I.T.As. Nos. 971/IB to 973/IB and 911/IB to 913/IB of 2006, decided oil 10th March, 2007. VS I.T.As. Nos. 971/IB to 973/IB and 911/IB to 913/IB of 2006, decided oil 10th March, 2007.
2007 P T D (Trib.) 1869
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Chairperson and Istataat Ali, Accountant Member
I.T.As. Nos. 971/IB to 973/IB and 911/IB to 913/IB of 2006, decided oil 10th March, 2007.
(a) Income-tax--- ----`Public welfare'---Definition---Activity which is aimed at advancement of general public fell in the definition of "public welfare".
(b) Income-tax---
---Micro-finance Bank and ordinary Bank---Difference---Only difference between an ordinary bank and micro-finance Bank is in term of scale of loans and there is no other difference between the two.
(c) Income Tax Ordinance (XLIX of 2001)---
----S. 2(11A)---Charitable purpose---Exemption---Micro finance business---Welfare activity---Small loans given by scheduled banks to poor people "who are not in good financial condition" was also micro finance business which did not mean that they should claim that part of their income earned from micro finance business was not taxable because it was exempt from being related to small loans which had to be treated as "welfare activity"---Whether a bank was exclusively engaged in micro-finance or it was partly engaged in such business was not material---Micro finance was essentially a `banking business' done in ordinary course of activity.
(d) Income Tax Ordinance (XLIX of 2001)---
----S. 2(11A)-Charitable purpose---Money lending business---Banking business---Welfare activity---Money lending business at small scale was essentially a banking business which could not be termed as "welfare activity" simply for the reason that loans were given to people who were termed as "poor" for the purpose of advancing of such loans.
(e) Income Tax Ordinance (XLIX of 2001)---
----Second Sched., Cls. (58), (59), (60) & Ss. 122(5A) & 2(11A)---Khushhali Bank Ordinance (XXXII of 2000), Preamble---Exemption---Micro-Finance Bank---Exemption under Cl. (58) of the Second Schedule of the Income Tax Ordinance, 2001 was not available to the assesses simply for the reason that condition of approval from Central Board of Revenue for the purposes of such exemption had not been fulfilled---Exemption under Cl. (59) of the Second Schedule of the Income Tax Ordinance, 2001 was also not available because no "religious" or "charitable" cause was being promoted by the Bank---Income about which exemption was being claimed had not actually been set apart for the purposes of any `welfare activity'---Entire income earned by the Bank from micro-finance business was being utilized for accumulation of further funds for recycling of loans---Profits earned by the Bank on each cycle of loan were again put in the main stream of funds for advancing further loans---Bank had not been proved to have spent or set apart even a single penny for the "welfare of poor people".
(f) Income Tax Ordinance (XLIX of 2001)---
----Second Sched., Cls. (59), (60), Ss.122(5A) & 2(11A)---Khushhali Bank Ordinance (XXXII of 2000), Preamble---Exemption---Micro-Finance Bank---Income from interest on securities---Interest income from deposits---If income from primary sources i.e. micro-finance business was not exempt from tax then how exemption could be claimed/allowed in respect of Bank's income from interest on securities and interest income arising from its deposits kept in other banks---Fundamental issue of exemption from tax on the basis of being a "welfare organization" had not been established by the Bank---Claim of exemption on income from government securities and bank deposits did not appeal to any logic or reason because the primary source of income from micro-finance business had been offered for taxation---Exemption was not available to the bank under Cl. (59) of the Second Schedule of the Income Tax Ordinance, 2001 in respect of its income from government securities and bank deposits---Micro-finance was not a welfare activity which qualified for exemption---Taxation Officer had correctly disallowed the claim of exemption in respect of income from interest on government securities and interest on bank deposits---First Appellate Authority had rightly rejected the assessee's claim of exemption---No interference was warranted in the orders of both the authorities below by the Appellate Tribunal.
80 Tax 98 and 2004 PTD 1304 ref.
(g) Khushhali Bank Ordinance (XXXII of 2000)---
----Preamble---Statutes of Khushhali Bank---Body corporate---Public limited company---Contention was that Khushhali Bank was a "body corporate" which carne into existence through a special legislation and it had to be treated as a "public limited company" for the purpose of tax rates---Validity---Bank was neither a finance company nor a financial institution; it was a banking company, which was engaged in business of money lending on which interest was also charged on specified rates---Prudential Regulations of State Bank of Pakistan were fully applicable to Khushhali Bank---Bank had rightly been treated as a banking company because it was essentially engaged in banking business as it was giving loans and charging interest on loans---Orders of both the authorities below were upheld by the Appellate Tribunal and appeal of the assessee was rejected on the point of status of the company for the application of tax rates.
1999 PTD (Trib.) 2949 ref.
(h) Income Tax Ordinance (XLIX of 2001)---
----S. 76(10)---Khushhali Bank Ordinance (XXXII of 2000), Preamble---Cost---Amortization of deferred government grants---Admissible deduction---Grants received from the government for the purchase of durable assets were amortized over a period of their expected life---Amount equal to amortized cost was booked as income and at the same time the amortized amount was shown as expenditure in the account books of the Bank---Entries were made to comply with accounting requirements it was just a formality that a sum equal to amortized cost was shown as an income at the same time a sum equal to this amount was shown as an expenditure in the account books---Said accounting entries did not have any relevance to the tax matters---Taxation Officer was not correct to treat the "amortization of deferred grants" as inadmissible deduction---First Authority had rightly held that amortization @ 10% of the grants which had been reduced from total value of assets purchased by the Bank confirmed that no effect was made on taxable income---Since grants were not income and had only been recorded in the account books for fulfilment of required International Accounting Standards, the addition made was not legally justified and First Appellate Authority was legally right to delete it from income---Departmental appeal was rejected by the Appellate Tribunal on this point.
A. A. Sheikh, D.R. for Appellant (I.T.As. Nos.971/IB to 973/IB of 2006).
Tariq Jamil, F.C.A. and Farrukh Jamil, ACA/AR for Respondent (I.T.As. Nos.971/IB to 973/IB of 2006).
Tariq Jamil, F.C.A. and Farrukh Jamil, ACA/AR for Appellants (I.T.As. Nos.911/IB to 913/IB of 2006).
A.A. Sheikh, D.R. for Respondent (I.T.As. Nos.911/IB to 913/IB of 2006).
ORDER
These appeals have been filed by, the assessee as well as by the Department for tax years, 2003, 2004 and 2005 against combined orders of learned CIT(A), Zone-I, Islamabad passed on 17-6-2006.
2. As per facts original assessments in the case of this assessee deriving income from micro finance business were made under section 120 by accepting the declared loss. These assessments were rectified and loss was assessed at Rs.8,39,65,982. Rs.30,33,886 and Rs.3,66,37,543 for tax years 2003, 2004 and 2005 respectively. Subsequently Additional Commissioner (IAC-Audit) noticed that all these assessments are erroneous insofor as being prejudicial to the interest of Revenue because:
(i) for the purpose of tax rates status of banking should have been assigned in the assessments instead of public limited company as claimed by the assessee, as the assessee is engaged in banking business;
(ii) interest on government securities and bank deposits earned by the assessee should have been subjected to tax because no exemption was available to the assessee on income from these sources; and
(iii) amortization of deferred grant should not have been allowed as expenditure or deduction from taxable income.
3. Proceedings were, therefore, initiated by the IAC for amendment of assessment under section 122(5A) of the Income Tax Ordinance, 2001. Show-cause notices under section 122(9) were accordingly issued conveying intention to the taxpayer that the aforesaid assessments being erroneous and prejudicial to the interest of Revenue were liable for amendment under section 122(5A). The assessee responded that it is not a banking company for the purposes of tax rates. It is rather a public limited company whose income is exempt under clauses (58), (59) and (60) of Second Schedule to the Income Tax Ordinance, 2001 because "micro-finance" is a welfare activity through which relief is provided to poor classes of society with an objective of alleviation of poverty. For the reasons recorded in separate assessment orders under section 122(5A), dated 27-4-2006 assessee's claim of exemption in terms of clauses (58), (59) and (60) was rejected and income was determined as under:---
TAX YEAR 2003
| Loss under sections 120/221 assessed: | Rs.83,965,982 |
Add:
| (1) Interest on Government securities | Rs.83,549,012 |
| (2) Interest on Bank deposits | Rs.7,413,214 |
| (3) Amortization of deferred grant | Rs.19,071,324 |
| Less total addition | Rs.110,033,550 |
| Balance income | Rs.26,067,568 |
| Tax @ 47% on the above. | Rs.12,251,757 |
TAX YEAR 2004
| Loss under sections 120/221 assessed: | Rs,3,033,886 |
Add:
| (1) Interest on Government securities | Rs.33,131,641 |
| (2) Interest on Bank deposits | Rs,6,448,462 |
| (3) Amortization of deferred grant | Rs.27,451,858 |
| Total income | Rs.70,065,847 |
| Tax @ 47% on the above | Rs.30,828,273 |
TAX YEAR 2005
| Loss under sections 120/221 assessed: | Rs. (36,637,543) |
Add:
| (1) Interest on Government securities | Rs.28,022,242 |
| (2) Interest on Bank deposits | Rs.6,923,138 |
| (3) Amortization of deferred grant | Rs.41,553,378 |
| Total Income | Rs.39,861,215 |
| Tax @ 4% on the above | Rs.16.343,098 |
4. The assessee filed appeals against the aforesaid assessments and learned C.I.T.(A) vide impugned order dated 17-6-2006 held that addition on account of amortization of deferred grant for all the years should be deleted for all the years holding that it was not taxable. He, however, held that exemption was not available to the taxpayer under Clauses (58), (59) or (60) for the following reasons:
(i) The appellant is created through a law which specifically provides for and allow activities like that of a banking company;
(ii) The objective of poverty alleviation of poor class/segment of society through advancement of loans on which service charges are charged is for earning income therefore, is business:--
(iii) The appellant's income contentedly from charitable/welfare activities and claimed exempt but without fulfilling the condition of spending the same for the charitable purpose as admittedly it is taken towards further formation of capital hence charitable/ welfare purpose for achieving the prescribed objective without charging any costs is contradicted hence the activities of the appellant are not charitable in the sense as prescribed under the law.
(iv) Position reported by appellant in the paper clipping is a true picture of the appellant's business as it was a conscious statement which co-insides and conforms with the legal and factual position; and
(v) Also no requisite approval from C.B.R. wherever required has been obtained.
5. The assessee has filed second appeals, against the aforesaid order of learned CIT(A) on the following common grounds for all the years under appeal:
(i) That the order of the learned CIT(A) was bad in law and on facts.
(ii) That the learned CIT(A) was not justified in upholding the appellant as a non-charitable institution without discussing and distinguishing the precedence of case laws, which were cited o defend the plea of "charitable institution".
(iii) That the learned CIT(A) was not justified in upholding the appellant as a profitable institution on the basis of newspaper clipping published about the appellant.
(iv) That the learned CIT(A) has not discussed charging of tax on profit on Government securities and on bank deposits which were exempt under clause (59) of Part 1 of the Second Schedule to the Income Tax Ordinance, 2001 and
(v) That the learned CIT(A) was not justified in upholding the appellant as a banking company for the purpose of levy of income tax, which was a non-banking financial institution and cannot be treated as banking company as held by the income Tax Appellate Tribunal in a decision reported at 80 Tax 98.
6. The Department has also filed second appeals against orders of learned CIT(A) on the following common ground for all the years under appeal:
(i) That the order of learned CIT(A) Islamabad was bad in law and against the facts of the case.
(ii) That the learned CIT(A) was not justified to delete addition under the head amortization of deferred Government grants as this expense is inadmissible under the law.
(iii)--------------------
7. At the time of hearing it was stated by learned AR that the assessee came into existence through Khushhali Bank Ordinance, 2000 (Ordinance No.XXXII of 2000) to mobilize funds and to provide sustainable micro-finance services to poor persons, particularly poor women, in order to mitigate poverty and promote social welfare and economic justice through community building and social mobilisation. It was stated that "poor persons" have been defined in the Ordinance as those people who have meagre means of subsistence and whose total income or receipt during the year is less than income chargeable to income tax. It was stated that funds are provided to the bank by:--
(a) Share capital from banking companies, financial and other institutions as the SBP may, from time to time, determine;
(b) Grants from Government of Pakistan and
(c) Funding from World Bank.
8. It was stated by learned AR that a legal restriction has been placed on Khushhali Bank by way of prohibiting it to undertake or transact any kind of business other than that authorized by or under the Khushhali Bank Ordinance. It was stated that Khushhali Bank is a charitable institution as it has been established for charitable purposes. The expression "not for profit" helps in elaborating that it is "not" an organization that was formed to make profit. There could be five types of "not for profit" organisations:--
(a) General type: trade bodies, trade associations, community organization (example, Chamber of Commerce and Industry, Overseas Chambers of Commerce, associations for various business sectors like telecom, textile, glass, cotton growers, etc);
(b) Sporting and athletic organizations: (example, PCB, PLTA, PFA PHF, KCCA, LCCA).
(c) social clubs; (Example, Islamabad Club, Karachi Club, Lahore Gymkhana);
(d) service Clubs: (Example, Rotary Club, Lions Club) and
(e) Charities; include religious organizations and organizations that are engaged in carrying out certain good work that is beneficial to the Society, (Example Madarsa, Islamic Propagation Centre and many others)
9. It was further stated by learned AR that "charitable purpose" has been defined in section 2(11A) of the Income Tax Ordinance, 2001 and it includes relief for poor, education, medical relief and the advancement of any other objective of general public utility. It was further stated that C.B.R. has accepted that an entity engaged in the poverty alleviation through micro-finance is a "charitable institution". While granting approval under clause (58) of the Second Schedule to Pakistan Poverty Alleviation Fund (a company incorporated under the Companies Ordinance, 1984 as an association not for profit) it was clarified by C.B.R. that following incomes of a welfare institution are exempt from tax in terms of clause (59) of Part-I of Second Schedule to the Income Tax Ordinance, 2001:--
(i) income from investment in securities of Federal Government;
(ii) profit on debt from financial institutions;
(iii) grants received from Federal/Provincial or District Government;
(iv) foreign grants and
(v) income from house property held under trust or other legal obligation.
10. It was further stated by learned AR that the institution will be considered/treated as charitable if its objective is to provide service of general public utility. The only essential factor to determine whether it is a charity or not, would be whether there is or not any private gain by the setting up of the institution. The institution will clearly be treated as charitable if it is dispensing charity to the deserving deprived segment of society. It was stated by learned AR that Khushhali Bank is also one of such institutions/organizations which was established for rendering micro-finance services to poor persons for purpose of alleviation of poverty. It was contended by learned AR that Khushhali Bank is rated as the region's fastest growing and Pakistan's largest retail miscro-finance bank operating under the Central Bank regulations. The Bank is funded by a leading international financial institution and was established as a partnership between public, multinational and private commercial financial institutions to counter prevailing poverty conditions in Pakistan. Bank's mission is to market financial services tailored for the poor in line with international micro-finance practices, through its extended network operating, across the country's rural and urban divides. The Bank is combining expertise from the financial, consumer services, and commercial sectors to create a customer-focused culture backed by strong financial operations and product management teams. The Bank is investing in next generation financial and delivery management systems to support country's expanding nationwide network in consultation with leading international expertise to spearhead growth within the domestic micro-finance sector and counter poverty through effective financial intermediation.
11. It was stated by learned AR that in the light of principles laid clown about object of "general public utility" it cannot be denied that objects of Khushhali Bank are not confined to the welfare of any individual but are available to a large section of the public. The language used in the definition of "charitable purpose" is of great amplitude because the definition is inclusive and not exhaustive or exclusive. The expression "object of general public utility" was not restricted to objects beneficiary to a section of public. It is not necessary that the object should be for the benefit of the whole society or all the persons belonging to that society. It is sufficient if the intention is to benefit a section of the public. It was stated by AR that Khushhali Bank was created with a specific objective of providing sustainable "micro-finance" services to poor persons particularly poor women with a goal to alleviate poverty.
12. It was contended by learned AR that in case reported as (2004) PTD 1304 (H.C. Kar.) it has been held that the expression "public purpose" includes any purpose in which even a fraction of a community may be interested or by which it may be benefited. He asserted that the expression `charitable purposes" carries a broader and extended connotation. A purpose will be treated as "welfare" or "charitable" if it brings certain segments of society into the loop of benefits. He stated that Khushhali Bank is operating on similar lines on which Grameen Bank is being operated in Bangladesh. He stated that Grameen Bank has been exempted from taxation. On this point learned DR responded by stating at the case law cited by learned AR simply specifies the outlines which are required for a purpose to become "charitable". He stated that these outlines and parameters are not applicable in the case of Khushhali Bank. He further stated that every country has its own tax laws and if Grameen Bank has been exempted from tax in Bangladesh, it does not necessarily mean that Khushhali Bank should also be granted exemption from tax in Pakistan. He asserted that in the case of Khushhali Bank exemption from tax has to be considered in the light of taxation laws contained in clause (59) of the Second Schedule. He emphasized that Khushhali Bank does not fulfil the parameters prescribed for exemption under clause (59).
13. Learned DR stated that the Bank is neither a trust or a non-profit organization nor a charitable or religious institution. It is performing retail micro-finance banking operations. It is marketing financial services and it is engaged in commercial activities in the shape of financial operations. He contended that Khushhali Bank is essentially a banking company engaged in banking business and is earning profit in the shape of mark-up on loans advanced to customers. Learned DR emphasised that exemption under clause. (59) of the Second Schedule is not available to the Khushhali Bank because:--
(a) the Bank is neither a trust, non-profit organization nor a charitable or religious institution;
(b) it is conducting retail micro-finance banking operation and
(c) it is marketing financial services and it is engaged in commercial activities in the shape of financial operations.
14. Learned DR stated that it will be appropriate to reproduce clause (59) of the Second Schedule which reads as under:--
"(59) Any income which is derived from investments in securities of the Federal Government, profit on debt from scheduled banks, grant received from Federal Government or Provincial Government or District Government, foreign grants and house property held under trust or other legal obligations wholly or in part only, for religious or charitable purposes and is actually applied or finally set apart for application thereto...."
15. Learned D.R. stated that analysis of clause (59) will indicate that exemption is available in respect of:--
(i) any income which is derived from investment in securities of the Federal Government, profit on debt from scheduled banks, grant received from Federal Government or Provincial Government or District Government foreign grant.
(ii) house property held under trust or other legal obligations wholly, or in part only.
(iii) for religious or charitable purposes and
(iv) is actually applied or finally set apart for application thereto.
16. Learned DR pointed out these conditions for claiming exemption are subject to further restrictions contained in two provisos and one explanation. It was contended by learned DR that Khushhali Bank cannot be treated as a welfare organization because it is engaged in banking business. The profit or mark-up charged from customers on small loans given to them, is also being offered for taxation, in the return of income filed for the years under appeal. He stated that in this manner a clear contradiction has been shown by the Bank in its own stance 'about exemption from tax. He asserted that if the Bank is considered as "welfare organization" then its entire income should have been claimed as exemption in terms of clause (59) of the Second Schedule. He contended that ratio of the case-law quoted by learned AR of the assessee in support of claim of exemption does not apply because nature of business and facts this ease are totally different from those appearing in the case-law. Learned DR emphasized that both the Assessing Officer and learned CIT(A) were correct to hold that the appellant's income contentedly from charitable/welfare activities does not qualify for exemption because the condition of spending the same for charitable purposes has not been fulfilled. The Bank's income is set apart for formation of further capital which is required for expansion of business. He further stated that both the Assessing Officer and the learned CIT(A) have held that exemption from tax is not available to the bank because Bank's own statement about its status and functions published in "DAWN", dated 23-4-2006 clearly indicates that it is a fast growing bank engaged in micro - finance through extended network operations. Learned DR stated that it is worthwhile to reproduce the aforesaid item published in newspaper which reads as under:
"We are rated as the region's fastest growing and Pakistan's largest retail micro-finance bank operating under the central bank regulations. We are funded by a leading international financial institution and established as a partnership between public, multinational and private commercial financial institutions to counter prevailing poverty conditions in Pakistan. Our mission is to market financial services tailored for the poor in line with international micro-finance practices, through our extended network operating across the country's rural and urban divides."
17. We have given careful consideration to arguments of both the parties on the point of exemption from tax under the provisions of clause (59) of the Second Schedule. It is noted that the Bank was created through an Ordinance with an objective to advance small loans to poor persons. The Bank is charging interest/service charges from all its customers on the amount of loans given to them. The recoverypercentage is also quite healthy at this stage of Bank's life. However, if any amount of debt remains unpayable a provision is created in Bank's accounts about its non-recovery and the amount is transferred to the relevant head. The Bank is not registered with SECP as a company. however, it has its own governing body to regulate the smooth functioning of business operations. There cannot be any second opinion about the definition of "public welfare" which has very vast scope. An activity which is aimed at advancement of general public falls in the definition of "public welfare". However, it has to be seen as to whether a business being done with poor people, actually means that it is for their welfare. The taxation laws have been formulated by government to regulate such situations. Micro-finance is essentially a banking business. It is termed as "micro" because of scale being small and its targets are the people who are in need of financial assistance. In the case of this assessee this financial assistance is not in the shape of grant. It is basically a loan which is re-payable within prescribed time schedule. Interest is also chargeable on this amount at prescribed rate. In case of default in payment 'of loan a separate mechanism for recovery has also been provided. In banking business the loans are given for fixed duration of time and interest is also charged at prescribed rates. The only difference between an ordinary bank and micro-finance bank is in term of scale of loans. There is no other difference between ordinary banking business and micro-finance banking. Even otherwise the scheduled banks are also engaged in advancement of small loans to their clients who are not in good financial conditions. They have also created separate sections which are exclusively dealing with small loans. Small loans given by scheduled banks to poor people "who are not in good financial conditions" is also micro-finance business. It does not mean that they should also claim that part of their income earned from micro-finance business is not taxable because it is exempt for being related to small loans which has to be treated as "welfare activity". It does not matter that a bank is exclusively engaged in micro-finance or it is partly engaged in such business. Micro-finance is essentially a banking business done in ordinary course of activities.
18. Although the term "welfare purposes" has quite vast meanings and even if such meanings are stretched to whatever extent, yet the Khushhali Bank cannot be treated as a welfare organization. It is actually engaged in money lending business on which interest is also charged. It is also interesting to note that even the interest rate is not concessional. The only peculiar feature of the banking business of the assessee is that big loans are not given to the clients. Moreover, generally there is no collateral against which such loans are advanced. Money lending business at small scale is essentially a banking business which cannot be termed as "welfare activity" simply for the reason that loans are given to people who arc termed as "poor" for the purpose of advancement of such loans.
19. Exemption under clause (58) of the Second Schedule is not available to the assessee simply for the reason that condition of approval from C.B.R. for the purposes of such exemption has not been fulfilled. Similarly exemption under clause (59) is also not admissible because no "religious" or "charitable" cause is being promoted by the Bank. Moreover, the income about which exemption is being claimed has not actually been set apart for the purposes of any welfare activity. In fact the entire income earned by the Bank from micro-finance business is being utilised for accumulation of further funds for recycling of loans. Profits earned by the Bank on each cycle of loans are again put in the main stream of funds for advancing further loans. It has not been proved by the Bank that even a single penny was spent or set apart for the "welfare of poor people".
20. It is quite interesting to note that the bank itself is offering its income from micro-finance business for tax purposes. Interest income earned on small loans statedly advanced to poor people has been declared by the Bank as its taxable income in its return of income for all the years under appeal. In this manner the Bank has admitted that its income from micro-finance business is not exempt from tax and in this way it is also admitted that micro-finance is not an activity for "welfare purposes". The Bank has itself negated its stance on the point of exemption under clause (59). If income from the primary sources i.e. micro-finance business is not exempt from tax then how exemption can be claimed/allowed in respect of Bank's income from interests on securities and interest income arising from its deposits kept in other banks. The fundamental issue of exemption from tax on the basis of being a "welfare organization" has not been established by the appellant-Bank. Its claim of exemption on income from government securities and bank deposits does not appeal to any logic or reason because the primary source of income from micro-finance business has been offered for taxation. In this manner we are constrained to hold that exemption is not available to the bank under clause (59) of Second Schedule in respect of its income from government securities and bank deposits.
21. The question as to whether micro-finance is welfare activity, therefore, gets the answer in negative. It cannot be held by any stretch of imagination that micro-finance is a welfare activity which qualifies for exemption under clause (59) of Second Schedule. It is, therefore, held that the Taxation Officer has correctly disallowed the claim of exemption in respect of income from interest on government securities and interest on bank deposits. Learned CIT(A) has also rightly rejected the assessee's claim on this point. We do not find any warrant to interfere in the orders of both the authorities below on the point of exemption on income from interest on government securities and interest on bank deposits under clause (59) of the Second Schedule and Bank's appeals are rejected for all the years under appeal on this point.
22. Learned AR contended that the Assessing Officer has wrongly treated the Khushhali Bank as a "banking company" for the purpose of rates of tax. He contended that in case reported as (1999) PTD (Trib.) 2949 it has been held that investment companies and financial institutions are not banking companies. He stated that Khushhali Bank is a "body corporate" which came into existence through a special legislation and it has to be treated as a "public limited company" for the purpose of tax rates. Learned DR however, stated that the Bank is neither a finance company nor a financial institution. It is a banking company, which is engaged in business of money lending on which interest is also charged on specified rates. He further stated that Prudential Regulations of State Bank of Pakistan are fully applicable to Khushhali Bank. He contended that in this manner Khushhali Bank has rightly been treated as a banking company because it is essentially engaged in banking business. We have considered arguments of both the parties on this point and we are inclined to agree with learned DR that Khushhali Bank is engaged in banking business. It is giving loans. It is charging interest on loans. It is subject to Prudential Regulations of State Bank of Pakistan. It is carrying on a business which is clearly a banking business. Therefore, the Assessing Officer had correctly treated the Khushhali Bank as a banking company and learned CIT(A) has also rightly upheld this treatment. Orders of both the authorities below on this point are, therefore, confirmed and it is held that Khushhali Bank is a banking company. Assessee's appeal for all the years under appeal is rejected on the point of status of the company for the application of tax rates.
23. It was contended by DR that learned CIT(A) was not justified to delete addition on account of "amortization of deferred government grants" because the same was not admissible as deduction in the nature or expenditure. He contended that the Assessing Officer thoroughly examined this aspect of the case before holding that amortization cannot be claimed as straight deduction from taxable income. In the accounts of the assessee his amount has been recognised as income, therefore, it was rightly charged to tax. It was asserted that learned CIT(A) was not justified to hold that grant received from government and booked towards capital of the appellant is not its income. It was emphasized by learned DR that as this deduction was not admissible therefore CIT(A) was not justified to delete it from assessee's income. Learned AR of the assessee, however, contended that grant was received from the government of Pakistan for acquisition of fixed assets under the Subsidiary Loan and Grant Agreement. Such grants are initially recognized as deferred income and then amortized over the useful life of the assets acquired from these grants in accordance with provisions of International Accounting Standards. IAS 20. It is evident from note number 7 of the notes to the accounts that the grant in question was meant for fixed assets acquisition. This amount by no stretch of imagination can be termed as income of the Bank, as it is already deducted from the cost of fixed assets for depreciation purposes under section 76(10) of the Ordinance, 2001. In view of the above treatment of' amortization of the grant is also not the income of Khushhali Bank. Amortization of deferred grants results in reduced claim of depreciation expense. Khushhali Bank has not claimed depreciation on the assets created out of Government grants therefore, disallowance of exemption on account of amortization would result in its double taxation which is not allowed by the statute. It was emphasized that grant for capital expenditure is not an income chargeable to tax.
24. We have given due consideration to arguments of both the parties on the issue relating to "amortization of deferred grants" and we have found that grants received from the government for the purchase of durable assets were amortized over a period of their expected life. The amount equal to amortized cost was booked as income and at the same time the amortized amount was shown as expenditure in the account books of the Bank. These entries were made in the account books just to comply with accounting requirements prescribed under International Accounting Standards. It was just a formality that a sum equal to amortized cost was shown as an income and at the same time a sum equal to this amount was shown as an expenditure in the account books. These accounting entries did not have any relevance to the tax matters. The Taxation Officer was, therefore, not correct to treat the "amortization of deferred grants" as inadmissible deduction. Learned CIT(A) is right to hold that amortization @ 10% of the grants which has been reduced from total value of assets purchased by the Bank confirmed that no effect is made on taxable income of the Bank on this count.. Since the grants are not income and have only been recorded in the account books for fulfilment of required International Accounting Standards, therefore, addition made by the Assessing Officer was not legally justified and learned CIT(A) was legally right to delete it from Bank's income. We do not find any merit in departmental appeal on this point which is rejected for all the years under appeal.
25. All appeals under consideration filed by the assessee as well as the Department are disposed of in the manner and to the extent as indicated above.
C.M.A./58/Tax (Trib.)Order accordingly.