2007 P T D (Trib
2007 P T D (Trib.) 2635
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Chairman, Jawaid Masood Tahir Bhatti, Judicial Member and Shahid Azam Khan, Accountant Member
I.T.As. Nos. 992/KB and 1467/KB of 2005, decided on 27/02/2007.
Per Jawaid Masood Tahir Bhatti, Judicial Member (Minority view)
Income Tax Ordinance (XLIX of 2001)---
----Second Sched., Part-I, Cl. (132), Ss.39 & 120---Income Tax Ordinance (XXXI of 1979), Second Sched., Cl. (176)---Exemption---Tax years 2003 and 2004---Income from "Profit on Debts"---Taxation of being "Income from Other Sources"---Validity---Taxpayer being limited company incorporated under Companies Ordinance, 1984 conducting, business of power generation had filed returns declaring NIL income---Profits and gains of power generation were granted exemption previously vide Cl. (176) of the Second Schedule to the Income Tax Ordinance, 1979 which. were in similar manner exempted under Cl. (132) of the Second Schedule in the Income Tax Ordinance, 2001---Returns stood accepted under S.120 of the Income Tax Ordinance, 2001 and orders were deemed to be passed.
I.T.A. No.2145/KB of 2002; I.T.A. No.1835/KB of 2003 and R.As. Nos. 673 and 674/KB of 2002 rel.
CIT v. Shart Meattle (1973) 90 ITR 385; Commissioner of Income Tax v. Express News Papers Limited (1960) 40 ITR 38; Messrs Tri Pack Films Limited`s case I.T .A. No.955/KB of 1998-99; 1990 PTD 708 and 1998 PTD 3179 ref.
Income Tax Ordinance (XLIX of 2001)---
----S. 124A---Powers of tax authorities to modify orders, etc.---Additions on profit of debts by the Inspecting Additional Commissioner while Appellate Tribunal had already directed the Taxation .Officer to allow exemption on profits earned on bank account of the company for the previous years and upheld the order of First Appellate Authority---Validity---No justification existed for rejection of claim of exemption for Tax Year, 2003 as First Authority without keeping in view specific provisions of law i.e. 124A of the Income Tax Ordinance, 2001 regarding powers of tax authorities to modify the orders had rejected the appeal filed by the taxpayer---Order of First Appellate Authority as liable to be vacated by the Appellate Tribunal in circumstances.
I.T.A. No.2145/KB of 2002; I.T.A. No.1835/KB of 2003; .1999 PTD (Trib.) 1528 and 2003 PTD (Trib.) 1643 rel.
Income Tax Ordinance (XLIX of 2001)---
----S. 122(5A)---Amendment of assessments---Order passed under S.122(5A) of the Income Tax Ordinance, 2001 by the Inspecting Additional Commissioner, which was an unknown authority in the Income Tax Ordinance, 2001 was liable to be vacated in circumstances.
2006 PTD (Trib.) 1778 rel.
Per Shahid Azam Khan, Accountant Member disagreeing with Jawaid Masood Tahir Bhatti, Judicial Member---(Minority view)
Income Tax Ordinance (XLIX of 2001)---
----S. 39, Second Sched., Cl. (132)---Income from other sources---Power generating project---Profit on debts---Profit on debts earned by the taxpayer was chargeable to tax under S.39 of the Income Tax Ordinance, 2001 and did not enjoy exemption under Cl. (132) of the Second Sched. of the Income Tax Ordinance, 2001.
Messrs AES Pak. Gen (Pvt.) Ltd. v. C.I.T. Civil Petitions Nos.2211-L and 2212-L of 2005; DTPSC'0016: 5 Tax 262: 1962 PTD 415: -1962 PTD 128 and 2005 PTD 296 rel.
Income Tax Ordinance (XLIX of 2001)---
----Ss. 122(5A) & 2(65)---Amendment of assessment---Amendment of Order under S.122 (5A) of the Income Tax Ordinance, 2001 by the Inspecting Additional Commissioner---Legality---Order passed under S.122(5A) of the Income Tax Ordinance, 2001 had shown that designation mentioned on it was that of "TO/Inspecting Additional Commissioner"---Designation `TO' stands for `Taxation Officer' which was defined in S.2(65) of the Income Tax Ordinance, 2001 to also include `Additional Commissioner'---Order had been passed by the Departmental Officer in the capacity of a `Taxation Officer' who was also an Additional Commissioner---Order passed under S.122(5A) of the Income Tax Ordinance, 2001 had suffered from no legal infirmity and merely incorrect use of second designation as `Inspecting Additional Commissioner did not prejudice the Departmental stand on the chargeability of profit on debt under .5.39 of the Income Tax Ordinance, 2001.
Per Khawaja Farooq Saeed, Chairman Agreeing with Shahid Azam Khan, Accountant Member---[Majority view]
(a) Income Tax Ordinance (XLIX of 2001)---
----S. 2(65}---Taxation Officer---Section 2(65) of the Income Tax Ordinance, 2001 provided that the Deputy Commissioner of Income Tax (DCIT) as well as the Additional Commissioner (BPS-19) could be made as Taxation Officer by the Commissioner of Income Tax.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 210(1A)---Delegation---Amendment in S.210(1A) of the Income Tax Ordinance, 2001 had only drawn a line in respect of delegation of the power by the Commissioner of Income Tax---Power under S.122(5A) of the Income Tax Ordinance, 2001 was not to be assigned to an officer less than an officer of the rank of an Additional Commissioner---Prior to said date the Commissioner of Income Tax could delegate the power to cancel an order under S.122(5A) of the Income Tax Ordinance, 2001 to a Taxation Officer of Grade 17 or Grade 18 in addition to Grade 19 and that did not have any effect on the proceedings initiated and continued by the department specially for the reason that the order was cancelled after the insertion of the said provision---Such was notwithstanding the fact that the Commissioner of Income Tax had the powers to assign the powers to cancel the order under S.122(5A) of the Income Tax Ordinance, 2001 to Taxation Officer of any rank before said amendment; however, after 1-7-2004 he could now delegate the power of cancellation of an order to an Additional Commissioner only.
(c) Income-tax---
----Charging provision---Doubts---If it was a charging provision the doubt, if any, should be resolved in favour of taxpayer.
(d) Income-tax---
----Exemption---Doubts---Doubt in case of grant of exemption is fatal and is always resolved in favour of the department.
(e) Income Tax Ordinance (XLIX of 2001)---
----Second Sched. Part-I, Cl. (132), Ss.39 & 120---Income Tax Ordinance (XXXI of 1979), Second Sched: Cl. (176)---Exemption---Power generating project---Tax years, 2003 & 2004---Interest income---Taxation of---Validity---Neither technically nor factually interest income earned form bank could be declared as exempt---Action of the Assessing Officer of charging tax on interest income by considering the same as not auxiliary or ancillary of the income of power generation was held to be fully justified.
2004 PTD 2255 rel.
Tayyab G. Adeeb, F.C.A. for Appellant (in I.T.A. No.992/KB of 2005).
Faheem ul Haq D.R. for Respondent (in I.T.A. No.992/KB of 2005)
Faheem ul Haq D.R. for Appellant (in I.T.A. No.1467/KB of 2005).
Tayyab G. Adeeb, F.C.A. for Respondent (in I.T.A. No.1467/KB of 2005).
ORDER
Out of these two appeals, one has been filed by the taxpayer for Tax Year, 2003 against the impugned order of the learned CIT(A), dated 29-4-2005 on the following ground:--
(2) That learned Commissioner of Income Tax Appeals-II has erred in confirming the action of IAC/Taxation Officer charging tax on profit of Rs.622,583 earned by the appellant on funds deposited with the banks which are necessarily to be kept in Bank.
While the second appeal has been filed by the Department for Tax Year, 2004 against the impugned order of the learned CIT(A), dated 31-8-2005 on the following grounds:--
(2) That the learned CIT(Appeals) was not justified in directing to allow exemption on income from "Profit on Debts" without appreciating the facts that the interest income was taxed under section 39 of Income Tax Ordinance, 2001 as "Income from Other Sources" and same does not enjoy exemption under clause (132) of the 2nd Schedule to the Income Tax Ordinance, 2001.
(3) That in case of Messrs Genertech Pakistan Ltd., the Hon'ble Supreme Court held the income from other sources (interest income) as taxable and not covered under exemption provided to power generation companies. The decision is reported as 2004 PTD 2255.
Regarding the appeal filed by the taxpayer for Tax Year, 2003, Mr: Tayyab G. Adeeb, FCA has appeared on behalf of the taxpayer and has argued the case on legal as well as on factual aspects. There are three legs of the arguments of the learned counsel on legal issues. He has contended that the assessee company, in this case, is incorporated under the Companies' Ordinance engaged in the business of generation of electric power. According to the learned counsel, profits and gains of the electric power projects enjoy exemption from income tax under clause (132) of Part-I of 2nd Schedule to the Income Tax Ordinance, 2001 while such exemption was granted under clause (176) of the 2nd Schedule to the repealed Income Tax Ordinance, 1979. Return for the year under review declaring NIL income was filed by the taxpayer, which was accepted under section 120 of the Income Tax, Ordinance, 2001 and order deemed to be passed. Inspecting Additional Commissioner of Income Tax, Range-III, Coys. Karachi has reopened the case under section 122(5A) of the Income Tax Ordinance, 2001 and has charged to tax profit earned on bank deposits against which taxpayer has filed appeal before learned CIT(A), which has been dismissed.
His first objection regarding reopening of assessment is that the requirement of the written assessment order is mandatory and as in this case, no written order is available therefore, there was no justification for reopening the assessment under section 122(5A) of the Income Tax Ordinance, 2001 as according to him, to treat assessment to be erroneous in so far as it is prejudicial to the interest of revenue, there must be a written order available on record.
Second legal objection raised by the learned counsel is that as in the new Income Tax Ordinance, 2001, there is no authority as Inspecting Additional Commissioner., therefore, order passed by the Taxation Officer is without any jurisdiction. He has, in this respect, referred section 210 of the Income Tax Ordinance, 2001 which is regarding delegation of powers and according to which Commissioner, may by order in writing; delegate to any Taxation Officer all or any of the power or function conferred upon or assign to Commissioner under this Ordinance other than the power of delegation. However, under subsection (1A) of this section, it has been specifically mentioned that "Commissioner shall not delegate the power of amendment of assessment contained in subsection (5A) of section 122 to the Taxation Officer below the rank of Additional Commissioner of Income Tax". And in the Income Tax Ordinance, 2001, there is no authority as Inspecting Additional Commissioner, therefore, no powers can be delegated by the Commissioner to the authority, which is not available in the statute, therefore, the order has been passed without any statutory authority. In this regard, he has further contended that subsection (1A) has been inserted in section 210 through Finance Act, 2004, while the return in this case has been filed on 30-10-2003 and as the power of delegation was not available at that time to the Commissioner, therefore, the order is not under the proper jurisdiction, as subsection (5A) at that time was not in the field. He has contended that Notification regarding delegation. f powers in this case as per the Department's contention is dated 28-11-2002 when the Commissioner was not having the jurisdiction to delegate powers, therefore, Notification regarding delegation of powers in this regard is ultra vires having no effect. The learned counsel, in this regard, has placed reliance on the decision of this Tribunal reported as 2006 PTD (Trib.) 1778 wherein, it has been specifically held that subsection (1A) in section 210 was inserted in 2004, so delegation of authority to a Taxation Officer below the rank of Additional Commissioner of Income Tax could become illegal .after this date, when there was no such provision in the statute book and the order passed under section 122 has been declared to be devoid of legal sanction behind it.
Third legal objection raised by the learned counsel for taxpayer is that this Tribunal in the previous assessment years has directed to allowed exemption on profits earned on bank account of the company. He has, in this. respect, referred the decision of this Tribunal, dated 16-8-2003 for the assessment year 2001-2002 in I.T.A. No.2145/KB of 2002 in the case of the taxpayer allowing the appeal and in the assessment year 2002-2003 vide order, dated 7-4-2004 in I.T.A. No.1835/KB of 2003 dismissing the appeal filed by the Department, as learned CIT(A) has ,directed to allow exemption on profits earned on bank account of the company following the decision of this Tribunal. The learned counsel has also placed before us the order of this Tribunal, dated 8-11-2002 in R.As. "Nos. 673 and 674/KB of 2002 (Assessment years 1999-2000 and 2000-2001) wherein in the case of the taxpayer, reference applications filed by the Department for the two years have been dismissed with the observation that "The provisions of clause (176) of 2nd Schedule of the Income Tax Ordinance, 1979 are very clear and unambiguous and provide exemption to the income of the power' project without placing any restriction to the effect that the exempt income should only relate to the power supply receipts etc." With these observations, this Tribunal has inclined to agree with the contention of the learned counsel for the appellant and decline to refer questions framed by the Department to the Hon'ble High Court. The learned counsel has contended that the Department has, however, filed reference applications before the Hon'ble High Court which are still .pending. He has contended that under section 124A of the Income Tax Ordinance, 2001, it has been specifically provided that "Where a question of law has been decided by High Court or the Appellate Tribunal in the case of a taxpayer, on or after 1st day of July, 2002, the Commissioner may, notwithstanding that he has preferred an appeal against the decision of the High Court or made an application for reference against the order of the Appellate Tribunal, as the case may be, follow the said decision in the case of the said taxpayer in so far as it applies to said question of law arising in any assessment pending before the Commissioner until the decision of the High Court of the Appellate Tribunal is reversed or modified'.'. He has, therefore, contended that as the law point has been .decided by this Tribunal, the Commissioner in this case was bound to accept the pronouncement as made by this Tribunal and there was no justification for rejecting the appeal filed by the taxpayer. The learned counsel has, therefore, contended that the appeal filed by the taxpayer may please be allowed and order passed by Inspecting Additional Commissioner under section 122 (5A) of the Ordinance, 2001 be declared to be illegal, without any jurisdiction and having no force of law.
On the other hand, Mr. Faheem-ul-Haq is representing the Department and has contended that clause (176) of the repealed Ordinance, 1979 which in the present Ordinance, 2001 is clause (132) of the 2nd Schedule provide exemption only regarding "profits and gains" and whole income of the power generating units is not exempt. He has, in this respect, referred subsection (24) of section 2 of the repealed Income Tax Ordinance, 1979 which defines income in so far as to include "profits and gains" as one of its part. The learned DR, in this respect, has referred the decision of Indian Jurisdiction in the case of CIT v. Shart Meattle reported as (1973) 90 ITR 385 wherein, it has been held that "The word "income" as used in the Income Tax Act has often been characterized by judicial decision as formidably wide and .vague in its scope. It is a word of elastic import and its extent is not controlled and is pat governed by the word "Profits and Gains". In this regard, he has referred another case of Indian Jurisdiction in the matter of Commissioner of Income Tax v. Express News Papers Limited reported as (1960) 40 ITR 38 wherein while dilating upon the words "profits and gains", it is held that "Words profits and gains of business have distend meaning under the Act, and it cannot include another equally distend concept recognized by the Act, viz a capital gain and profits and gains ofthe business referred to therein should therefore be limited in their meaning to the head of income referred to in section 6(iv)". According to the learned DR, this is nonetheless, very important to distinguish between the word "Profits and Gains" and "Any Income" as used in the Second Schedule to the repealed Income Tax Ordinance, 1979 and according to the learned DR, it is very essential that the two terms may not be confused with each other. He has contended that while granting exemption legislature has intentionally used the "Profits and Gains" under clause (176) of the .Second Schedule to the repealed Income Tax Ordinance, 1979 and under clause (132) of the Second Schedule to the Income Tax Ordinance, 2001. According to the learned DR, there are other exemption clauses which open up with the words "any income derived" and therefore these clauses clearly show that wherever the intention of the legislature is to the extent of exemption only for "profits and gains", or "income" arising under all heads. He has, in this respect, referred section 15 of the repealed Income Tax Ordinance, .1979, where the words "any income derived" has been used. The learned DR, in this respect, has also referred the decision of this Tribunal, dated 30-3-1999 in LT.A. No.955/KB of 1998-99 in the case of Messrs Tri Pack Films Limited wherein income was exempt under clause (118C), which is regarding exemption of profits and gains derived from industrial undertaking. He has contended that in this case interest income has been disallowed. According to the learned DR, interest income squarely falls under the purview of section 30 as "Income from other sources" and not "business income" assessable under section 22/23 of the repealed Ordinance, 1979. The learned counsel, in this regard, has also referred the decision of -this Tribunal reported as 1990 PTD 708 and 1998 PTD 3179.
We have heard the learned representatives from both the sides and have also perused the impugned order of the learned CIT(A) and the assessment orders.
We have found that in this case for both the Tax Years i.e. 2003 and 2004, taxpayer being limited company incorporated under Companies Ordinance conducting business of power generation has filed returns declaring NIL income. Profits and gains of power generation were granted exemption previously vide clause (176) of the Second Schedule to the repealed Ordinance, 1979 which are in similar manner exempted under clause (132) of the Second Schedule in the new Ordinance, 2001. For both the years, returns stand accepted under section 120 of the Income Tax Ordinance, 2001 and orders deemed to be passed. For both the years under review, Inspecting Additional Commissioner has reopened the case with nearly similar following observations:--
"The said order was examined. Thereafter, it is observed that the taxpayer had claimed to earn profit on debts as per statement of accounts. However, this income was also claimed to be exempt along with the profits and gains of the power generation. The claim of exemption on profit on debts was not legally correct as clause (132) of the Second Schedule annexed to the Income Tax Ordinance, 2001, grants exemption to the profit and gain only and it could not be extended to the profit on debts. As the income covered under section 39 was also granted exemption, therefore the order was erroneous and had caused loss of revenue".
After issuing notices, vide order, dated 14-2-2005 for Tax Year, 2003 and vide order, dated 19-5-2005 for Tax Year, 2004, Inspecting Additional Commissioner has made the additions on profit of debts for the two years. At the first appellate stage, the appeal was filed by the g taxpayer for Tax Year, '2004, which has been allowed vide the above referred impugned order of the learned CIT(A), dated 31-8-2005 with' the following observations:--
"After examining the relevant materials filed by the appellant, I am of the firm opinion that Taxation Officer passed the order in a slipshod manner. He has not taken into account the (not legible) as indicated by the learned AR in his submission. In the preceding year the undersigned passed the order and directed the DCIT to allow exemption to profits on bank deposits, in this regard department's second appeal was dismissed by the ITAT. Keeping identical facts and circumstances of the case the order treated as issued was neither erroneous nor prejudicial to interest of revenue. The action of taxation officer passing the impugned order under section 122(5A) of the Ordinance is ab initio illegal and therefore cannot be upheld. It would not be out of place to mention here the case of LT.A. No. 136/KB of 1998-99 as Division Bench of Hon'ble I.T.A.T. has held that:--
"..The exemption allowed is not from the sale of electricity generated by the appellant but the exemption has been allowed to the profits and gains from the entire project. It is the profit and gains from the entire project. It is absolutely necessary to open the bank account in order to run the project and therefore interest income is part of the profits and gains derived from an electric power generation project. It is therefore held that the learned two officers below were not justified in taxing the interest income which is hereby deleted. "
Keeping in view the above mentioned facts and as well as .respectfully following the appellant's history at learned ITAT's level I deem it fit to direct the taxation officer to follow the direction contained in learned ITAT's order and allow exemption in accordance with law. Since the entire profits of the project are exempt therefore WWF cannot be levied on exempt income the same is hereby deleted. Regarding the .issuance of notice under section 184 for levy of penalty, it is noted that taxation officer has neither given specific findings on the point of concealment nor he confronted the same therefore issuance of notice under section 184 is hereby vacated."
While for Tax Year, 2003, the order passed under section 122(5A) as been confirmed by the learned CIT(A) with the following observations:--
"The plain reading of the pare reproduced from the judgment supra vis-a-vis facts of this case reveals that interest income earned by the appellant, specially on TDR of Rs.65(M), is quite different and distinct from the profit- and gains derived from power generation project exempt under clause (176) of Second Schedule to the R.O. Ordinance, 1979. Moreover, in the case of appellant the interest income is not arising to him in a normal course of business of power generation project but it is accruing to the appellant by a scheme of .investment where by certain sums of money have been kept under TDR consciously to earn fixed profits other than the variable profits or gains enjoying special dispensation of exemption under the law. Of course such income which is earned through fixed deposits bearing fixed rates of returns cannot be termed as profit or gain arising out of business power generation project by any stretch of imagination. I am therefore, of the considerate view that the T.O. has rightly brought the interest income to tax and his action is fully justified which is upheld and confirmed".
We have further noted that this Tribunal vide order, dated 16-8-2003 in I.T.A. No. 2145/KB of 2002 (Assessment year 2001-2002) and for the assessment year. 2002-2003 vide order, dated 7-4-2004 in I.T.A. No.183/KB of 2003 has already directed the Taxation Officer to allow exemption on profits earned on bank account of the company while allowing the appeal for the assessment year 2001-2002 and upholding the impugned order of the learned CIT(A) for the assessment year 2002-2003 placing reliance on the decision of this Tribunal referred by the learned counsel reported as 1999 PTD (Trib.) 1528 wherein, it has been held as under: --
"that the incomes enumerated in Part-I of the Second Schedule of the Income Tax Ordinance, 1979, being incomes as defined under subsection (24) of section 2 are part of the total income as defined under subsection (44) of section 2 liable to charge tax under sections 9 and 10 of the Income Tax Ordinance, 1979. It was further held that since the charge under section 9 as well as under section 10 is subject to the provisions of the Ordinance and since clause (a) of subsection (1) of section 14 and the clauses of 'Part-I of the Second Schedule provide that incomes enumerated therein shall be exempt from tax".
Another decision of this Tribunal reported as 2003 PTD (Trib.) 1643was also referred in that order. The judgment of the Hon'ble Supreme Court referred by the IAC in the order passed under section 122(5A) as well as by the learned CIT(A) has also been discussed in the order of this Tribunal, dated 16-8-2003 with the following observations:--
"this judgment of the Honourable Supreme Court of Pakistan. is not relevant, as the judgment is not regarding exempt income, rather it is supporting the appellant as, in this case, it has been specifically held that each case must be decided on its own facts".
We have further noted that this Tribunal vide order, dated 8-11-2002 has already rejected the reference applications refusing to refer the questions framed by the Department in this case in R.As. Nos. 673 and 674/KB of 2002 (Assessment years 1999-2000 and 2000-2001).
In view of the decisions of this Tribunal referred supra, we find no justification for rejection of claim of exemption for the Tax Year, 2003, as the learned CIT(A) without keeping in view specific provisions of law i.e. 124A regarding powers of tax authorities to modify the orders has rejected the appeal filed by the taxpayer. Relevant section 124A of the Income Tax Ordinance, 2001 for the facility of the decision is, therefore, reproduced as under:--
Section 124A:
(1) "Where a questions of law has been decided by High Court or the Appellate Tribunal in the case of a taxpayer, on or after 1st day of July, 2002, the Commissioner may, notwithstanding that he has preferred an appeal against the decision of the High Court or made an application for reference against the order of the Appellate Tribunal, as the case may be, follow the said decision in the case of the said taxpayer insofar as it applies to said question of law .arising in any assessment pending before the Commissioner until the decision of the High Court or of the Appellate Tribunal is reversed or modified" .
(2) In case the decision of High Court or the Appellate Tribunal, referred to in subsection (1), is reversed or modified, the Commissioner may, notwithstanding the expiry of period of limitation prescribed for making any assessment or order, within a period of one year from the date of receipt of decision, modify the assessment or order in which the said decision was applied so that it conforms to the final decision".
Keeping in view the above legal position, we find no justification for rejection of the appeal for Tax Year, 2003 by the learned CIT(A). The impugned order, in this respect, is therefore, vacated. Even-otherwise, regarding second. legal issue raised by the earned counsel for the taxpayer that order for both the years in this case under section 122(5A) of the Ordinance, 2001 have been passed by the Inspecting Additional Commissioner, which is unknown authority in the Income Tax Ordinance, 2001. In this regard, the learned counsel for the taxpayer has placed before this Bench, the Notification, dated 28-11-2002 through which the powers have been delegated by the Commissioner, but in that Notification also, no powers have been given to any Inspecting Additional Commissioner, as in .the new Ordinance, 2001, there is no such authority. The learned counsel has also placed before us the decision this Tribunal reported as 2006 PTD (Trib.) 1778 wherein at page 1785, it has been specifically held that "subsection (1A) in section 210 was inserted by Finance Act, 2004, so the delegation of authority to any officer of the rank of Additional Commissioner could become legally possible after this date, when there was such provision in the statute book, the order passed under section 122 is devoid of legal sanction behind it". It has further been held in that reported decision that "there is no such authority in the new Ordinance, which has been designated as Inspecting Additional Commissioner. The assuming of jurisdiction by an authority designated as Inspecting Additional Commissioner is ab initio void and of no legal consequence".
In view of these observations made by this Tribunal, the order passed by the Inspecting Additional Commissioner for two .Tax Years under review at this score are, therefore, also cancelled. The impugned order for the Tax Year, 2003 is vacated while for the Tax Year, 2004 is upheld.
Regarding the contention as made by the learned DR, we are of the view that due to above discussed legal issues, those contentions do not carry any weight, as the cases referred by the learned DR are from Indian Jurisdiction and due to above discussed legal position are not being considered in the instant case.
Consequently, the appeal filed by the taxpayer for Tax Year, 2003 is allowed, while the appeal filed by the Department for Tax Year, 2004 is dismissed.
(Sd.)
(JAWAID MASOOD TAHIR BHATTI)
JUDICIAL MEMBER
1. I have very carefully examined the order of my learned brother, the Judicial Member of this Division Bench whereby he has:
(i) allowed the appellant company's claim of exemption to the interest income for the Tax year, 2003 under clause (132) of the Second Schedule to the Income Tax Ordinance, 2001 (which is similar to the clause (176) of the Second Schedule to the repealed Income Tax, Ordinance, 1979) and has ordered to vacate the order of the learned CIT(A) who had rejected the said claim of exemption on the interest income; and
(ii) cancelled the orders under section 122(5A) of the Income Tax Ordinance, 2001 for both the Tax years, 2003 and 2004 since assuming the jurisdiction by an authority designated as Inspecting Additional Commissioner is ab initio void and of no .legal consequence. Accordingly, the learned CIT(A)'s order for Tax year, 2003 has been vacated and for the Tax year 2004 has been upheld by my learned brother.
2. As a consequence, the learned Judicial Member of this Division Bench has allowed the appeal filed by the, taxpayer for the Tax year 2003 and has dismissed the appeal filed by the Department for the Tax year, 2004.
3. In the case before us, the taxpayer is a limited company, incorporated to conduct the business of power generation, filed returns of income declaring NIL income for the both Tax Years, claiming exemption under clause (132) of the Income Tax Ordinance, 2001 (hereinafter referred to as the Ordinance). The returns stand treated as deemed assessment orders in terms of section 120 of the Ordinance. Admittedly, the taxpayer has also earned profit on debt which has also been claimed as exempt under the clause (132) ibid. Through two separate orders the T.O./Inspecting Additional Commissioner proceeded to amend the deemed assessment orders whereby profit on debt declared by the taxpayer has been charged to tax under section 39 of the Ordinance (which is similar to section 30 of the repealed Income Tax Ordinance, 1979) and the exemption claimed under clause (132) ibid on profit on debt has been refused. On first appeal, the learned CIT(A) for the Tax year, 2003 has held that the income earned through fixed deposits bearing fixed rates of return cannot be termed as profit or gains arising out of the business of power generation project and has confirmed the Taxation Officer's action to charge tax on interest income. Whereas, for the Tax year 2004, the .learned CIT(A) relying on her order for the preceding year and the ITAT's order in I.T.A. No.136/KB of 1998-99 has declared the Taxation Officer's order to be ab initio illegal and has directed the Taxation Officer to follow the directions contained in the ITAT's order supra and allow exemption in accordance with law.
4. On the issue of taxability of the profit on debt from deposits with banks (earlier called as interest income from deposits with banks), their Lordships of the Hon'ble Supreme Court of Pakistan have decided the issue in a number of cases as follows:--
(i) Civil Petitions Nos. 2211-L and 2212-L of 2005
Messrs AES Pak. Gen (Pvt.) Ltd. v. CIT
We have heard the learned counsel for the parties and have also gone through the judgment relied upon by the High Court for disposing of .the above references. It will be appropriate to reproduce the relevant para. therefrom herein below:--
"Now question for consideration is as to whether interest earned by the appellants from the share capital deposited in the Banks does fall within the scope of "income from other sources" under section 30 of the Ordinance. To answer the proposition it is to be borne in mind that Item 176 of Second Schedule of the Ordinance provides in clear terms that "profits and gains derived by an assessee from Electric Power Generation Project, set up in Pakistan on or after 1st of July, 1998 shall be .exempted from total income tax".
Essentially, profits and gains from the Electric Power Generation Project is distinct and different from the interest being obtained by the Company on the deposit of share capital in the Banks, during the financial years for which the return of income under the relevant provision of Ordinance is filed and the exemption is claimed from the payment of income tax under Item 176 of Second Schedule of the Ordinance. It is informed that Electric Generating Plants of appellants companies had started functioning in 1994-95 but they instead of claiming exemption on the profits/gains from Power Generation, claimed it from the deposit of the share capital lying in the Banks. It is to be seen that no sooner as a Company goes in production it cannot claim exemption. of income tax on the interest of share capital deposited in Banks because on commencement of the .production, profits and gains are to be earned out of the income of Electric Generation independently. "
In view of the above- findings/observations we are of the considered opinion that the petitioner is not entitled for exemption of Tax on the interest which has accrued on the amount which has been accumulated/generated for the purpose of installing power generation plant because such exemption would only be admissible on the profit/gain earned from sale of electricity generated after setting up the power generating plant of the petitioner.
Learned counsel next contended that the petitioner would be entitled to claim adjustment/set off of the above interest income against the interest/money, which it was paying on the capital borrowed by it for installation of the power generation plant. This contention was vehemently controverted by the counsel for the respondent stating that such claim of adjustment/set off counsel be alloyed only if any provision of the Ordinance or any other law permitted so and further submitted that as neither there was any provision in the Ordinance nor in any other law, the High Court rightly disallowed the claim of set off referring to sections 34 to 38 of the Ordinance which dealt with set off and carry forward of business losses.
Learned counsel for respondent also relied on the judgment in the case of Tuticorio Alkaku Chemical and Fertilizers Ltd. v. Commissioner of Income Tax (1998 PTD 900) in support of his contention that petitioner is not entitled for the said claim. Relevant para therefrom is reproduced herein below:--
"It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilizing the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh v. CIT (1938) 6 ITR 157 (All.) that "anything which can properly be described as income is taxable under the Act unless expressly exempted". The interest earned by the assessee is clearly its income and unless it can be shown that any provision like section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract from the revenue character of the receipt. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that is not the case here. The assessee may be entitled to, capitalize the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditure, which are allowable as deduction from income assessable under section 56, it is not the case of the assessee that the interest payable by it on term loons is allowable as deduction under section 57 of the Act.
From a bare perusal of the paragraph reproduced from the judgment of Tuticorio Alkali Chemical and Fertilizers Ltd. v. Commissioner of Income Tax (1998 PTD 900) it may be observed that the Supreme Court of India after considering relevant provisions of the Indian Income Tax Act, 1961 pronounced that anything which can properly be described as income is taxable under the Act unless expressly exempted and further that, payment of interest on the capital generated/borrowed by the petitioner for starting a business venture would not be adjustable or it could be set off against the income accruing to it by investing/utilizing the generated/borrowed capital or part thereof and earning interest thereon. There is no provision in the Ordinance exemption such income from being charged to tax.
For the above facts, reasons and discussion these petitions are found to be without any substance and are accordingly dismissed. Leave to appeal is declined. "
(ii) DTPSC 0016: 5 Tax 262: 1962 PTD 415: 1962 PTD 128
"Business income---Interest---Company's normal business construction and running of Railway---Articles of Association empowering Company to invest money---Surplus money deposited in bank---Interest on deposit---Whether normal business income---Held no.
Company engaged in "construction and running" of Railway Deposit of surplus moneys in Bank---Articles of association allowing company to "invest money"---Interest derived from deposit, held, not "income" from normal business in circumstances of case---".
5. In another case cited as 91 Tax 281/2005 PTD 296, the ITAT has held:-
"Income Tax Ordinance, 1979---Sections 14, 30 and Second Sched., Clause (176)---
Income from other sources---Power generating plant---Deposit of security in Sui Gas Department---Interest income---Exemption Disallowance---Validity---Whether income from security deposit may be income of company but not of power generation project---Held yes---Whether no other income except one which is earned by power generation plant on sale of electricity qualifies for exemption under Clause (176) of Second Schedule---Held yes---Whether interest income is not composite income in terms of Clause (176) Held yes---
6. Respectfully following the judgments cited supra, I am of the considered opinion that the profit on debt earned by the instant taxpayer is chargeable to tax under section 39 of the Ordinance and does not enjoy g exemption under clause (132) ibid being not profit or gains derived from the sale of electricity from the power generation project.
7. On the issue of authority that has passed impugned orders under section 122(5A) of the Ordinance, it transpires that the designation mentioned on both the said orders is that of TO/Inspecting Additional Commissioner. The designation `TO' stands for `Taxation Officer' which is defined in section 2(65) of the Ordinance to also include `Additional Commissioner'. The orders have been passed by the Departmental Officer in the capacity of a `Taxation Officer' who is also an Additional Commissioner. Accordingly, I am of the considered opinion that the orders under section 122(5A) passed for both the Tax Years under appeal suffer from no legal infirmity and merely incorrect use, of second designation as `Inspecting Additional Commissioner' does not prejudice the Departmental stand on the chargeability of profit on debt under section 39 of the Ordinance.
8. As a consequence, the appeal filed by the taxpayer for the Tax Year 2003 is dismissed being devoid of merit and the appeal filed by the Department for Tax Year 2004 is allowed by vacating the order of the learned CIT(A) and restoring the order of the Taxation Officer under section 122(5A).
9. In view of the foregoing differences of opinion recorded by me in this case, the matter is required to be referred to the third member by Hon'ble Chairman, ITAT on the questions formulated as follows:--
(i) Whether, in view of the cases cited supra, the taxpayer enjoys exemption from tax under Clause (132) of Second Schedule to the Income Tax Ordinance, 2001 on its income as profit on debt earned from bank deposits?.
(ii) Whether, the income earned by the taxpayer as profit on debt from bank deposits is not' chargeable to tax under section 39 of the Income Tax Ordinance, 2001?
(iii) Whether the orders under section 122(5A) of the Income Tax Ordinance, 2001 passed by the Taxation Officer suffer from any legal infirmity?;
(iv) Whether the orders passed under section 122(5A) of the Ordinance can be held to be ab initio void in the presence of the correct designation as 'Taxation Officer' recorded on the said orders? And
(v) Whether incorrect recording of designation as "Inspecting Additional Commissioner' on the orders passed under section 122(5A) of the Ordinance would prejudice the interest of revenue safeguarded by the Legislature in section 122(5A)?
(Sd. )
(SHAHID AZAM KHAN)
ACCOUNTANT MEMBER
10. This appeal on behalf of the tax payer has been referred to me by a Division Bench to resolve the difference of opinion. The five questions which have already been narrated at page 21 are as under:--
(i) Whether, in view of the cases cited supra, the taxpayer enjoys exemption from tax under clause (132) of Second Schedule to the Income Tax Ordinance, 2001 on its income as profit on debt earned from bank deposits?.
(ii) Whether, in income earned by the taxpayer as profit on debt from bank deposits is not chargeable to tax under section 39 of the Income Tax Ordinance, 2001?
(iii) Whether the orders under section 122(5A) of the Income .Tax Ordinance, 2001 passed by the Taxation Officer suffer from any legal infirmity?
(iv) Whether the orders passed under section 122(5A) of the Ordinance can be held to be ab initio void in the presence of the correct designation as `Taxation Officer' recorded on the said orders? and
(v) Whether incorrect recording of designation as `Inspecting Additional Commissioner' on the orders passed under section 122(5A) of the Ordinance would prejudice the interest of revenue safeguarded by the Legislature in section 122(5A)?.
11. The A.R. of the assesses referring to the issue came out with combined arguments and he did not take up above questions one by one.
12. The learned AR firstly objected to cancellation of the assessment by the .Taxation Officer/Inspecting Assistant Commissioner. Hs said that nomenclature "Inspecting Assistant Commissioner" does not exist in the Income Tax Ordinance, 2001. He also objected to the cancellation by the IAC by arguing that said powers are assigned by the Finance Act, 2004 while the delegation of the power to the said IAC was in the end of 2002 i.e. prior to insertion of the provision. In support of his contention he referred a judgment of the ITAT Lahore in the case reported as 2006 PTD (Trib.) 1778. The judgment says that the provision inserted by the Finance Act, 2004 in section 210(1A) would not give life under section 122(5A) prior to the said insertion to the delegation of power to the Additional Commissioner for cancellation of the order in my humble opinion the Court was not properly assisted at the time of hearing of the said order while the same is in respect of assessment year 1999-2000. Since in the famous case of Honda Shahra-e-Faisal the provision of Income Tax Ordinance, 2001, with specific reference to section 122(5A) has been held to be as inapplicable. I would not make further comments on the said judgment. However, I am unable to subscribe to the views of the learned A.R. for the obvious reason that said judgment is in respect of an assessment which is prior to application of Income Tax Ordinance, 2001. The other judgment is by the Lahore Bench it is reported as 2006 PTD 1515 is also not relevant to the issue. The action taken therein is also in respect of the assessments prior to the Income Tax Ordinance, 2001. Regarding claim of the assesses that IAC does not figure as an authority. The Ordinance, 2001 has defined the Taxation Officer and it includes all such officers who have been so appointed. As per section 2(65) the DCIT as well as the Additional Commissioner (BPS-19) can be made as Taxation Officer by the Commissioner of Income Tax. The amendment in law in section 210(1A) has only drawn a line in respect of delegation of the power by the Commissioner of Income Tax. It says that the power under section 122(5A) was not to be assigned to an officer less than an officer of the rank of an Additional Commissioner. This obviously means that prior to the said date the Commissioner of Income Tax could delegate the power to cancel an order under section 122(5A) to a Taxation Officer of Grade 17 or Grade 18 in addition to Grade 19. It does not have any effect in respect of the proceedings initiated and continued by the department specially for the reason that the order was cancelled after the insertion of the said provision. This is notwithstanding the fact that the Commissioner of Income-Tax always had the powers to assign the powers to cancel the order under section 122(5A) to Taxation Officer of any rank before said amendment. However, after 1-7-2004 he can now delegate the power of cancellation of an order to an Additional Commissioner only. Obviously- the facts and circumstances of the case are not hit by any mischief of section.
13. Coming to the main issue in this case the A.R. says that in the case of this assesses the Tribunal in its Single Bench case had allowed interest income as income from power generation project. The judgment is in respect of the proceedings relating to assessment year 2001-2002 and 2002-2003. He said that these judgments are binding on the department by virtue of section 124(A). I agree with the learned A.R. to this extent that this provision has come to control the highhandedness of some of the Revenue officers. However now that the proceeding are before the Income Tax Appellate Tribunal, we have to move by the principle of stare decisis. We have in more than half a dozen of the cases; .some of which I am the author, have held that the power generation project is entitled to the exemption of income from power generation only. Moreover, in famous judgment of the Hon'ble Supreme Court in the case reported as 2004 PTD 2255 (Messrs Genertech Pakistan Limited) the interest income earned by an exempt unit (power plant) has already been held as taxable. The learned AR tried to distinguish this case by saying that in the case of Genertech Pakistan Limited, the assessee had an option either to earn interest income or not, as said interest income could be termed as that from `other sources' and not from power generation. However, since in this case and in similar like cases, it is in a way compulsion to retain a bank account for the payment of salary etc. the interest receipt is an ancillary income. The same, therefore, should be considered as part and parcel of income from power generation.
14. This distinction is of no help: This Tribunal by holding income from power generation to be as the only exempt income under the erstwhile Ordinance, 1979 has held all other sources of the said project to be as taxable. In this regard its clause (176) of the then Second Sched. is pari matreia to clause (132) of the Second Schedule of the Ordinance, 2001. The golden principle of interpretation is application of law as it is the other principle which is in respect of doubt in the language of law, however, says that if it is a charging provision the doubt should be resolved in favour of taxpayer. This principle again have one exception. It is otherwise if the interpretation of a provision that grants exemption, is involved. This is for obvious reason that exemption provision comes as a favour, a special concession to one person, against millions of other taxpayers of the country. In such like situation, one can only be granted exemption if he comes within the fours of the language of law. The doubt in case of grant of exemption is fatal and is always resolved in favour of the department. I do not think that a lot of discussion would be required in this case. I, therefore, agree with the learned Accountant Member that in this case neither technically nor factually interest income earned from bank could be declared as exempt. The action of the Assessing Officer of charging tax on interest income by considering the same as not auxiliary or ancillary of the income of power .generation is held to be as fully justified and the appeals are accordingly disposed of. Furthermore, in the presence of the judgment of Genertech (Pvt.) Ltd. decided by the Supreme Court of Pakistan already referred above there is no question of a contrary view.
15. The above findings cover all the five questions raised by the Division Bench.
C.M.A./131/Tax (Trib.)Order accordingly.