I.T.As. Nos.206/LB to 209/LB of 2004, 569/LB to 572/LB of 2004, decided on 18th November, 2006. VS I.T.As. Nos.206/LB to 209/LB of 2004, 569/LB to 572/LB of 2004, decided on 18th November, 2006., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1055 (2006)

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

----Ss.24(1) & 16(2)---Deductions not admissible---Inclusion of medical expenses in excess perquisites---Validity---Medical expenses could not be included in excess perquisites---Addition upheld by the First Appellate Authority was without any justification---Addition made in respect of medical expenses was deleted by the Appellate Tribunal.

Oxford Dictionary; Longman Dictionary; Black's Law Dictionary; (1984) 49 Tax 110; 1998 PTD 977; (1988) 173 ITR 290(AP); (2001) PTD 964; (1982) 137 ITR 827; 1998 PTD 1042 and 1998 PTD 977 ref.

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

----S.24---Deductions not admissible---Capital loss---Setting off loss on investment in securities against other business income---Disallowance of such loss was confirmed by the First Appellate Authority with the observation that "loss not dealing with securities was capital loss, which could not be set off against business income"---Validity---Investment in quoted stocks was part of composite business activity of the company and any loss arising from such investment could be adjusted against other business---Addition upheld by the First Appellate Authority was without any justification which was deleted by the Appellate Tribunal.

77 Tax 231 (Trib.) Dictionary and 1993 PTD (Trib.) 472 rel.

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

----S. 24(c)---Deductions not admissible---Legal and professional charges---Addition was deleted by the Appellate Tribunal as assessee had given full details of such expenses and all the evidence was produced---No justification existed for such addition.

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

----S.24---Deductions not admissible---Addition on account of `Taxation of Lease Rental in litigation'---Validity---Since recovery suits were filed, the possibility of recovery, if any, was conditional and subject to the order of court, the lease rentals did not accrue in the accounts---First Appellate Authority was not justified in confirming the addition which was deleted by the Appellate Tribunal.

C.I.T. v. U.P. Financial Corporation (1995) 85 ITR 565 and C.I.T. v. Citibank N.A. (1994) 75 ITR 483 rel.

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

----S. 24---Deductions not admissible---Other expenses---Assessee-Company made adjustment on instructions of Auditors on account of wrong entries---Disallowance was confirmed by the First Appellate Authority with the observation that no evidence' to substantiate such claim was produced---Validity---Both the officers below failed to appreciate that such was merely an adjustment for which no evidence was necessary---Addition was deleted by the Appellate Tribunal.

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

----S.24---Deductions not admissible---Lease Key Money, deletion of addition by the First Appellate Authority by reliance on the decision of Appellate Tribunal was confirmed by the Appellate Tribunal.

I.T.A. No.304/LB of 2001 and I.T.A. No. 2377/LB of 2002 rel.

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

----S.24---Deductions not admissible---Vehicle Running Expenses, deletion of---No interference was made by the Appellate Tribunal as the addition was deleted by the First Appellate Authority keeping in view the decision of the Appellate Tribunal.

2005 PTD (Trib.) 2041 rel.

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

----S.24---Deductions not admissible---Allowance of expenses relating to exempt capital gain---Appeal on issue regarding "allowance of expenses relating to exempt capital gain" was dismissed by the Appellate Tribunal as the same was decided by placing reliance on the decision of Appellate Tribunal.

(2004) 90 Tax 129 (Trib.) rel.

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

----S.23(1)(x)---Deductions---Irrecoverable receivables---Deletion of addition---No interference was made by the Appellate Tribunal as the addition was deleted by reliance on the decision of Appellate Tribunal.

2002 PTD (Trib.) 1898; (2002) 85 Tax 245 (Trib.) and 2003 PTD (Trib.) 1189 rel.

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

----Ss.24(c), 50(4) & 52----Deductions not admissible---Fee and subscription---Disallowance of "fee & subscription" paid to Stock Exchange, Leasing Associations of Pakistan and CDC under S.50(4) of the Income Tax Ordinance, 1979---Addition was deleted by the First Appellate Authority on the ground that such payments did not fall within the nature of supply of goods, services 'rendered or for execution of contract which were pre-requisite for invocation of S.50(4) of the Income Tax Ordinance, 1979---Since the said figure stands taxed under S.52 of the Income Tax Ordinance, 1979, no addition under S.24(c) of the Income Tax Ordinance, 1979 Could be made---No interference was made by the Appellate Tribunal in circumstances and appeal of the department was dismissed.

2002 PTD (Trib.) 3118 rel.

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

----S.24---Deduction not admissible---Irrecoverable/written off lease rentals---Addition was deleted by the First Appellate Authority by following the decisions of Appellate Tribunal---No interference was made on the issue by the Appellate Tribunal.

2002 PTD (Trib.) 1898; (2002) 85 Tax 245 (Trib.) and 2003 PTD (Trib.) 1189 rel.

Dr. Ikramul Haq and Masood Baig for Appellant (in I.T.As. Nos.206/LB to 209/LB of 2004).

Mrs. Sabiha Mujahid, D.R. for Respondent (in I.T.As. Nos.206/LB to 209/LB of 2004).

Mrs. Sabiha Mujahid, D.R. for Appellant (in I.T.As. Nos.569/LB to 572/LB of 2004).

Dr. Ikramul Haq and Masood Baig for Respondent (in LT.As. Nos.569/LB to 572/LB of 2004).

ORDER

Through these cross appeals, the consolidated impugned order of the learned CIT (A) dated 6-11-2003 for the assessment years 1999-00 to 2002-03 has been objected.

The assessee in all the four years under review has objected the impugned order regarding inclusion of medical expenses in excess perquisites. While for the assessment year 1999-00, the disallowance of capital loss, addition under section 24 (c) under the head "Legal & Professional Charges", addition under the head "Software Development Charges", addition under the head "Tax on lease rental in litigation", addition under the head "Other Expenses", for the assessment years 2001-02 & 2002-03, addition under the head "Donation", for the assessment year 2001-02, addition under the head "Processing Fee on Loan Facility", for the assessment year 2002-03, "adjustment of rental already offered for tax", disallowance of expenses incurred on purchase of revenue stamp for bonus shares and confirmation of method of calculation of excess perquisites have been objected.

The Department in the cross appeals for all the four years under review has objected the deletion of addition under the head "Lease Key Money" and deletion of addition under the head "Vehicle Running Expenses". For the assessment years 2000-01 to 2002-03, allowance of expenses regarding exempt capital gain, for the assessment year 1999-00, the deletion of addition under the head "Irrecoverable Receivable", deletion of addition under the head "Fee & Subscription", for the assessment years 2001-02 and 2002-03, deletion of addition under the head "Provision of. Doubtful Receivable" and for the assessment year 2001-02, deletion of addition under the head "Irrecoverable/Written off" lease rentals have also been objected.

We have heard the learned representatives from both the sides and have also perused the consolidated impugned order of the learned CIT (A), the assessment order, the case law referred by the learned counsel for the assessee and all relevant record of the case.

After considering all the facts, circumstances and case law, our findings regarding agitated issues are as under: -

For all the four years under review, the appellant has objected the impugned order regarding inclusion of medical expenses in excess perquisites. In this respect, the learned counsel for the assessee has contended that the expression "perquisites" as mentioned in Section 24 (i) is to be assigned the same meaning as has been mentioned in section 16 (2) (b), which says that the term includes:--

(i) the value of rent-free accommodation;

(ii) the value of any concession in the matter of rent respecting any accommodation;

(iii) any sum payable by the employer, whether directly or indirectly, to effect an insurance on the lift of, or to effect a contract for any annuity for the benefit of, the assessee, or his spouse or any dependent child;

(iv) the value of any benefit provided free of cost or at a concessional rate;

(v) any sum paid by an employer in respect of any obligation of an employee;

He has contended that the above said definition of "perquisites" being inclusive covers some items mentioned above and any other may qualify if covered in the generally accepted meaning of the expression "perquisites". He has in this respect referred dictionary meaning of the term "perquisites", which according to Oxford Dictionary are "Money" or "Goods" given or regarded as a right in addition to one's pay. In the Longman Dictionary; the meaning has been mentioned as "Something that you get legally from your work in addition to your wages" and according to Black's Law Dictionary "A privilege or benefit given in addition to one's salary". The learned counsel has contended that 'from the above definitions, it is evident that medical reimbursement do not fit in the categories mentioned in section 16 (2) (b) or ordinarily accepted meaning of the term. If providing medical facilities is the obligation of the employer as per contract, it will be allowed as an expenses wholly and exclusively for the business e.g. a hospital and clinic run by the employers for the employees/workers. If instead of running facility itself a premises, the employer reimburse actual expenses incurred by the employee, it cannot be termed as "perquisites" in the hands of an employee. It is neither the value of any benefit provided free of cost or at a concessional rate nor any sum paid by an employer in respect of any obligation of an employee. According to the learned counsel, medical reimbursement not exceeding the actual expenses are not to be considered as "perquisites" as envisaged in section 24 (i) of the repealed Income Tax Ordinance, 1979. According to him, the purpose of referring to definition of the expressions "perquisites" in section 24 (i) to section 16 (2) is significant as the Legislature wants to distinguish it from allowances and other benefits. Had it been medical allowance, it would have been taken into account for the purpose of section 24(i). Where an employer is providing medical facilities as per contract of service and reimburse actual expenses, the same cannot be construed as "perquisites" within the ambit of section 24 (i) for the reason that they were in the nature of reimbursement of expenses wholly and necessarily for the performance of duty. In case of medical reimbursements, these are not treated as perquisites for the purpose of section 16 (2). The learned counsel in this respect has referred many cases of the Indian as well as Pakistan jurisdiction wherein it has been held that "the mandatory payments made by the assessee company to its employees for reimbursement of medical expenses incurred by the employees did not represent expenditure resulting directly or indirectly in the provision of any benefit or amenity or perquisites". In some of the cases, it has specifically been held that "the expenses incurred by the assessee company of reimbursement of medical expenses of the employees could not be treated as a perquisite and cannot be disallowed". The following reported decisions have been referred by the learned counsel for the assessee:---

(i) 1984 PTD 169; (ii) 1998 PTD 977 (H.C. Delhi); (iii) (1988) 173 ITR 290(AP); (iv) (2001) PTD 964; (v) (1982) 137 ITR 827; (vi) 1998 PTD 1042 and (vii) 1998 PTD 977.

After considering the above arguments, we are of the view that medical expenses cannot be included in excess perquisites and therefore the addition made in this respect by the Taxation Officer has been upheld by the learned CIT (A) without any justification. The addition made in this respect is, therefore, deleted.

Regarding the disallowance of "Capital Loss", which has been objected by the assessee for the assessment year 1999-00, we have found that the assessee has set off loss on investment in securities against other business income. The Taxation Officer has disallowed this loss, which has been confirmed by the learned CIT (A) with the observation that "loss not dealing with securities is a capital loss, which cannot be set off against business income".

It has been contended by the learned counsel for the assessee that securities in the hands of a financial institution constitute its stock- in-trade as has been held by this Tribunal in a case reported as 77 Tax 231 (Trib.). He has contended that both the Officers below erred in disallowing loss arising from investment. The investment in quoted stocks is part of composite business activity of the company and any loss arising from such investment can be adjusted against other business. This Tribunal in a decision reported as 1993 PTD (Trib.) 472 has observed that "Although the impugned add back out of interest expenses has been deleted by us it may still be of advantage to reaffirm that this Tribunal has already held in (1976) 33 Tax 23 (Trib.) that banking business being a composite activity cannot be bifurcated into sub-trades for computing income".

In view of the above legal position, we are of the view that addition as made by the Taxation Officer in this respect has been upheld by the learned CIT (A) without any justification which is, therefore, deleted and the appeal filed by the assessee on this issue is allowed.

Regarding the addition under section 24 (c) under the head "Legal and Professional Charges" for the assessment year 1999-00, we have found that the Taxation Officer has invoked section 24 (c) regarding the payments amounting to Rs.60,000, Rs.55,000 and Rs.1,00,000. The learned counsel has contended that at the time of assessment, all the evidences were produced, but the Taxation Officer as well as learned CIT (A) in the impugned orders have rejected the claim on the ground that no evidence was produced. It has been contended that amount of Rs.60,000 was paid to Mr. Zahid as legal and documentation fee, Rs.55,000 were paid to C.A. as professional fee on account of appeal and Rs. 1,00,000 have been paid to Mr. Aslam Khan, C.A. for services rendered by him regarding legal matters.

As the assessee has given full details, we therefore find no justification for the addition. The addition in this respect is, therefore, deleted.

Regarding the addition under the head "Software Development Charges" for the assessment year 1999-00, according to the learned counsel these charges were paid to safeguard computer system from Y2K. The assessing officer has disallowed the claim with the observation that the said expense is capital in nature, as the benefit is spread over many years and the learned CIT (A) has confirmed the addition.

Keeping in view the facts of the case, we find no justification for the addition, as these charges were paid to safeguard the computer system from Y2K. The addition in this respect is also deleted.

Regarding the addition on account of 'Taxation of Lease Rental in Litigation' for the assessment year 1999-00, the learned counsel has contended that during the year under review, recovery suits were filed in courts on account of default. Accrual of these rentals was stopped subject to court's decision. The Taxation Officer has added these rentals in income, which has been confirmed by the learned CIT (A) with the observation that the assessee failed to substantiate that these rentals have become actually bad and written off as such. The learned counsel has contended that the learned CIT (A) has completely misconstrued the factual position that it was not the case of writing off of bad debts but non-accrual of lease rentals, in default on account of pendency of legal suits for recovery.

After hearing the learned counsel, we are of the view that once litigation is filed for recovery of lease rentals in default, the company was bound to stop accruing the lease rentals till the decision of court, as during the period of litigation, it lost the right to accrue any amount. The matter was sub judice and recovery, if any, could only be made in consequent to decree by the court. In the suits, the company claimed principal amount plus mark-up till the day of filing of suit. The learned CIT (A) and the Taxation Officer has erred in law in not accepting the fact that where any issue is in litigation, till the decision of court, the company could neither accrue any further lease rentals nor write off the bad debts. We are of the view that there was no case to write off the bad debts as wrongly assumed by the Taxation Officer and the learned CIT(A), but stopping of accruing lease rentals after filing law suits for recovery. According to established principles of accounting and regularly, employed method of accounting adopted by the company, which has not been objected to or rejected by the Department. Accrual of lease rentals, can only be made where there is reasonable possibility of receiving the income during the relevant accounting period. Since the recovery suits were filed, the possibility of recovery, if any, was conditional and subject to the order of the Court. In such a situation, lease rentals did not accrue in the accounts and this position was not appreciated by the CIT (A) and the assessing officer. The learned counsel for the assessee has referred the cases of Indian Jurisdiction reported as CIT v. U.P. Financial Corporation reported as (1995) 85 ITR 565 and CIT v. Citibank N. A. (1994) 75 ITR 483 wherein, it has been held that "income does not accrue or arise to a tax payer during the accounting year if suits are pending for recovery".

In view of these facts and case laws, we are of the view that the learned CIT (A) was not justified in confirming the addition. The addition made in this respect is, therefore, deleted.

Regarding the confirmation of addition under the head "Other Expenses" for the assessment year 1999-00, we have found that the company had made adjustment on the instructions of Auditors observed by them during the course of audit on account of wrong entries made during the whole year. The Taxation Officer has disallowed and the learned CIT (A) has confirmed this disallowance with the observation that no evidence to substantiate this claim was produced, but both the Officers below have failed to appreciate that this was merely an adjustment for which no evidence was necessary. The addition in this respect is also deleted.

Assessment years 2001-02 and 2002-03

For these two years, regarding the addition under the head "Donation", we have found that the learned CIT (A) has not adjudicated this issue, despite the fact that on behalf of the assessee, there was specific ground in this respect. The matter in this respect for the two years under review is remanded back to the learned CIT (A) for adjudication.

Assessment year 2001-02

For this year, the addition under the head "Processing Fee on Loan Facility" has been objected by the assessee. While perusal of the impugned order of the learned CIT (A), we have found that this issue has also not been adjudicated which is, therefore, also remanded back to the learned CIT (A) for adjudication.

Assessment year 2002-03

Regarding the adjustment of rental already offered for tax and confirmation of disallowance of expenses incurred on purchase of revenue stamps for bonus shares, the same Issues have also not been adjudicated by the learned CIT (A) and therefore, these issues are also remanded back for adjudication, by the learned CIT (A).

For this year, the assessee has also objected confirmation of method of calculation of excess perquisites, which issue has already been discussed in detail in the above referred paras in the grounds raised for all the four years on the issue of excess perquisites.

Departmental Appeals

The Department in the cross appeals for all the four years under review has objected the deletion of addition under the head "Lease Key Money". We have found that the learned CIT (A) has m deleted the addition placing reliance on the decision of this Tribunal dated 18-6-2001 in T.T.A. No. 304/LB of 2001 and order dated 13-9-2002 in I.T.A. No.2377/LB of 2002 wherein, it has been held as under: -

"Regarding the addition of lease key money the learned CIT (A) has written a lengthy order on the point that C.B.R. is not competent to interpret the law, we are in the respectful agreement with the principle enunciated in various reported decisions relied upon by the CIT (A). However, we are of the considered view that in respect of issue under consideration no interpretation of law has been made by the C.B.R. which is contrary to the legal provisions of law. In the instant case the C.B.R. has only explained that contents of the proviso to Rule 8(5). The guidance is provided to the field officers to pass proper and judicious assessment only. It appears that the learned CIT (A) has ignored the provisions contained in proviso to Rule 8 (5) whereby the residual value is to be considered as sale proceeds at the expiry of the lease period. Therefore," no justification exists to tax the security deposit under section 12(19) considering the fact that the other related provisions of law i.e. proviso to Rule 8(5) of Income Tax Rules, 1982, directs such lease key money to be considered as sale proceeds. The addition is accordingly deleted."

After perusal of the above referred decisions of this Tribunal, we are of the view that the learned CIT (A) has rightly deleted the addition and no interference in this respect is required. All the four appeals filed by the Department on this issue are, therefore, dismissed.

The Department for all the four years has also objected the deletion of addition made under the head "Vehicle Running Expenses". We have found that the learned CIT (A) has deleted the said addition for all the four years under review placing reliance on the decision of this Tribunal reported as 2005 PTD (Trib.) 2041 and other unreported decisions. No interference in this respect is, therefore, required, as the learned CIT (A) has deleted the addition keeping in view the decision of this Tribunal, All the four appeals on this issue are also dismissed.

Assessment years 2000-01 to 2002-03

The Department has objected the allowance of expenses relating to exempt capital gain. This issue has also been decided by the learned CIT(A) placing reliance on the decision of this Tribunal reported as (2004) 90 Tax 129 (Trib.) and other unreported decisions. The appeals on this issue are, therefore, also dismissed.

Assessment years 1999-00 & 2000-01

Regarding the deletion of addition under the head "Irrecoverable Receivables", we have found that the claim of the assessee was disallowed by the Taxation Officer with the observation that it is inadmissible under section 23(1)(x) of the repealed Income Tax Ordinance, 1979. As the assessee had not fulfilled all the conditions laid down therein. We have found that the learned CIT (A) placing reliance on the decisions of this Tribunal reported as 2002 PTD (Trib.) 1898, (2002) 85 Tax 245 (Trib.) and 2003 PTD (Trib.) 1189 has deleted the addition. No interference in this respect is also required.

Deletion of addition under the head "Fee and Subscription"

The Department has objected this issue for the assessment years 1999-00 and 2000-01. In this respect, we have found that fee in this respect has been paid to stock exchanges, Leasing Associations of Pakistan and CDC, which has been disallowed by the Taxation Officer under section 50(4) of the repealed Income Tax Ordinance, 1979. We have found that the learned CIT (A) has deleted the addition with the observation that such payments do not fall within the nature of supply of goods, services rendered or for execution of contract which are pre-requisite for invocation of section 50 (4). The learned CIT (A) has further observed that since this figure also stands taxed under section 52, no addition under section 24 (c) can be made. In this respect, decision of this Tribunal reported as 2002 PTD (Trib.) 3118 has also been referred. In view of this position, we find no warrant for interference in the impugned order. The appeals on this issue are, therefore, also dismissed.

Assessment years 2001-02 and 2002-03

For these two years, the deletion of addition under the head "Provision for Doubtful Receivables" and for the assessment year 2001-02, the deletion of addition under the head "Irrecoverable/Written Off Lease Rentals" have also been objected by the Department. We have found that the learned CIT (A) has deleted the additions in this respect following the decisions of this Tribunal reported as 2002 PTD (Trib.) 1898, (2002) 85 Tax 245 (Trib.) and 2003 PTD (Trib.) 1189. No interference; in this respect is; therefore, required. The appeals filed by the Department on these issues are also dismissed.

All the four appeals filed by the Department are dismissed; while the four cross appeals filed by the assessee are allowed to the extent and in the manner as indicated above.

C.M.A./231/Tax(Trib)Order accordingly.