manner stated above, in respect of the activity of leasing out assets, the end result may be income which obviously needs to be included in the total income. In case there may be two situations, namely:--

(i) When the loss calculated is due to deductions and allowances under section 23 other than the depreciation allowance under section 23(1)(v). This will happen when the depreciation allowance gets fully absorbed against revenue receipts or in simple words the depreciation allowance is less than the revenue receipts of these rentals. In such a situation the loss will have to be adjusted against incomes assessable under other heads of income as provided in section 34 of the Ordinance and if it is not fully set off against the income of the year under other heads of income, it may be carried over for set off in the succeeding years in accordance with the provisions of sections 35 and 38 of the Ordinance.

(ii) When the resultant loss calculated is due to deductions and allowances under section 23 including the depreciation allowance under sections 23(1)(v). This will happen when the depreciation allowance permissible is not fully absorbed against the revenue receipts of these rentals. In such a situation the loss excluding the loss due to depreciation will have to be adjusted against income of the year under other heads as provided in section 34 of the Ordinance or will have to be carried forward in accordance with the provisions of sections 35 and 38 of the Ordinance. The loss pertaining to depreciation allowance will not be set off against income under any other heads or even against the business income from any other activity and will have to be carried forward for adjustment against business income of lease rentals in subsequent years and in accordance with the provisions of sections 35 and 38 of the Ordinance.

13. In view of the discussion made above, we find that the action of the learned CIT(A) in not interfering with the order of the Assessing Officer's is justified and is therefore, maintained.

DISALLOWANCE OF FINANCIAL EXPENSES---ASSESS MENT YEAR 1997-98

14. The facts relevant to this controversy are that the appellant for carrying out its business obtained a loan from IFC. The total amount of the loan was placed in U.S. Dollar Foreign Currency Account which was used as collateral for obtaining further loans in Pak. Rupees and these loans in Pak. Rupees were utilized for the purpose of Modaraba business. The financial charges in respect of loans in Pakistani currency were charged to the accounts and duly allowed against the Modaraba business income. The interest paid on foreign currency loan was disallowed by the Assessing Officer because this was a charge against the interest income received from U.S. Dollars Foreign Currency Account. This treatment has been confirmed by the learned CIT(A). Against this treatment it is argued by the learned A.R. that since the loan had been obtained for the purpose of business of Modaraba, the financial charges paid in respect of this foreign loan are allowable against business income of Modaraba. W e are afraid we cannot agree with arguments of the, learned A.R. There is no dispute that the said loan has actually been utilized for earning interest income and these financial charges are nothing but the expenditure incurred or laid out wholly aid exclusively for the purpose of earning this interest income. The authorities below were therefore, justified in considering these financial charges against the income generated from the source where the said loan was actually utilized. The appeal therefore, fails on this issue.

15. Consequently, all the appeals failed and are hereby dismissed.

C.M A./934/Tax (Trib.)Appeals dismissed.