I.T.As. Nos.744/IB, 1255/IB of 200.5, I.T.A. No.768/IB of 2004, M.As.(R) Nos.22A/TB and 22B/IB of 2007, decided on 11th March, 2007. VS I.T.As. Nos.744/IB, 1255/IB of 200.5, I.T.A. No.768/IB of 2004, M.As.(R) Nos.22A/TB and 22B/IB of 2007, decided on 11th March, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2109 (2007)

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

----Fifth Sched., Part-I, R.2(3)---Computation of the profits and gains from the exploration and production of Petroleum---Adjustment and carry forward of losses of dry hole---Rejection on the ground that assessee had failed to comply with provisions of law and had not provided a mechanism about set off and carry forward of losses in its concession agreement with the Government of Pakistan---Assessee was not entitled to claim the carry forward and set off of loss in respect of dry hole---Validity---Concession agreement of the company/assessee was not altogether. silent about mechanism for adjustment and carry forward of lost expenditure on dry hole---Article of the agreement provided that all expenditure deemed to have been lost in terms of R.2 of Part-I of Fifth Schedule of the Ordinance shall be adjusted on "a fully consolidated basis in one of the two ways mentioned in R.2(3) of the Part-I of the Fifth Schedule of the Income Tax Ordinance, 1979---Assessing Officer failed to take into account the Witty gritty of the concession agreement in a proper manner---If for the sake of argument it was accepted that concession agreement was silent about such mechanism, even then the. Assessing Officer was not justified to, disallow the assessee's claim because in such situation the Revenue itself should decide whether the lost expenditure was to be allowed under Cl.(a) or Cl.(b) of R.2(3) of Part-I of the Fifth Schedule of the Income Tax Ordinance, 1979---First Appellate Authority. was fully justified to set aside the assessment for re-determination of expenditure for the purpose of adjustment and carry forward after verification---Order of First Appellate Authority was maintained with the directions that during re-assessment proceedings the Assessing Officer should allow the lost expenditure in either of the two ways prescribed in Cl.(a) and clause (b) of Sub-R.(3) of R.2 of Part-I of the Fifth Schedule to the Income Tax Ordinance, 1979.

DHP Petroleum Asia Pacifiy Islamabad's case LT.A. No.341 (IB) of 2002 ref.

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

----S. 23---Deduction---Exchange loss---Disallowance---Department contended that exchange loss due to fluctuation of currency rates could not be claimed in respect revaluation of assets because in that case it will be a capital loss and not a revenue loss---Similar position will prevail in respect of those liabilities which were payable on account of assets created from such liabilities---Exchange loss due to fluctuation was not admissible deduction at all as it was considered as a business loss then it had to be restricted only to business transaction yielding revenue/income of the assessee---In no way such losses could be claimed as expenditure in respect of assets or those liabilities which related to creation of assets because in that situation it had to be treated as a capital loss---Validity---Exchange loss due to fluctuation of currency rates could not be claimed as revenue expenditure on revaluation of assets or those liabilities out of which such assets were created---Said loss was admissible only in respect of normal business transactions, however, legal position had not been scrutinized to find out as to what portion of loss was of capital nature and what portion was of revenue nature---Orders of both the authorities below were vacated and set aside the assessment with the directions that during de novo proceedings accounts of the assessee should be properly examined to ascertain the nature of exchange loss and if it was found that any portion of such loss related to normal business transactions of the assessee, and did not relate to capital assets or liabilities the same should be allowed as business expenditure---Assessee should be provided with proper opportunity to explain the case and provide necessary details.

1989 PTD 582 ref.

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

----S.23---Deduction---Explorationexpenditurewrittenoff---Disallowance---Setting aside by the First Appellate Authority instead of deleting the said disallowances---Validity---First Appellate Authority rightly set aside the assessment for re-assessment of the issue and adjudication thereof in accordance with law as the details provided during the hearing before Appellate Tribunal were either not placed before the Assessing Officer or the same were not given proper consideration at assessment stage---Said issue needed detailed analysis at the level of Taxation Officer---Order of First Appellate Authority was upheld by the Appellate Tribunal with the direction that during re-assessment proceedings all the details, documents and evidence available 'with the company should be examined for adjudication in the light of relevant law.

(d) Income Tax---

---Limitation---Assessment will not be barred by time simply for the reason that there was a gap of some days between the date of assessment and the date of service of assessment order on the taxpayer.

2006 PTD (Trib.) 1052 and 1998 PTD 1125 rel.

Nadeem Ayaz FCA/AR for Appellant (I.T.As. Nos.744/IB and 1255/IB of 2005).

A.A. Sheikh, DR for Appellant (I.T.As. Nos.744/IB and 1255/IB of 2005).

A. A. Sheikh, DR for Respondent (I.T.A. No.768/IB of 2004).

Nadeem Ayaz FCA/AR for Respondent (I.T.A. No.768/IB of 2004).

Nadeem Ayaz, FCA/AR for Appellant (M.As.(R). Nos.22A/IB and 22B/IB of 2007).

A. A. Sheikh, DR for Respondent (M.As.(R). Nos.22A/IB and 22B/IB of 2007).

ORDER

The assessee has filed appeals for the assessment year 1999-2000 against order dated 2-4-2005 passed by learned CIT(A), Zone-1, Islamabad. It has filed separate appeal for assessment year 2001-2002 against-order dated 14-7-2005 passed by the same CIT(A). The Department has filed appeal for assessment year 1999-2000 against the aforesaid appellate order. The assessee filed miscellaneous applications for assessment years 1999-2000 and 2001-02 raising legal ground that the order of Taxation Officer is barred by time. As legal points have been raised in the miscellaneous applications, the same arc admitted for adjudication.

2. As per facts the assessee a foreign company is engaged in the business of oil and gas exploration and development activities. Original assessment for assessment year 1999-2000 was made at "NIL" business income and interest income for this year was assessed at Rs.5,78,066. A loss of Rs.19,31,51,512 claimed on account of drilling of dry hole in Block `A' of East Badin (Extension) Concession Area was not assessed on the ground, there were no provisions in the Concession Agreement regarding set off or carrying forward of losses as required as per the provisions of rule 2(3) of Part-I of the 5th Schedule to the Income Tax Ordinance, 1979. On filing appeal, the CIT(A) set aside the order with the .directions to re-examine the case in the light of assessee's claim of determination of income on the, basis of return which is of loss and which falls in the purview of rule 2(2) of Part-I of the 5th Schedule to the Income Tax Ordinance, 1979. It was also directed that the assessee should be provided with an opportunity of being heard and filing evidence in support of its contention. During re-assessment proceedings, the Assessing Officer vide his impugned order under sections 62/132 dated 30-6-2004 accepted the loss of Rs.19,31,51,512 in respect of dry hole. The Assessing Officer; however gave a finding that such loss will neither be set off against any income nor carried forward and income was finally assessed as under:--

3. The assessee filed appeal before learned CIT(A) contesting that the Taxation Officer was not justified to hold that loss assessed by him will neither be set off against any other income nor it will be carried `forward in subsequent assessment year(s). It was also contested that the "Taxation Officer had erred in not considering the assessed loss amounting to Rs.23,55,98,164 from prior years for carry forward and set oft learned CIT(A) in his impugned order observed that the Assessing Officer did not confront the assessee before taking the impugned decision. He also observed that the Assessing Officer did not record sufficient reasons in the light of provisions of law in support of his action. Learned CIT(A), therefore, held that action of the Assessing Officer was not justified. He, therefore, set aside the assessment on this point with the directions to re-examine the case in the light of relevant provisions of law and case-law relied upon by the assessee. He also directed that assessee should be provided with sufficient opportunity of being heard in order to explain its position and produce evidence in support of its claim. In respect of assessed loss of previous years, not brought forward, learned CIT(A) directed that assessed loss of previous years should be carried forward under the law after due verification. The assessee has filed second appeal contesting that the learned CIT(A) has erred in setting aside the Taxation Officer's order that the appellant's assessed loss in the year will neither be set off against any other income nor carried forward to the subsequent assessments/tax years(s). The Department has filed second appeal against this appellate order on the following grounds:--

(i) .

(ii) The learned CIT(A) was not justified in holding that the action of Assessing Officer in not setting off the business loss against other income or carry forward the same was illegal.

(iii) .

4. At the time of hearing it was contended by learned AR that the Assessing Officer was not justified to draw a conclusion that no loss can be carried forward under one of the two alternate methods prescribed in sub-Rule (3) of Rule 2 of Part-I of the 5th Schedule to the Income Tax Ordinance, 1979, if Concession Agreement between the company and Government of Pakistan does not specifically provide a mechanism for adjustment and carry forward of loss under the aforesaid provisions. Learned AR stated that it has been held by the Tribunal in its decision in I.T.A. No. 341(IB) of 2002, assessment year 1999-00 (in the case of DHP Petroleum Asia Pacific, Islamabad) that omission of either clause (a) or clause (b) of rule 2(3) in the Concession Agreement is not fatal to assessee's claim in determination of lost expenditure and the adjustment or carry forward thereof'. It was held by the Tribunal that in such situation if no specific provision is made in respect thereof in the Concession Agreement the Revenue itself may decide whether the lost expenditure is to be allowed under clause (a) or clause (b) of rule 2(3), Learned DR, however, stated that it is obligatory for the assessee to incorporate in the Concession Agreement in a specific manner the mechanism for adjustment and carry forward of losses of dry hole as provided in rule 2 of Part-I of the 5th Schedule. He contended that the assessee has failed to comply with provisions of law laid down in the rule 2(3) and has not provided a mechanism about set off any carry forward of losses in its Concession Agreement with the Government of Pakistan. He contended that in these circumstances the assessee is not entitled to claim the carry forward and set off of loss in respect of dry hole. He emphasized that Taxation Officer was justified to disallow assessee's claim on this score.

5. We have given due consideration to argument of both the parties in the light of relevant provisions of law and material obtaining on record. First of all sub-rule (3) of rule 2 of Part-I of 5th Schedule is reproduced as under:--

"(3) Where the agreement provides that any portion of the expenditure deemed to be lost under sub-rule (2) shall be allowed against any income of such undertaking it shall be allowed in either of the following two ways, as may be provided for in the agreement namely:---

(a) the said loss in airy year shall be set-oft' against the income of that year chargeable under the head "income from business or profession" or any income (other than income from dividends) chargeable under any other head and where the loss cannot be wholly set-off in this manner the portion not so set off shall be carried forward to the following year and set off in the same manner and so on, but no loss shall be carried forward for more than six years: or

(b) the said loss in any year shall be set off against the income of such undertaking of the income year in which commercial production has commenced and where the loss cannot be wholly set off against the income of such undertaking of that year, the portion not so set off shall be carried forward to the following year and set off against the income, if any, of such undertaking of that year, and if it cannot be wholly so set oft the amount of loss not so set off shall be carried forward to the following year and so on, but no loss shall be carried forward for more than ten years.

6. It shows that the assessee has to provide a mechanism for the adjustment or carry forward of expenditure lost in dry hole. Perusal of Concession Agreement of the Company shows that in Article 122 of the East Badin (Extension) Concession Agreement a method of taxation of lost expenditure has been provided in the following manner:--

"12.2. Where any expenditure allocable to a Surrendered Area or to the drilling of a dry hole is deemed to be lost under rule 2(2) in Part-I of the 5th Schedule of the Income Tax Ordinance, 1979 (No.XXXI of 1979) such expenditure shall be allowed in either of the ways provided for in rule 2(3) of Part I of the 5th Schedule at the election of the relevant Working Interest Owner in relation to the expenditure in question and in accordance with .its respective Working Interest at the time such expenditure was incurred in the Area in the relevant operation.

7. After analyzing aforesaid Article 122 of 'the Concession Agreement and provisions contained in sub-rule (3) of rule 2 of the Part-I of 5th Schedule, we are of the opinion that the Concession Agreement of the Company is not altogether silent about mechanism for adjustment and carry forward of lost expenditure on dry hole, as alleged by Taxation Officer. Last portion of the aforesaid article clearly provides that all expenditure deemed to have been lost in terms of rule 2 shall be adjusted on "a fully consolidated basis in one of the two ways mentioned in rule 2(3)" The Assessing Officer has, therefore, tailed to take into account the Witty gritty of the Concession Agreement in a proper manner. We are, therefore, not in agreement with Assessing Officer that Concession Agreement of the assessee company is silent about mechanism of adjustment and carry forward of lost expenditure in a dry hole. If for the sake of argument it is accepted for a moment that Concession Agreement is silent about such mechanism, even then the Assessing Officer was not justified to disallow the assessee's claim because principles have clearly been specified in Tribunal's order in the case of DHP Petroleum Asia Pacific, Islamabad in Appeal No.341(IB)2002 that in such situation the Revenue itself should decide whether the lost expenditure is to be ,allowed under clause (a) or clause (b) of rule 2(3) of Part-I of the 5th Schedule of Income Tax Ordinance, 1979 (repealed). We, therefore, hold that the learned CIT(A) was fully justified to set aside the assessment for re-determination of this item of expenditure for the purpose of ,adjustment and carry forward niter verification. We, therefore, do not find any reason to interfere in the impugned order of learned CIT(A) which are hereby maintained with the directions that during re-assessment proceeding the Assessing Officer should allow the lost expenditure in either of the two ways prescribed in clause (a) and clause (b) of sub-rule (3) of rule 2 of Part-I of 5th Schedule to the Income Tax Ordinance, 1979.

8. In respect of departmental appeal for assessment year 1990-00 it was stated by learned DR that learned CIT(A) was not justified in holding that action of the Assessing Officer in not setting off the business loss against other income or carry forward the same was illegal. Learned AR asserted that this ground of appeal does not arise from the impugned order of the learned CIT(A). Learned DR responded that departmental ground of appeal is very relevant because in respect of assessed losses of previous years not brought forward, learned CIT(A) directed to "carry forward the assessed loss of the previous years under the law after due verification". He stated that the directions about carry forward of loss of previous years are unjustified because in this case assessed losses of previous years cannot be carried forward for adjustment against income of the subsequent year(s). We have given careful consideration to departmental appeal and we are convinced to hold that a cause of action does arise to the Department in respect of directions of learned CIT(A) relating to carry forward of assessed losses of previous years. This issue was not properly looked into at the time of original assessment nor the learned CIT(A) thoroughly dilated upon this issue. The assessment is, therefore, set aside on this point with the direction that at the time of re-assessment this issue should be disposed of strictly in accordance with law after providing adequate opportunity of hearing to the appellant.

9. In respect of assessment year 2001-02, it was asserted by learned AR that learned CIT(A) has erred in upholding the action of Taxation Officer of disallowing appellant's entire claim in respect of "exchange loss" amounting to Rs.27,70,49,88. He stated that the assessee is maintaining account books in dollar .terms and at the end of each financial year the value of assets and liabilities is translated into Pak rupees and due to fluctuation in currency rates resultant gain is shown as an income and resultant loss is claimed as an expenditure in the P&L account. No stated that complete record of computation of such loss was produced before the Assessing Officer but he did not appreciate the legal position and unjustifiably held that it was a national loss. Learned AR contended that this loss has correctly been debited to the P&L account and it is admissible deduction froth business income of the assessee of the Assessing Officer was not justified to reject assessee's claim. He further stated that learned C.I.T.(a) was also not justified. to distinguish the facts o1' this case with those involved in a case reported as 198) PTD 582 for the reason that in the reported case loss was on account of devaluation of Pak Currency whereas in this case it is just on the basis of revaluation of assessee's liabilities on a given date. It was emphasized by learned AR that the Company is following the International Accounting Standards and has rightly claimed loss of account of revaluation of assets and liabilities as a business expenditure. Learned DR, however, stated that exchange loss due to fluctuation of currency rates cannot be claimed in respect revaluation of assets because in that case it will be a capital loss and not a revenue loss. He also stated that similar position will prevail in respect of those liabilities which are payable on account of assets created from such liabilities. He emphasized C that exchange loss due to fluctuation is not admissible deduction at all. If it is considered as a business loss then it has to be restricted only to business transaction yielding revenue/income to the assessee. In no way such losses can be claimed as expenditure in respect of assets or those liabilities which relate to creation of assets because in that situation it has to be treated as a capital loss.

10. We have given due consideration to arguments of both the parties on the point of "exchange loss" due to fluctuation in currency rates. We are convinced with the arguments of the learned DR. and we hold that exchange loss due to fluctuation of currency rates cannot be claimed as revenue expenditure on revaluation of assets or those liabilities out of which such assets were created. This loss is admissible only in respect of normal business transactions. We are of the opinion that in this case this legal position has not been scrutinized to find out as to what portion of loss is of capital nature and what portion is of revenue nature. We, therefore, vacate orders of both the authorities below and hereby set aside the assessment for assessment year 2001-02 with the directions that during de novo proceedings accounts of the assessee should be properly examined to ascertain the nature of exchange loss and if it is round that any portion of such loss relates to normal business transactions of the assessee, and does not relate to capital assets or liabilities the same should be allowed as business expenditure. For ascertaining the final outcome, the assessee should be provided with proper opportunity to explain the case and provide necessary details.

11. It was stated by learned AR that in respect assessment year 2001-02, the CIT (A) was not justified in setting aside the assessment on the point of disallowance of Its. 1,05,97,000 on account of "exploration expenditure written off" instead of deleting the said disallowances. He slated that expenditure in respect of exploration of development was shown in the accounts in the following manner:--

US DollarEquivalent Pak Kupees

Exploration and Develop ment expenditure

Balance at beginning off28,558,1471,79,423,005

the year

Expenditureincurred3,142,616177,132,320

during the year

Exploration expenditure(1,886,227)(85,997,797)

written off

Amortization of (3,334,695)272,838,779)

expenditure for the year

Balance at end of the26,479,9311,602,617,749

Year

12. He further stated that cost incurred in Connection with acquisition (East Badin Extension) was shown in the account books in the following manner:--

Details of exploration expenditure written off

Share of expenditure since inception to the date of surrender of Badani Bloe Petroleum Concession Area as per related Joint Operations, Joint Account for the year ended December 31, 7.000.

-- Concession Area RentalRs.183,026

-- Geological and GeophysicalRs. 25,621,105

-- General AdministrationRs. 8,528,538

-- Administrative overheadRs. 9,388,029

Costs incurred in connection withRs. 42,388,029

acquisition of East Badin (Extension)

Block AB&C Petroleum Concession area

and Block 28 .Petroleum Concession Area.

Rs. 85,997,797

13. Learned AR stated that the Taxation Officer Failed to take into account all the aforesaid details and observed in the assessment order that it was not clear as to what costs/expenditure were incurred to acquire the Concession Area. It was further stated by learned AR that the 'Assessing Officer was not justified to hold that if these were incurred prior to the Concession Agreement or acquiring Concessions Area the proper treatment should have been to amortize such expenditure. Learned AR asserted that the Assessing Officer did not appreciate the correct position of this expenditure during examination of accounts and made addition of Rs.1,05,97,007 equal to 25% of the claim of Rs.4,23,88,029 on notional basis: He emphasised that the CIT(A) was not justified to set aside assessment on this issue by way of providing another opportunity to the Revenue to subject the assessee to the same drill of production of accounts, and records. Learned DR, however, supported action of the Assessing Officer as well as the CIT(A) and stated that order of the learned CIT(A) does not cause any prejudice to the assessee because another opportunity has been provided to the company to prove its claim with the help of accounts and records.

14. We have given due consideration to arguments of both the parties on this point and agree with the learned DR that learned CIT(A) has rightly set aside the assessment on this point for re-examination of the issue and adjudication thereof in accordance with law. We are of a strong opinion that details provided during the hearing of this appeal before us were either not placed before the Assessing Officer or the same were not given proper consideration at assessment stage. We, therefore, deem it appropriate that this issue needs detailed analysis at the level of, Taxation Officer. Keeping in view these facts we uphold the order of learned CIT(A) on this point and do not accept, assessee's appeal. It is however, directed that during re-assessment proceedings all the details, documents and evidence available with the company should be examined for adjudication of this in the light of relevant law.

15. The assessee filed additional grounds for assessment years 1999-00 and 2001-02 claiming that order of the Taxation Officer are barred by time and, therefore, illegal. It was stated by learned AR that the impugned assessment were made on 30-3-2003 and 30-6-2004 respectively whereas demand notices were not served on the same date henc4 both the assessments are barred by time and not maintainable legally. Learned DR stated that this issue of a reasonable gap between the elate of order and date of service of demand notice has been resolved and it has been held in the cases reported as 2006 PTD (Trib.) 1052 and 1998 PTD 1125 (LHC) that an assessment will not be barred by time simply for the reasons that there is a gap of some days between the date of assessment and the date of service of assessment order on the .taxpayer. We have given due consideration to arguments of both the parties on this point and we fully agree with learned DR that in the light of ratio settled in the aforesaid reported cases the impugned assessments for both years are not barred by time. Assessee's appeal on additional grounds for both the years are, therefore, dismissed for being without any merit.

16. All the appeals are disposed off in the manner and to the extent as indicated above.

C.M.A./67/Tax(Trib.)Order accordingly.