Messrs ATLAS INVESTMENT BANK LTD. VS COMMISSIONER OF INCOME TAX
2005 P T D 2586
[Karachi High Court]
Before Muhammad Mujeebullah Siddiqui and Khilji Arif Hussain, JJ
Messrs ATLAS INVESTMENT BANK LTD.
Versus
COMMISSIONER OF INCOME TAX
I.T.Rs. Nos. 247, 248, 249, 250, 251 & 252 of 2005, decided on /01/.
th
August, 2005. (a) Income Tax Ordinance (XXXI of 1979)---
----Ss.23 & 24---Income Tax Act (XI of 1922), Ss.10(2)(iii) & 15-BB---Deductions---No conflict or difference of opinion existed in the judgment passed by Karachi High Court in the case of Commissioner of Income Tax Y. PICIC 1988 PTD 626 and judgment passed by Lahore High Court in Tax Reference No.7 of 2001 dated 22-6-2004 reported as 2005 PTD 2599---Position elucidated.
Commissioner of Income Tax v. PICIC 1988 PTD 626 and 2005 PTD 2599 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss.23, 26 & 136---Deductions ---Reference to High Court---Tribunal had found that if an assessee had taxable as well as exempt income, the expenditure incurred for the purpose of earning the taxable income was a deductible expenditure while the expense incurred for earning the exempt income was not deductible expenditure---Principle forming basis of the order passed by the Tribunal was not open to any exception by the High Court.
(c) Precedent---
----If there is difference of opinion between the High Courts, all the subordinate Courts including Benches of the Income Tax Appellate Tribunal are required to follow the view taken by the High Court within whose jurisdiction they are working.
Rehan Hassan Naqvi with Miss Lubna Perwez for Applicant.
None for the Respondent.
Date of hearing: 26th August, 2005.
JUDGMENT
MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---In all the above Reference Applications, the following common questions, stated to be questions of law, arising out of the order of Income Tax Appellate Tribunal, dated 27-4-2005, have been proposed for our consideration:---
(i) Whether on the facts and in the circumstances of the case the Learned Full Bench of Income Tax Appellate Tribunal, Karachi was correct in deviating from the decision of Hon'ble Karachi High Court, reported as 1988 PTD 626 (H.C. Kar.) purportedly implying it with the decision of the Hon'ble Lahore High Court in Tax Reference No.7 of 2001, dated 22-6-2004 = 2005 PTD 2599, which is not in consonance with Article 201 of the Constitution of Islamic Republic of Pakistan?
(ii) Whether on the facts and in the circumstances of the case the Learned Full Bench of the Income Tax Appellate Tribunal, Karachi was right in law to hold that exempt income cannot be earned without a certain definite amount of expenditure?
(iii) Whether on the facts and in the circumstances of the case the Learned Full Bench of the Income Tax Appellate Tribunal, Karachi was correct in law to allow expenditure on pro-rata basis instead determining exactly the amount of expenditure related to exempt income vis-a-vis the taxable income although it was accepted that there was no concept of pro-ration of expenses in the related I. T. Ordinance, 1979?
(iv) If the answer to the question No. (iii) is in negative, whether on the facts and in the circumstances of the case the Learned Full Bench of the Learned Income Tax Appellate Tribunal, Karachi was legally justified to vacate the subject orders Assessing Officer and learned Commissioner of Income Tax (Appeals) and remand the same for fresh adjudication with directions for pinpointing each amount of expenditure?
We have heard Messrs Rehan Hassan Naqvi and Lubna Perwez for the applicants, and have perused order passed by the Tribunal. For the sake of convenience the findings of the Tribunal are reproduced below:
"We have heard the arguments of the learned representatives of both the parties and also of the learned D.R. and have also gone though the case law as cited by both the parties. The available record has been perused. It is very clear that the concept of income and expenditure go together side by side. In Income Tax Law, there is firstly the working out of income and also the allowing of expenditure allowances. Here it is to be brought on record in a categorically plain language and which is also undeniable that exempt income cannot be earned without a certain definite amount of expenditure. As for computation of the capital gain earned on the transfer of capital assets, its cost and expenditure incurred wholly and exclusively for acquiring, are deducted from the amount realized on transfer firstly. For dealing with a situation after this first step, then there are provisions of subsection (2) of section 28, which nor convenience are reproduced as under:---
" ..The provisions of section 24 shall, so, far as may be, :apply
to the allowances and deductions under this section as they apply to the allowances and deductions in respect of income chargeable under the heard "Income from business or profession."
This subsection (2) supra is making clear that statutory provisions contained in section 24 shall be applicable for working out any income to be assessed under the head capital gains. The section 24 is again referring to the provisions of earlier section i.e. 23 which is starting as under:--
" In computing the income under the head ".Income from business or profession", the followingallowances and deductions shall be made, namely:--"
The language as reproduced supra is making incumbent upon the Assessing Officer that the allowances and deductions as prescribed shall be made. So no escape is possible in respect of any income whether liable to tax, or not, exempt are not taxable. It is here also to be clarified for shedding all the doubts, that exempt, table, non-taxable income are to be worked out but only the taxable income shall be charged to tax, where patently the part of total income is not liable to tax in the hands of the assessee. Here in the instant case nothing has been commented upon by the Assessing Officer, regarding the income claimed as exempted and the expenses incidental with it, so the exempt income has not been disturbed. It is only in respect of taxable, income where add-backs/disallowances of expenditure have been made by prorating the same on the basis of exempt and taxable income. Thus the income which has been charged to tax has been assessed at an enhanced figure against the declared after these add-backs. It is a matter of great concern that the department is not pointing out as to how the accounts were maintained, which is missing in such accounting record. How the exempt income has been recorded in the books which was ultimately reflected in the final accounts at the end of the year. Similar is the position of the expenses, which too could not get the attention of the Assessing Officer. Nothing has been expressed as to how the capital gains or losses arising in the transactions have been recorded in the books or that have not been recorded at all or not fully recorded and the resultant position on the given facts. It is of vital importance for such concerns, like the assesses cases before us, to keep a proper fair record of investment along with expenditure incidental with it. Mainly such business houses earn profits by managing its funds and it is next to impossible as it is not at all comprehensible that there is total absence of maintenance of day to day record of such transactions like investment of funds by also highlighting expenditure involved with reference to such transactions. With the insertion of section 67 in the new Ordinance, 2001, the lawmakers have accepted that prior to it there can not be any concept of "Proration of expenses" exactly in identical situations. Anyhow it is admitted fact that the onus to prove the non-incurrence of any expenses for earning the exempt income was on the assessee, where the assesses have failed, whereas the Assessing Officer have also proceeded arbitrarily by making add-backs/disallowances on proration basis, without analyzing /determining as to the extent of each expenditure for generating exempt income in the hands of assessee, for example, the extent of financial expenses of investment in capital assets i.e. stock in shares is wholly from borrowed funds or partly and that borrowed funds have been wholly or partly utilized for carrying on taxable business activity. Similarly the administrative expenditure could be assigned by making clearly in reference to exempt and taxable activities.
Another factor which is of utmost importance is that in the instant cases the funds have been invested so as to earn profit on sale of such shares out of investment portfolio, whenever the opportunity arises in the market, which is distinct from the cases when simply surplus funds in hand are invested to earn the profit which could be either in the shape of dividend or surplus realized on sale. Another example is the investment of personal savings.
But here it is not the question of gain on sale of investment primarily representing the personal savings where there could not be any noticeable element of expenditure except the purchase price and the cost incidental thereto. The investment has been made by an organization with in object to indulge in such business activity as a result of it exempt capital gain has became visible, so here entire organizational structure with the fund at its disposal were used for such business activity. Thus there is an element of definitely attributable expenditure to investment.
Now, we discuss the applicability of case-law cited before us. In the case of PICIC Cited as 1988 PTD 626 (Karachi H.C.) findings were recorded by their lordships regarding dividend as the "exempt income" where the expenses shall not be charged. Sections as referred in this judgment are 10(2)(iii) and 15(BB) of the Repealed Income Tax Act, 1922. The reported judgment is in context with an assessee engaged in advancing of loan for setting up the industries and got shares of borrowing company compulsorily against the loan under the terms of loan agreement on which the tax free dividend was earned but in the instant case before us investment was being made by the assessee companies as a part of business activity. Further nothing is on record from the assessees sides as well from the department as to whether funds invested represent borrowings or own funds i.e. equity from members. In Tax Reference No.1 of 2001, the PTR No.128 of 2001, judgment has been authored by Mr. Justice Nasim Sikandar in Division Bench of Honourable Lahore High Court, but the learned representatives of assesses are claming that this judgment is not to be followed by this Bench, as it is sitting at Karachi which is within the jurisdiction of Honourable Karachi High Court. But without commenting on this arguments it would be of utmost importance that view as expressed in this cited Honourable Lahore High Court judgment should be brought on record by referring to the following paras:--
Thirdly:
"The concept of "composite business" in case of a bank or an investment company cannot be extended to capital gains as a matter of course. It is simply for the reason that a bank or investment company cannot take shelter behind their own failure to maintain accounts with respect to their different spheres of activities. To say that an investment company could not maintain separate account with regard to sale and purchase of shares, their retention and then disposal in the market and alleging them to be a part of day to business is not acceptable either as a matter of fact or in law. With the availability of professional expertise in financial and accounting matters the assessee as an investment company cannot take benefit of its own default of having failed to maintain record of transactions in shares.
Fourthly:
"The plea of a "composite business" is in fact an attempt to over simplify the issue. The sale and purchase of shares in a stock market is completely record and it is not believable that an investment company bank failed to maintain faithful record of these transactions even if these are in thousands. All payments and receipts without any iota of doubt are made through cheques and other baking instruments. In the case in hand despite repeated notices the assessee company failed to produce the record and as said above still wanted to take benefit of its default of having maintained no independent account of these transactions. The revising authority, therefore, rightly refused to give premium for the default of the assessee.
Fifthly:
The revising authority appears justified in finding that the original assessment order under section 62 as framed by the Assessing Officer was prejudicial to the interest of Revenue inasmuch as even accrual of the claimed capital gains was not proved through production of record and books of accounts. Non allocation of expense to such income, therefore, certainly increased the volume of the claimed exempt income.
Sixthly:
Learned counsel for the Revenue is correct in pointing out that in case the assessee had returned only capital gains it could not refuse allocation of expense. In such situation provisions of subsection (3) of section 32 (method of accounting) of the late Ordinance would have become applicable. The declaration of higher income from exempted source is as objectionable attempt as to inflate losses.
Seventhly:
It is also correct that during the proceedings before the revisingauthority the petitioner failed to establish that the investment in shares which resulted in capital gains was made from the equity of the members. The revising authority rightly rejected a telegraphic statement submitted before it to show the position of availability of certain funds out of share holder equity on a particular date. The plea taken in this regard though quite frivolous on the face of it was again sought to be supported from the factum of default on the part of the petitioner to maintain accounts.
Lastly:
It is also not acceptable that no expense whatsoever was incurred to earn such a huge amount of capital gains. It is common knowledge that stock exchange brokers charge commission of different rates in case of shares of different values. Also revenue stamps are required to be affixed on transfer deeds of shares. These expenses must have been substantial when transactions were made in thousands of shares and were repealed frequently.
This judgment though in respect of applicability of section 66A but the views expressed by the Honourable Division Bench of Lahore High Court have pertinently dealt with the issue in a judicially logical manner. Again reverting to the case of PICIC cited supra where funds were advanced for setting up industrial undertaking, as per the terms /conditions of working relationship between the PICIC and the borrower, that shares were given by such borrower to the PICIC, so it could become a party in managing and controlling the affairs of the company, whereas in the instant case before us there is no such compulsion, it is simply the investment of funds by the assessee with a view to earn the profits as well as selling at an appropriate time with a specific object of earning the profits. Thus we do not find that judgment passed in the case of PICIC is in context with the issue before us. To sum up the discussion and also keeping in view the discussion supra we feel persuaded to hold that exempt income cannot be earned without the incurrence of specific and certain amount of expenditure. Such incurrence of expenditure is being found also relatable to exempt income whereas it is only the proration of expenses which have been made at assessment stage. Such proration of expenses has no scope in the Repealed Income Tax Ordinance, 1979 and secondly, in these cases where the maintenance of accounts is inevitably indispensable so proration would become arbitrary method as in the present days against each rupee of investment, expenses could be very easily co-related and assigned in a precise manner to exempt vis-a-vis taxable income. So we are reluctant to uphold the allowing of expenditure on prorating basis instead of determining exactly the amount of expenditure related to exempt income vis-a-vis the taxable income after pinpointing each amount of expenditure to taxable and exempt income. Such workings are to be made by the Assessing Officer. The stakes of the revenue are higher when funds after borrowing were utilized in the investment and the profit arising on sale of shares is being incorporated in the books without deduction of any expenditure, So in respect of financial expenses greater care is to be exercised by the Assessing Officer for co-relating to exempt and table activities. As far as the administrative expenditure are concerned these shall be allocated on the basis of the work force essentially kept for running the two distinct business activities, i.e. exempt and taxable. In this computerized scientific age the proration of expenditure is on arbitrary method which cannot be permitted. So even at the cost of repetition, it is to be made clear again that expenditure shall not be prorated but should be allowed by actually identifying each amount of expenditure after proper scrutiny of the same by the Assessing Officer. The order passed by both authorities below are to be vacated and matter shall be remanded back to the Assessing Officer for passing a proper speaking order after obtaining the necessary details with documentary evidence of expenditure and on affording a proper opportunity of being heard to the assessee. The assessee is also directed to extend maximum cooperation to the Assessing Officer for properly disposing of the issue."
A perusal of the above elaborate discussion by the Tribunal shows that the finding of the Tribunal is based on the principle that if an assessee has taxable as well as exempt income, the expenditure incurred for the purpose of earning the taxable income is a deductible, while the expense incurred for earning the exempt income is not deductible expenditure For this purpose the Tribunal has remanded the cases to the Assessing Officer with the specific 'direction to pass a proper speaking order after obtaining the necessary details with documentary evidence of expenditure and after affording a proper opportunity of being heard to the assessee.
Mr. Rehan Hassan Naqvi, learned counsel for the applicant, has submitted that the judgment passed by Sindh High Court has binding effect on the Benches of Tribunal working at Karachi, while the judgment passed by the Lahore High Court has the binding effect on the Benches working within territorial jurisdiction of the Lahore High Court. He has submitted that the learned Tribunal has fallen in error in ignoring the judgment of Sindh High Court in the case of Commissioner of Income-tax v. PICIC, 1988 PTD 626 and placing reliance on the judgment of Lahore High Court in Reference No.1 of 2001.
So far the proposition of law relating to the binding effect of the precedent is concerned, there can be no cavil to it. If there is difference of opinion between the two High Courts, all the subordinate Courts including the Benches of the Income Tax Appellate Tribunal are required to follow the view taken by the High Court within whose jurisdiction they are working. However, we find that in the present case there is no difference of opinion in the judgments of this Court and the Lahore High Court, referred to by Mr. Rehan Hassan Naqvi, learned counsel for the applicant. The Tribunal has considered the ratio of the two judgments and has rightly held that the judgment of Sindh High Court in PICIC case is not an authority on the point that expenditure incurred for earning exempt income is an admissible expenditure.
A perusal of the judgment in PICIC case shows that a factual plea that the borrowed capital was utilized for earning exempt income was not accepted. It was held that, "It may be observed that the Income Tax Officer in his assessment order has not challenged the correctness of the respondent-assessee's averment to the effect that the investment wade by them did not exceed their capital and reserves, whereas the learned Income Tax Appellate Tribunal has recorded a finding of fact to that effect. In this view of the matter, it is not urged that any portion of the borrowed capital was utilized in purchasing the shares from which tax free dividends in question were received."
In the above context, the following questions of law were answered in affirmative:--
"(1) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that the interest paid on borrowed capital should not be allocated between gross receipts from the dividend income, which was exempt, and the other income, which was not exempt?
(2) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that no part of the total administrative and other expenses and interest should be allocated against dividend income which was exempt from tax?"
At this stage, we would like to observe that the head notes are misleading and are not in conformity with the findings contained in the judgment. It appears that because of misleading head notes in PICIC case, a confusion is prevailing, therefore, we would like to clarify that in this case the finding of Tribunal that the interest paid on borrowed capital should not be allocated between gross receipts from the dividend income, which was exempt and the other income which was not exempt and no part of the total administrative and other interest should be allocated against the dividend income which was exempt from the tax was based on a finding of fact that borrowed capital was not utilized for earning exempt income. The questions of law were answered in affirmative in the above context. Nowhere it has been held in this judgment that even if an expenditure has been made for earning exempt income the expenditure incurred on such income is not to be allocated to be exempt income or such expenditure can be deducted from the gross taxable income "Or arriving at the total income.
In this case there was no finding that the expenditure was incurred for earning the exempt income and, therefore, in this context it was held that since there was no material on record to show that any administrative expenses were incurred for earning the exempt income, therefore, no such allocation can be made. On the other hand, Lahore High Court judgment is concerned, it is specific on the point that in case an assessee has earned taxable as well as exempt income and has incurred expenditure for earning income falling the two categories, the C expenditure incurred for earning exempt income is not an admissible expenditure. There is no conflict in the judgments passed by this Court and the Lahore High Court. It is yet to be determined whether any expenditure has been incurred by the applicant for earning the exempt income. If ultimately it is held by the Assessing Officer that no such expenditure has been incurred, then the entire administrative expenditure shall be allocated to the taxable income and shall be allowed. So far the principle on the basis whereof the Tribunal has decided the issue, it is not open to any exception. Mr. Rehan Hassan Naqvi has contended that the concept of allocation of expenditure for earning exempt income and taxable income has been introduced by the Income Tax Ordinance, 2001, for the first time. We are not persuaded to agree with the contention. This concept is very old and is in practice from the very inception of the Income Tax law introduced in the sub-continent. Previously the concept was being acted upon on the basis of judicial pronouncements and on the interpretation of provisions contained in the law and now that principle has been given legislative recognition. Simply because a principle already being acted upon has been given a legislative recognition, it would not amount to introduction of some new concept.
A perusal of the questions proposed shows that the first question is on the presumption that the learned Tribunal has deviated from the principle laid down by this Court in PICIC case and has preferred to follow the law laid down by the Lahore High Court. As already explained, the contention is not correct.
As regards the second question, we are of the opinion that the Tribunal has merely made an observation on the basis of which this question has been framed. In fact the point, what has been decided by the Tribunal, is that 'after determining the fact as to what was the expenditure incurred for earning the income in two categories, the expenditure shall be allocated accordingly and the Tribunal has expressly given a finding that no allocation is to be made on pro-rata basis, meaning thereby that the question of admissibility of expenditure is to be decided after determining the fact whether any expenditure was incurred for earning the exempt income or not. If it is in negative, then no expenditure is to be allocated to the exempt income.
The question No.(iii) is misconceived as it is stated, "whether the Tribunal was correct in law to allow expenditure on pro-rata basis instead determining exactly the amount of expenditure related to exempt income". The finding of the Tribunal is in the terms that no pro-rata allocation is to be made and the expenditure is to be determined exactly related to the exempt income. The question No.(iii) is misconceived and does not arise out of the order of the Tribunal. The Question No. (iv) is consequential to question No. (iii) and requires no consideration.
For the foregoing reasons we are of the opinion that the principle forming basis of the order passed by the Tribunal is not open to any exception and so far the actual working is concerned, no finding can be given at this stage until and unless the exercise directed to be done by the Tribunal takes place.
In the above circumstances and with the observations made above, we are of the opinion that no substantial question of law requiring interpretation or opinion of this Court arises out of the order of Tribunal and consequently all the Reference Applications stand dismissed along with the listed application.
M.B.A./A-239/KApplications dismissed.