I.T.A. No. 5057/LB of 2004, decided on 12th February, 2007. VS I.T.A. No. 5057/LB of 2004, decided on 12th February, 2007.
2007 P T D (Trib.) 1885
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Khawar Khurshid Butt, Accountant Member
I.T.A. No. 5057/LB of 2004, decided on 12/02/2007.
Income Tax Ordinance (XXXI of 1979)---
----Ss. 34, 34A, 35, 36, 37, 38, 12(18) & 62---Income Tax Ordinance (XLIX of 2001), S.2(1 A)---Companies Ordinance (XLVII of 1984), Ss.284 to 288, 297 & 305---Set off of losses---Amalgamation---Merger by order of Court---Taxation Officer did not allow the losses sustained by the merged companies against the income of assessee on the ground that merged companies were dissolved and legally did not exist and claim under Ss. 34 and 35 of' the Income Tax Ordinance, 1979 was not eligible---Validity---Intention of Income Tax Law was to encourage merger and amalgamation and to give maximum tax benefits to the company absorbing in other companies and merging thereof---Merger approved by the High Court had the legal effect of giving a continuity to the operations of the merged company, which was a part of the assessee company and vesting the assesses company with all assets and liabilities of the merged companies---If there was any un-discharged tax liability of the non-surviving companies, the same would have been recoverable from the assessee company and that the assessee company would have been bound to duly discharge the same---Assessee company was clearly entitled to have adjustment of the unabsorbed losses that had been brought forward---Order of High Court sanctioned the Scheme of Arrangement under which the assessee company came to be vested with all rights and liabilities of merged companies---Such rights included the right of brought forward losses also---Merger approved by the superior Courts was binding on all concerned including tax authorities---Assessee company was entitled to claim of carrying forward assessed losses of merged companies being merged with assessee's company through orders of High Court---Orders of the officers below were vacated by the Appellate Tribunal and Taxation Officer was directed to allow the claim.
(1995) 51 Tax 223 ref.
Messrs Sitara Chemical Industries Ltd.'s case 2003 PTD 1285 not relevant.
Ujala Cotton Mill v. I.T.O. and others 1985 PTD 510 rel.
Yousaf Saed, FCA for Appellant.
Dr. Ishtiaq Ahmad, DR along with Javed Iqbal Rana, DR for the LTU for Respondents.
ORDER
The appellant through this appeal has objected to the impugned order of the learned C.I.T.(A), dated 1-6-2004 on the following grounds:--
"(1) That neither the learned Assessing Officer nor the CIT(A) has appreciated the facts of the merger between Elahi Spinning and Weaving Mills Ltd. and the assessee company and has erred in making an addition of 176,596, 408(sic) under section 12(12) of the Income Tax Ordinance, 1979, which is against the facts as well as the law.
(2) That the provisions of section 12(12) of the Income Tax Ordinance, 1979 are not attracted to the ease of the assessee as no transfer of assets has taken place as envisaged under section 12(12).
(3) That both the companies combined into one entity and hence the issue of acquisition of the assets at the fair value as envisaged under section 12(2) does not arise.
(4) That without prejudice to the above grounds of appeal, the value of the assets of Elahi Spinning and Weaving Mills Ltd. were represented in the value quoted on the Stock Exchange in respect of the shares of the company.
(5) That without prejudice to the above grounds of appeal, the learned Assessing Officer has incorrectly calculated the value of the assets of Elahi Spinning and Weaving Mills Ltd. By relying on the valuation report, dated September 5th 2001 and the CIT(A) has erred in upholding this action.
(6) Without prejudice to the above grounds report, dated September 5th 2001 cannot be made the basis for calculating the fair market value of the assets of Elahi Spinning and Weaving Mills Ltd.
(7) That the learned CIT(A) has erred in upholding the rejection of the declared yield of yarn at 84.41% and applying a yieldage of 85%. Moreover the sale rate applied at Rs. 99, 07 per Kg. is also not the declared sale rate of the assessee: Hence the addition made at Rs.10,943,272 is not based on the facts of the case.
(8) The learned CIT(A) has erred in confirming the addition of Rs.5 per Kg. in the sale rate declared in respect of yarn sales. The assessee has a history of acceptance of the sale rate declared and the cases quoted by the Assessing Officer cannot be compared with that of the assessee.
(9) That the learned CIT(A) has erred in confirming the addition of Rs.10 per meter in the sale rate declared in respect of cloth/ fabric sales, The assesses has a history of acceptance of the sale rate declared and the cases quoted by the Assessing Officer cannot be compared with that of the assessee.
(10) Without prejudice to the above grounds of' appeal, if at all, the sale rate of yarn and fabric has to be estimated, then only the local rates should be estimated as the export rates are verifiable.
(11) That the following add backs have been made from the profit and loss account of the assessee, and confirmed by the learned CIT(A), while the expenses claimed by the assessee were for the business of the company and are fully verifiable. Moreover, the add backs made are highly excessive.
| | Claimed | Disallowed. |
| Travelling and conveyance | Rs.3,982,322 | 773,765 |
| Repair and Maintenance | 706,031 | 176,508 |
| Printing and Stationery | 1,013,334 | 202,667 |
| General Expenses | 1,269,443 | 240,559 |
| General Expenses (Adam.) | 1,440,196 | 402,967 |
| Sampling expenses | 803,339 | 156,410 |
| Entertainment | 475,401 | 115,332 |
| Communication | 3,572,637 | 535,896 |
| Motor expenses | 2,608,254 | 547,733 |
| Utilities | 668,916 | 166,293 |
| Deferred expenses | 1,049,981 | 1,049,981 |
(12) While working out the income assessable under section 8000 the learned Assessing Officer has erred in allocating short term financial expenses amounting to Rs. 56,116,433 to export sales. The basis for allocating these has not been discussed in the order. No such allocation has been made in the previous years.
(13) Without prejudice to the above grounds of appeal the learned Assessing Officer has erred in adding back the whole of the additions of Rs.244,492,210 to the income assessable under section 62.
(14) The learned CIT(A) has erred in upholding the action of the Assessing Officer in not merging and carrying forward the assessed losses of Elahi Spinning and Weaving Mills Ltd. The same has been done in other parallel cases."
Mr. Yousaf Saeed, FCA has appeared on behalf of the appellant and has at the very outset submitted that he is not pressing grounds No.2 to 12 among the above referred grounds of appeal as these issues have already been settled through A.D.R. recommendations implemented by the C.B.R. through order, dated 4-6-2005. He has in this respect placed before us report of the Alternate Dispute Resolution Committee, Lahore and the order, dated 4-6-2005 issued under section 134A of the Income Tax Ordinance, 2001. The appeal filed by the assessee on the grounds Nos. 2 to 12 is, therefore, dismissed being not pressed.
Out of the remaining two grounds, one is regarding income assessable under section 80CC. In this respect, the learned counsel for the assessee has contended that the Taxation Officer has erred in allocating short term financial expenses to the export sales. He has contended that the basis for allocating these expenses had not been discussed in the order. According to the learned counsel no such allocation has been made in the previous years and there was no justification for deviating from the previous history of the case. Be has contended that the arbitrary figure of 70% has been taken by the Taxation Officer while charging 80CC.
We are of the view that the contentions raised by the learned counsel for the assessee are forceful and for that reason learned CIT(A) has already remanded back the matter for re-examination by the Taxation Officer, therefore, the assessee may explain the position before the Taxation Officer having further opportunity for this purpose. The Taxation Officer is, however, directed to afford the proper opportunity of being heard to the assessee and also to give due consideration to the decisions of this Tribunal as well as by the higher Courts re (erred by the learned counsel for the assessee, which he is directed to place before the Taxation Officer. The appeal on this ground is decided in the manner referred supra.
The next issue is regarding the action of the Taxation Officer in not accepting the merger and carrying forward the assessed losses of Elahi Spinning and Weaving Mills Ltd. In this respect explaining the facts of the case, the learned counsel for the appellant has contended that the appellant company filed its return declaring income along with statement under section 143B of the repealed Ordinance, 1979. It has been contended that another sister concern company, Messrs Elahi Spinning and Weaving Mills Ltd. during the year under appeal was merged with appellant company, i.e. Taj Textile Mills Ltd. from 1-10-1998. The Taxation Officer did not allow the losses sustained by said Elahi Spinning and Weaving Mills Ltd. against the income of the assessee-company Taj Textile Mills Ltd. According to the Taxation Officer the Elahi Spinning and Weaving Mills Ltd. stands dissolved and legally do not exist and, therefore, claim under sections 34 and 35 of the repealed Income Tax Ordinance, 1979 is not exigible. The learned CIT(A) has upheld the treatment meted out by the Taxation Officer in this regard.
On behalf of the appellant it has been contended that as the business of both the companies have been merged and as per order of the Hon'ble High Court all the assets, liabilities, rights, privileges, rent and taxes of both the companies have been merged, therefore, the assessed losses/income of both the companies have to be merged. In this respect reliance has been placed on the decision of the Hon'ble High Court reported as (1995) 51 Tax 223 (H.C. Lah).
While on the other side learned representative of the department is supporting the impugned orders of the officers below in this respect. He has contended that the officers below in this respect placing reliance on the decision of the Hon'ble Karachi High Court in the case of Messrs Sitara Chemical Industries Ltd., reported as 2003 PTD 1285 (Kar. H.C.) have not allowed the carrying forward the losses of Elahi Spinning and Weaving Mills Ltd. during the assessment proceedings of the appellant company.
In this respect on behalf of the assessee it has been contended that this case has no reliance in the case of this assessee as in this case the issue before the Hon'ble High Court was the jurisdiction of the Taxation Officer in the tax related issues arising out of the amalgamation of the companies and not regarding the carrying forward the losses.
We have heard the learned Representatives from both the sides and have also perused the impugned orders of the officers below, the relevant provisions of law and the case law referred from both the sides. Regarding the case referred by the learned representative of the department reported as 2003 PTD 1285 (H.C. Kar.) in the matter of Messrs Sitara Chemicals Industries Ltd. we are of the view that this case is not relevant in this case as the issues before the Hon'ble High Court were of totally different nature. According to the facts of that case the Sitara Chemical Industries Limited and Sitara Spinning Mills Ltd. were merged under order by the Lahore High Court for Scheme of Arrangement under sections 284 to 288 of the Companies Ordinance, 1984 for amalgamation. The Assessing Officer issued notice under section 62 confronting addition under section 12(12) on the basis that the asset of Sitara Spinning Mills Ltd. transferred to the petitioner have been revaluated and the difference between the book value and the revalued value attracts provision of section 12(12)---Notice also sought explanation on adjustment of B/F losses of Sitara Spinning Mills Ltd.---The assesses filed Writ Petition in the Honourable High Court for declaration that the aforesaid notice under section 62 was without lawful authority and of no legal effect---The Hon'ble High Court in the case has held that the Writ Petition is not maintainable against the notice issued by the Taxation Officer as no exception can be taken regarding jurisdiction and competent to issue notice under section 62 of the repealed Income Tax Ordinance, 1979.
We have found that in the present case the merger has been allowed by the Hon'ble High Court Lahore through Civil Original No.136 of 1996 vide order, dated 27-10-1998 after appointment of Local Commission to convene and supervise the meeting of the Registrar Joint Stock Companies, creditors of the two companies and share holders and after that meeting the proposed amendment in the scheme of merger was unanimously approved to the following effect as has been mentioned in the order of the Hon'ble High Court:
"Resolved that the following amendment be and is hereby incorporated in the Scheme of Arrangement for the proposed merger of Elahi Spinning and Weaving Mills Limited and Taj Textile Mills Ltd.
The existing creditors of TTM and ESWM respectively having charges over the land, building, machinery and other fixed assets of the respective companies shall continue to retain their security interests over the land, building, machinery and other fixed assets respectively and charged in their favour.
The existing creditors of TTM having charges over the current assets of TTM shall retain their respective charges over the current assets as on the transfer date of TTM and shall have a first charge ranking, parr passu inter se, on the future current assets which are kept at the TTM premises.
The existing creditors of ESWM having charges over the current assets of ESWM shall retain their respective charges over the existing current assets of ESWM as on the transfer date and shall havea first charge ranking parr passu inter se, on the future current assets which may be kept at the ESWM premises after the transfer date."
The Hon'ble High Court has finally allowed the merger in the concluding para. 4 in the following manner:--
"Since no one had appeared on the last date of hearing to oppose the proposed merger and as the same is found to be in the interest of the two companies as also their share holders and the creditors inasmuch as it will reduce the over-head costs and enhanced unified sales resulting into better prospects of profits and then the pooling of the assets and resources will enhance the security to the creditors and also the offer of commercial viability shall be increased, resultantly the employees of petitioners Nos.1 and 2 shall be benefits. The interest of the creditors has been amply secured by way of amendment proposed and unanimously approved by the share holders of the companies in the meeting held under the supervision of Mr. Jawaid Shaukat Malik, Advocate, therefore, I have no hesitation to granting this petition. The same is hereby accepted. The proposed merger is allowed in the meeting of the companies held under the supervision of Mr. Jawaid Shaukat Malik, Advocate/ Local Commissioner which has been reproduced above as also subject to the express condition that the credit of the creditors shall be the responsibility of the companies as merged together. There shall, however, be no order as to costs."
We have further noted that in the Companies Ordinance, 1984 and in the repealed Ordinance, 1979 there is no provision regarding merger or the amalgamation of the companies and the merger of the companies is made through the winding up proceedings by the Courts under section 297 of the Companies Ordinance, 1984 which is re-produced hereunder:--
"297. Modes of winding up.---(1) The winding up of a company may be either
(i) by the Court; or
(ii) voluntary; or
(iii) subject to the supervision of the Court.
(2) Save as otherwise expressly provided, the provisions of this Ordinance with respect to winding up shall apply to the winding up of a company in any of the modes specified in subsection (1)".
Under section 305 of the Companies Ordinance the circumstances in which company may be wound up by a Court has been mentioned and in subsection (a) it has been legislated that "(a) if the company has, by special resolution, resolved that the company be wound up by the Court". We have further noted that in the Income Tax Ordinance, 2001 the amalgamation has been defined. In subsection (1A) of section 2 which is reproduced as under:--
"amalgamation" means the merger of one or more banking companies or non-banking financial institutions, (or insurance companies) (or companies owning and managing industrial undertakings) in either case (at least one of them) being a public company, or a company incorporated under any law, other than Companies Ordinance, 1984 (XLVII of 1984), for the time being in force, (the company or companies which so merged being referred to as the "amalgamating company" or companies and the company with which they merge or which is formed as a result of merger, as the "amalgamated company") in such manner that--
(a) the assets of the amalgamating company or companies immediately before the amalgamation become the assets of the amalgamated company by virtue of the amalgamation, amalgamated company or as a result of distribution of such assets to the amalgamated company after the winding up of the amalgamating company or companies; (and)
(b) the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation".
The assessee in this case declared Set off the losses under sections 34 and 35 of the repealed Ordinance, 1979. The above said section 34 is regarding set-off losses, which says:--
"(34) Set-off of losses.---Where an assessee sustains a loss (not being a loss to which section 36 or section 37 applies) in any assessment year under any head of income specified in section 15, he shall (subject to clause (v) of subsection (1) of section 23) be entitled to have the amount of the loss set-off against this income (other than income to which subsection (7) or (9) of section 112 applies), if any, under any other head assessable for that assessment year."
We are of the view that under section 34A of the late Ordinance, 1979 there are certain restrictions for set-off losses of certain company. Accorder to clause (b) of subsection (2) of this section:--
34A (2)(b) a scheme for a profitable operation of the business of the subsidiary company submitted by the assessee has been approved, before the commencement of the income year referred to in subsection (1), by--
(i) the Pakistan Industrial Credit and Investment Corporation Limited;
(ii) the Industrial Development Bank of Pakistan;
(iii) the National Development Finance Corporation; or
(iv) the Bankers Equity Limited;
While section 35 is regarding carry forward of business losses which is re-produced as under:--
"(35) Carrying forward of business losses.---Where an assessee sustains a loss in any assessment year under the head `Income from business or profession' (not being a loss to which section 36 applies) and the loss cannot be wholly set-oft' under section 34, so much of the loss as has not been set-off, or the whole of the loss where the assesee has no income under any other head, shall be carried forward (subject to clause (b) of subsection (1) of section 23,) to the following assessment year and set-off against the profits and gains, if any, of such business or profession assessable for that year if such business or profession continues to be carried on by the assessee fig that assessment year, and if the loss cannot be wholly set-off in this manner, the amount of the loss not so set-off shall be carried forward to the following assessment year, assessment years immediately succeeding the assessment year for which the loss, was first computed:
(Provided that, where the said loss relates to an assessment year commencing on or after the first day of July, 1970, and is sustained by any such assessee, being the owner of an industrial unit which is declared sick and is being rehabilitated under a scheme approved by the Federal Government, as may be notified by the Central Board of Revenue in the official Gazette, this section shall have effect as if for the word "six assessment years" the word "ten assessment years" were substituted)"
Section 36 is regarding Speculation losses and section 37 is regarding Capital losses. While section 38 deals with limitations as to set-off and carry forward of losses in the case of firms, partners, etc. and is re-produced hereunder:--
"(38). Limitations as to set-off and carry forward of losses in the case of firms, partners, etc.---(1) Where the assessee is a registered firm, any loss which cannot be set-off against any other income of the firm shall be apportioned among the partners of the firm and they alone shall be entitled to have the amount of the loss set-off and carried forward for set-off under sections 34, 35, 36 and 37."
We have noted that in the very beginning of the section 34A referred supra the entire ownership of the shares of another company called subsidiary company falls in that category on which bar or loss on account of depreciation has been put. But in the present case Messrs Elahi Spinning and Weaving Mills is not the subsidiary company as such does not come under the purview of section 34A.
We are of the view that the order in Civil Original. No. 136 of 1996 of the Hon'ble High Court clearly envisages the merger of all assets, rights, privileges, benefits etc. After concluding the definition of the word "amalgamation" in the new Income Ordinance, 2001 and the order of the Hon'ble High Court regarding the merger of Messrs Elahi Spinning and Weaving Mills in the assessee company we have noted that it has clearly established that the intention of the Income Tax Law is to encourage merger and amalgamation and to give maximum tax benefits to the company absorbing in other companies and merging thereof.
We have no doubts in our mind that the merger approved by the Hon'ble High Court had the legal effect of giving a continuity to the operations of the merged company, which in the instant case is Messrs Elahi Spinning and Weaving Mills as a part of the assessee company i.e. Messrs Taj Textile Mills consequent and vesting the assessee company with all assets and liabilities of Messrs Elahi Spinning and Weaving Mills (merged company). It is evident that if there was any un-discharged tax liability of the aforesaid non-surviving company, the same would have been recoverable from the assessee company and that the assessee company would have been bound to duly discharge the same. Similarly, the assessee company is clearly entitled to have adjustment of the unabsorbed losses that have been brought forward.
We are of the view that the departmental officers are bound by the orders passed by the Hon'ble High Court. This order sanctioned the Scheme of Arrangement under which the assessee company carne to be vested with all rights and liabilities of merged company. These rights included the right of brought forward losses also. It is needless to say that under the Constitution of Pakistan all authorities are bound by the order passed by the Hon'ble High Court. The superior Courts of Pakistan have repeatedly held that a merger approved by the Hon'b1c High Court is binding on all concerned including tax authorities. In this regard case tilled Ujala Cotton Mills v. ITO etc. reported as 1985 PTD 510 is referred wherein it has been held that:--
"The contention that the Income Tax Department was not party to those proceedings cannot be heard. There is no such provision to implead them as a party and hence for all purposes any order in this behalf made by the High Court shall be binding on them, otherwise no sanctity could be attached to it and for that purpose the whole exercise in obtaining it will be quite an otiose act. The order by its very nature determines the vesting of assets and incurring of' liabilities."
In another case which is regarding the merger of Faisal Bank of Bahrain (the non-surviving company) with Faisal Bank Ltd. (as the surviving company) it was decided by this Tribunal, that all bad debts of the non-surviving bank were adjustable against the income of the surviving bank.
Considering all these facts, circumstances and legal position, we are of the considered view that the appellant, in this case, is entitled to claim of carrying forward assessed losses of Elahi Spinning and Weaving Mills Ltd. being merged with appellant's company through the orders of the Hon'ble Lahore High Court. The impugned orders of the officers below in this regard are, therefore, vacated and Taxation Officer is directed to allow the claim.
The appeal filed by the assessee on this ground is, therefore, allowed.
The appeal regarding other grounds is dismissed being not pressed by the learned counsel as discussed supra.
C.M.A./48/Tax (Trib.)Order accordingly.