I.T.As. Nos. 1246/LB of 2003 and 3768/LB of 2005, decided on 8th December, 2005. VS I.T.As. Nos. 1246/LB of 2003 and 3768/LB of 2005, decided on 8th December, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2396 (2005)

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

----S. 156(1)---Rectification of mistake---Opportunity of being heard--No order under S.156(1) of the Income Tax Ordinance, 1979 could be passed by the Assessing Officer whereby effect of liability for the assessee was increased unless, the assessee had been given an opportunity of being heard.

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

----S. 156(1)---Rectification of mistake---Notice for rectification---Though the Assessing Officer was empowered to rectify any mistake apparent on the face of the record in the original order even on his own, however, it was incumbent upon the Assessing Officer to issue notice under S.156 of the Income Tax Ordinance, 1979 with regard to the subject-matter which the Assessing Officer wanted to rectify---Admittedly, no such notice was given by the Assessing Officer, rectification made regarding such issue was not sustainable in the eye of law.

(c) Income-tax---

----Remand of order---Judicial authority could not use the power of remand just to allow the lower authorities to fill in the lacunae.

1992 PTD 570 rel.

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

----S. 38(6)---Limitation as to set-off and carry forward of losses in the case of firms, partners, etc.---Unabsorbed depreciation---Other income---First Appellate Authority fell in error while allowing set off of unabsorbed depreciation allowance against other income of the following year---Section 38(6) of he Income Tax Ordinance, 1979 dealt with cases of firms and partners, while the assessee was a limited company---Allowance for unabsorbed depreciation could not be set-off/adjusted against other income of the following year.

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

----S. 38(6)---Limitation as to set-off and carry forward of losses in the case of firms, partners, etc.---Set-off unabsorbed depreciation against other income---Validity---If there was any link between the expense and income from other sources meaning thereby this expense was particularly incurred in earning income from other sources, it could be set-off against profits or gains made out of other income and if not then it must be disallowed---Depreciation was an outcome of use of machinery engaged in business which keeps on depleting with passage of time, thus law envisages set-off of unabsorbed depreciation against the income of the very business or profession for which the said machinery had been used---Unabsorbed depreciation could not be set-off against income from other sources for the simple reason that it had no nexus whatsoever with the other income; even otherwise, it did not come within the ambit of sections 30 and 31 of the Income Tax Ordinance, 1979---Since assessee being a limited company, did not come within the purview of S.38 of the Income Tax Ordinance, 1979 the same had been erroneously invoked---Order of First Appellate Authority was vacated by the Appellate Tribunal being unsustainable in the eye of law and that of assessment framed by the Assessing Officer was restored whereby he refused to allow set-off of unabsorbed depreciation of the preceding assessment year against income earned from other sources in the following year.

Muhammad Aslam Lillah (LTU), D.R. for Appellant.

Nemo for Respondent.

ORDER

SYED NADEEM SAQLAIN (JUDICIAL MEMBER).---Titled two appeals pertaining to the assessment years 1997-98 and 1999-2000 have been filed at the instance of the revenue calling in question two separate orders, dated 16-1-2003 and 1-6-2005. Both of the appeals are being disposed of by this consolidated order as under:--

Assessment year 1999-2000.

2. The Revenue has come up in appeal 'assailing the impugned order, dated 1-6-2005 passed by the learned CIT(A), Zone-III, Lahore. It is the contention of the department that the learned first appellate authority was not justified in recalling its earlier order, dated 19-4-2004 under section 132 of the repealed Income Tax Ordinance, 1979 (hereinafter called the repealed Ordinance).

3. The facts relevant for disposal of the instant appeal are that the assessee, a public limited company filed rectification application under section 156 of the repealed Ordinance contesting following three issues:

(i) Disallowance of Initial Depreciation.

(ii) Taxation of Dividend @ 33 %.

(iii) Claim of Rebate not allowed.

The Assessing Officer while passing order on the rectification application also made an observation on an issue i.e. allocation of expenses to dividend income which was not the subject-matter of the rectification application preferred by the assessee. It is also worthnoting that the order passed on this issue increased net tax liability of the assessee. The assessee approached the learned first appellate authority who accepted the assessee's contention on the issue with the observation that assessee's tax liability could not be enhanced without confronting the assessee and issuing notice under section 156(2) of the repealed Ordinance. However, after making above said observation, the learned CIT(A) remanded the case to the Assessing Officer for de novo consideration. The assessee filed an application under section 156 of the repealed Ordinance before the learned first appellate authority that there is a mistake apparent on the face of the record, committed by the learned CIT(A) whereby he remanded the case to the Assessing Officer for de novo consideration in spite of the fact that he gave clear-cut observation that the Assessing Officer erred in law while making rectification on the issue about which no notice under section 156(2) had been given to the assessee. The aforesaid rectification application of the assessee was accepted by the learned first appellate authority who recalled the earlier order, dated 1-6-2005 passed by the learned CIT(A) and deleted the tax liability imposed upon the assessee. The Revenue is in further appeal before the Tribunal agitating that the learned first appellate authority could not recall the earlier order, dated 19-4-2004 passed by the predecessor of the present Commissioner of Income Tax and order deletion of tax liability imposed upon the assessee.

4. No one appeared on behalf of the assessee/respondent. The learned D.R. has been heard and relevant orders perused. The learned D.R. has vehemently argued the case and supported the rectification order passed by the Assessing Officer.

5. Before proceeding further, it would be appropriate to reproduce .the relevant extract from section 156 of the repealed Ordinance:-

Section 156(2).---No order under subsection (1), which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall be made unless the parties affected thereby have been given a reasonable opportunity of being heard.

6. Bare perusal of' the above reproduced provision of law clearly evinces that no order under section 156(1) of the repealed Ordinance could be passed by the Assessing Officer whereby effect of liability for the assessee is increased unless the assessee has been given an opportunity of being heard. It is very much apparent from the record that the assessee filed rectification application whereby he contested the three issues such as disallowances of initial depreciation, taxation of dividend @ 33% and claim of rebate not allowed. Though the Assessing Officer was empowered to rectify any mistake apparent on the face of the record in the original order even on his own, however, it was incumbent upon the Assessing Officer to issue notice under section 156 of the repealed Ordinance with regard to the subject-matter which the Assessing Officer warranted to rectify. Admittedly, no such notice was given by the Assessing Officer, therefore, the rectification made regarding such issue was not sustainable in the eye of law.

7. As regards findings given by the learned CIT(A) whereby he remanded the case to the Assessing Officer for de novo consideration despite the fact he concurred with the assertions made by the learned A.R. that a notice under section 156(2) of the repealed Ordinance was sine qua non for making a rectification which led to the enhancement of liability of the assessee. It has been held time and again by the Tribunal as well as by the higher legal fora that the judicial authority cannot use this power of remand just to allow to the lower authorities to fill in the lacunae. The Honourable Supreme Court of Pakistan in the reported judgment cited as 1992 PTD 570 held that:

"Where an Assessing Officer exercising powers under section 35 of the Income Tax Act, 1922 enters into the controversy, investigates into the matter, reassess the evidence or takes into consideration additional evidence and on that basis interprets the provision of law and forms an opinion different from the order, then it will not amount to rectification of the order. Any mistake which is not patent and obvious on the record, cannot be termed to be an order which can be corrected by exercising power under section 35 of the Income Tax Act, 1922."

8. In the light of above discussion and judgment cited supra, we are

not inclined to interfere in the impugned order, thus the departmental appeal is herby dismissed.

Assessment year 1997-98

9. As far as assessment year 1997-98 is concerned, the Revenue has challenged the set-off of brought forward depreciation losses against other income. The relevant facts are that the assessee during the year under appeal claimed set-off unabsorbed depreciation losses of previous years against other income which was rejected by the Assessing Officer. The assessee preferred appeal before the learned First Appellate Authority who vide its order, dated 16-1-2003 directed the Assessing Officer to allow unabsorbed depreciation losses against other income of the year as per history of the case. The relevant para. of the said order is reproduced as under:

"Arguments of the appellant have been given due consideration. The Assessing Officer while dealing with the matter of set-off of depreciation losses ignored the legal provisions of section 38(6) according to which unabsorbed depreciation losses shall be deemed to be the part of depreciation allowance of the following year and if there was no allowance it shall be deemed to be the allowance for that year. Thus as per provisions of section 38(6) of the repealed Ordinance, unabsorbed depreciation allowance of previous years has become allowance for the year under appeal and must be set-off according to the provisions of sections 34 and 35. There is no dispute that no set-off of losses is allowable in the case of presumptive tax regime, but here the situation is different as the appellant has been enjoying income from other sources as well. The Assessing Officer is directed to allow unabsorbed depreciation losses against other income of the year under appeal in the same manner as done in the past."

10. Departmental representative appearing on behalf of the department submitted that the learned Appellate Commissioner erred in law while allowing unabsorbed depreciation against other income. He contended that the learned CIT(A) misinterpreted the respective provision of law in this regard. It was urged by the learned D.R. that section 38 covered cases of firm and partners etc. While assessee in present case is a limited company. It was highlighted that 'relevant provisions of law which deal with set-off of losses or carry forward of business losses are sections 34 and 35 of the repealed Ordinance. It was pleaded that even if unabsorbed depreciation was to be allowed, it could only be allowed/adjusted against profits and gains of business and not other income.

11. None is present to controvert the arguments addressed by the Departmental Representative.

12. We have given our anxious consideration to the submissions made at the bar by the learned D.R. and have also perused both the orders passed by the Authorities below. We feel ourselves persuaded by the assertions made by the learned D.R. We have no hesitation in holding that the learned CIT(A) fell in error while allowing set-off of unabsorbed depreciation allowance against other income of the following year. Bare perusal of section 38(6) would evince that it deals with cases of firm and partners, while the assessee is a limited company. Besides, the allowance for unabsorbed depreciation could not be set-off/adjusted against other income of the following year. Even it' we look at the scheme, or lay-out provided in late Income Tax Ordinance, 1979 regarding heads of income and deduction allowed against those heads, which start from section 15 enumerating the heads of income and ends with section 31. Bare perusal of these sections would indicate that Ordinance made provisions for deductions against each head of income. Obviously, the spirit of law behind this scheme is that in order to ascertain net profits, one must make allowance for the expenses incurred for making those profits. In this respect, sections 17 and 18 could be clubbed together since deduction under section 18 are allowed only against the income earned under the head of interest on securities (section 17). Similarly section 20 allows deduction against income made from house property (section 19). Likewise, section 23 caters for allowing deduction against income from business or profession and lastly the law made specific reference under section 31 for allowing deduction against income from other source. This shows that for making allowance, one must establish nexus between the allowance which is to be made with the nature of income against' which the same is being allowed or set off.

13. Reverting to the issue which is sub judice before us, we will have to search out that if there is any link between the expense (i.e. unabsorbed depreciation) and income from other sources meaning thereby this expense was particularly incurred in earning income from other sources. If the answer is in the affirmative then obviously, it can be set off against profits or gains made out of other income. But if the answer is in the negative on the basis of parameter discussed above then it must be disallowed. At this stage, we will once again refer to section 23(v) which encompasses the allowance of depreciation against income from business or profession under section 22. One can easily appreciate the wisdom of law whereby it has provided this allowance. It is very much apparent that depreciation is an outcome of use of machinery engaged in business which keeps on depleting with the passage of time, thus law envisages set off of unabsorbed depreciation against the income of very business or profession for which the said machinery has been used. However, unabsorbed depreciation could not be set off against income from other sources for the simple reason that it had no nexus whatsoever with the income earned. Even otherwise, as per scheme of the Ordinance in this respect, it does not come within the ambit of sections 30 and 31 of the Ordinance. The argument tendered by the learned A.R. also carries weight for the reason that section 38 deals with the cases of firm and partners while the assessee is a private limited company. Since the assessee being a limited company, does not come within the purview of section 38, the same has been erroneously invoked in the case of the assessee. The impugned order is liable to be cancelled on this score only.

14. In the light of supra discussion, we are constrained to observe that order passed by the learned CIT(A) is unsustainable in the eye of law. We vacate the impugned order, dated 16-1-2003. Resultantly, the assessment framed by the Assessing Officer stands restored whereby he refused to allow set off of unabsorbed depreciation of the preceding assessment year against the income earned from other sources in the following year.

15. Departmental appeals succeed accordingly.

C.M.A./99/Tax (Trib.)Appeals succeeded.