I.T.A. No. 2697/LB of 2003, decided on 1st December, 2005. VS I.T.A. No. 2697/LB of 2003, decided on 1st December, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2737 (2005)

Income Tax Ordinance (XXXI of 1979)---

----S. 66-A & Third Sched., R. 8(8)(e)---Powers of Inspecting Additioial Commissioner to revise Deputy Commissioner's order---Loss on account of exchange fluctuation on repayment of instalment of loan---Capital expenditure or revenue expenditure---Loss sustained on account of exchange fluctuation on repayment of instalment of loan was claimed as a revenue expenditure in Profit and Loss account, which was allowed by the Assessing Officer---Inspecting Additional Commissioner discarded assessee's explanation and treated loss as capital expenditure under R.8(8)(e) of the Third Schedule of the Income Tax Ordinance, 1979 and assessment order was modified accordingly treating the same to be erroneous being prejudicial to the interest of Revenue---Validity---Loss on account of exchange fluctuation had wrongly been treated as capital expenditure despite the fact that the assessee's loan did not fall within the category of loan, which attracts the provisions of law laid down under R.8(8)(e) of the Third Schedule of the Income Tax Ordinance, 1979 as the basic ingredient Was the purchase of machinery or plant which was not available in the case of assessee---Assessee paid back short term loan and it was properly shown in the statement of accounts---Inspecting Additional Commissioner had ignored the fact that another loan was in Pak Rupees and had been availed in Pakistan and was repayable in Pak Rupees, thus R.8(8)(e) of the Third Schedule of the Income Tax Ordinance, 1979 did not cover the case for invocation of S.66A; of the Income Tax Ordinance, 1979---If the said rule was not applicable to the loan then how could it be made applicable to the exchange fluctuation loss on repayment of loan---Action taken under S.66A of the Income Tax Ordinance, 1979 was unfounded and unsustainable and original assessment order passed was strictly in accordance with law being neither erroneous nor prejudicial to the interest of Revenue---Appellate Tribunal vacated the order of Inspecting Additional Commissioner and restored the assessment order framed under S.62 of the Income Tax Ordinance, 1979.

1986 PTD (Trib.) 105 and 1991 PTD (Trib.) 894 rel.

Dr. Muhammad Sharif Chaudhry for Appellant.

Anwar Ali Shah, D.R. for Respondent.

ORDER

ZAFAR ALI THAHEEM (JUDICIAL MEMBER).---This further appeal at the instance of the assessee has been directed against the impugned order, dated 22-4-2003 recorded under section 66A by the Additional Commissioner of Income Tax, Range-HI, Companies Zone-II, Lahore, whereby the following issues have been raised as per memo of appeal for adjudication:--

(1) That the learned Additional Commissioner was not justified to invoke provisions of section 66A of the Income Tax Ordinance, 1979 with respect to charging of Exchange Fluctuation Loss in the Prof t and Loss Account.

(2) That' the learned Additional Commissioner was not justified to capitalize the Exchange Fluctuation Loss on foreign currency loan obtained for working capital assistance. No asset was purchased out of the Foreign Currency Loan as the machinery of the assessee was much earlier in operation on the date of receipt of loan.

Brief facts of the case are that the assessee, a private limited company, deriving income from plastic goods, contracted a loan amounting to Rs.20 Million in Pak Rupees from Bank of America for import of raw material, stores and spares, machinery etc. and also repayable in Pak Rupee in February, 1993. In April, 1995 the assessee company also contracted a loan amounting to 1,300,000 Dollars from Messrs Kiawah Investment Limited of British Virgin Islands and repayable in the same currency, which was later on converted in Pak Rupees of Rs.40,210,720. As per agreement between the parties dated 13-4-1995 and Note No.3.2 to the accounts of the assessee-company for the year ended 30-6-1995, the said loan was utilized for repayment of short term loans of American Bank, Prime Bank, absorbed in working capital and absorbed in losses and also used for repayment of this very loan. During the period under consideration, the assessee company sustained a loss of Rs.2,756,644 on account of exchange fluctuation on the repayment of instalment of loan to Kiawah Investment `Company and claimed it as a Revenue expenditure in P&L account, which was allowed by the I.T.O. while finalizing assessment under section 62 on 25-1-2001. Later on the IAC requisitioned the assessment record for examination and after going through the Notes of the Chartered Accountant to assessee's accounts of 1995-96, he issued a show-cause notice to the assessee calling upon his explanation on the exchange fluctuation loss of Rs.2,756,644 for the charge year. In response to the said Notice, the assessee tendered his explanation in this regard, which was discarded by treating loss as capital expenditure under Rule 8(8)(e) of the 3rd Schedule of the Income Tax Ordinance, 1979, He, therefore, modified the assessment order accordingly by invoking the provisions of section 66A treating the same to be erroneous in so far as prejudicial to the interest of Revenue.

The learned AR has termed the action of IAC to be arbitrary and contrary to facts and law in this case by maintaining that he has wrongly treated loss on account of exchange fluctuation as capital expenditure by resorting to Rule 8(8)(e) of the 3rd Schedule of the Income Tax Ordinance, 1979, He has read before us the Provisions of the said Rule resorted by IAC; a gist of which is quoted as under:--

"Exchange fluctuation loss or gain would be treated in the nature of capital and would be added to or deducted from the cost of Plant and Machinery if it is sustained in repayment of a loan which fulfills the following conditions:--

(a) It is foreign loan.

(b) It is in foreign currency.

(c) With his loan, Plant and Machinery is purchased from aboard for installation in Pakistan.

He has apprised the Court that the assessee/appellant's loan from Messrs Kiawah Investment Company, fulfills first two conditions of the said Rule but does not the third condition as such not applicable to the case in hand. He has further elaborated his viewpoint that with the said amount of loan no plant or machinery whatsoever was ever purchased from abroad. He has contended that since, out of new loan amounting to Rs.40,210,720 taken from Messrs Kiawah Investment Company, an amount of Rs.25,000,000 has been paid back to Bank of America, therefore, exchange fluctuation loss incurred by the assessee on repayment of instalment of loan of Messrs Kiawah is not capital expenditure under the said Rule of 3rd Schedule of Income Tax Ordinance, 1979. He has also furnished before us statement by virtue of which short term loan of Rs.5,134,805 has been paid back to American Bank. He has asserted that even if the assessee has made payment of American Bank loan. amounting to R.25,000,000 as alleged by the IAC, then to the rule 8(8)(e) of the 3rd Schedule of the Income Tax Ordinance, 1979 is not attracted to asesee's case as the loan of Bank of America is in Pak.. Rupee and has been taken in Pakistan and also repayable in Pak Rupee. He has stressed on this point that since, the said Rule is not applicable to the loan of the Bank of America then how it can be applied to the exchange loss on repayment of loan of Messrs Kiawah Investment Company. He has emphatically asserted that the assessee claimed exchange fluctuation loss for the assessment years 1999-2000 to 2002-2003 but the learned IAC has only invoked the provisions of 66A in assessment year 2000-2001 whereas for the rest of the years, the Department has accepted the version of the assessee, which also goes adversely to the root of the impugned treatment. In order to lend credence to his submissions, he has referred before us reported judgments cited as 1986 PTD (Trib.) 105 and (1991) PTD (Trib.) 894. On the issue of invocation of provisions of law under section 66A of the repealed Income Tax Ordinance, 1979, he has emphasized that original order under section 62, dated 25-1-2001 framed by Taxation Officer was not erroneous as well as prejudicial to the interest of Revenue as it was strictly in accordance with law and by lawful authority. While summing up his arguments, the learned AR has vehemently objected the impugned treatment of revising authority being unfounded on legal and factual plane. He has stressed upon for vacation of impugned treatment under section 66A of the repealed Income Tax Ordinance, 1979 as impugned treatment was accorded without appreciation of loan agreement, dated 13-4-1995 executed between the assessee and Messrs Kiawah Investment Company and being entirely baseless and uncalled for.

On the contrary, the learned DR has supported the action of learned IAC by confining his arguments to the factors and reasons as enumerated in the body of impugned order and contended that learned IAC was legally justified to invoke the provisions of section 66A, because the exchange fluctuation loss declared by assessee was not allowable as revenue expense. He has maintained that learned IAC has rightly held the assessment order erroneous and prejudicial to the interest of Revenue.

We have given anxious consideration to the arguments advanced on behalf of rival parties and also carefully gone through the relevant record available on file. Main issue involved in this appeal for adjudication is that whether exchange fluctuation loss of Rs.2,756,644 sustained by the assessee on the repayment of loan is Revenue expenditure debitable to P&L account as claimed by the assessee or it is a capital expenditure as treated by the IAC in his order passed under section 66A. The assertions made on behalf of the assessee in this regard are forceful being supported by plausible reasons. After giving due consideration to facts of the case as well as provisions contained in Rule 8(8)(e) of the 3rd Schedule of the Income Tax Ordinance, 1979, we find that loss on account of exchange fluctuation has wrongly been treated as capital expenditure by the IAC despite the fact that the assessee's loan from Messrs Kiawah Investment Company does not fall within the category of loan, which attracts the provisions of law laid down under rule 8(8)(e) of the 3rd Schedule of the repealed Income Tax Ordinance, 1979 as the basic ingredient was the purchase of machinery or plant which is not available in the case of assessee. In fact, the emerging facts of the case demonstrate this aspect that learned IAC has not fully appreciated the terms and conditions of the loan agreement and specifically its utility for which it was availed by the assessee. Another focal point, which is wroth considerable is that the learned IAC has erroneously observed that the assessee has repaid an amount of loan at Rs.25,000,000 to Bank of America out of this loan. Therefore, exchange fluctuation loss incurred by the assessee on the repayment of instalment of loan of Messrs Kiawah Investment Company is of capital nature under the said Rule cited supra is baseless. In fact, the assessee paid back short term loan of Rs.51,34,805 to the American Bank and it was properly shown in the statement of accounts. The learned IAC has ignored this factum of the case that another loan by Bank of America is in Pak Rupee and has been availed in Pakistan and is repayable in Pak Rupees. Thus, Rule 8(8)(c) of 3rd Schedule of the repealed Income Tax Ordinance, 1979 does not cover the case of the assessee for invocation of section 66A. It is a very simple preposition that if the above stated Rule is not applicable to the loan of Bank of America then how could it be made applicable to the exchange fluctuation loss on repayment of loan of Messrs Kiawah Investment Company. The learned IAC was also misconceived because addition to machinery in the year 1999-2000 was financed by the assessee out of his circulating capital as the cash flow statement proved the version of the assessee and it was not at all from the loan availed by Messrs Kiawah Investment Company. We also do not approve the impugned action of learned IAC because exchange fluctuation loss claimed by the assessee was also admissible for the other relating years 1999-2000 and 2002-2003, hence why not for the intervening assessment year under consideration. In view of above stated facts and in the light of arguments of both sides, we safely come to the conclusion that the impugned action taken under section 66A of the Ordinance by the learned IAC is unfounded and unsustainable and the original assessment order passed in this case was strictly in accordance with law and it did not contain the element of erroneousness and prejudicial to the interest of Revenue. Furthermore, the cases relied by the learned AR in support of his assertions are fully applicable to the instant case, Hence, we are left with no option except to vacate the impugned order under section 66A by resorting the assessment order framed under section 62. We order accordingly.

C.M.A./129/Tax (Trib.)Appeal accepted.