I.T.As. Nos.5767/LB and 5768/LB of 2004 and 4944/LB to 4948/LB and 4954/LB of 2005, decided on 27th April, 2006. VS I.T.As. Nos.5767/LB and 5768/LB of 2004 and 4944/LB to 4948/LB and 4954/LB of 2005, decided on 27th April, 2006., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 406 (2006)

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

----S. 34---Set off of losses---Nature of the provisions---Provisions of S.34 of the income Tax Ordinance, 1979 were clearly substantive in nature and by no stretch of imagination could be held to be of exemption/concessionary nature.

1992 PTD 1141 and 2005 PTD 2430 distinguished.

2005 PTD 1621; 1998 PTD 3866 and 51 Tax. 222 rel.

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

----S.34---Set off of losses---Scope---Convention of the department that entitlement of the assessee to set off loss suffered under a head of income is restricted to choosing a `head of income' and not the `source of income' within a particular `head' is an attempt to restrict or narrow down the scope of a substantive provision which is neither the intention nor the purpose of the legislation.

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

----S. 34---Income Tax Ordinance (XLIX of 2001), S.122---Set off of the business loss against the dividend income---Validity---Set off of the business loss against the dividend income, seemed to be against the principles of equity particularly in the circumstances where if there had been a business income that would have been subjected to tax at the rate applicable to interest income and not the dividend income---Present one was a simple case of comparing like with like under which principle again no room existed for setting off the business loss against the dividend income--No exception could be taken to the findings recorded by the First Appellate Authority that the business loss computed in the case of assessee was required to be set off against the interest income and not the dividend income.

2005 PTD 1621 and 1998 PTD 3866 rel.

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

----S. 156---Income Tax Ordinance (XLIX of 2001), Ss. 221 & 122---Rectification---Computation of limitation---Where a rectification was carried out on a matter which was not the subject of subsequent proceedings the time limitation would always be computed from the date of original assessment--Amendment proceedings never involved in issue i.e. computation of rebate on donations---Consequently,, time limitation of four years would be considered from date of original assessment which had expired three months before the date of rectification order---Findings of First Appellate Authority that the rectification was barred by time was fully in accordance with law and did not call for any interference--Even otherwise if the contention of department was accepted that rectification was carried out in respect out in respect of amendment order, the same was again not maintainable because when amendment order had been found to be illegal then the subsequent rectification in respect thereof was also not maintainable and was illegal.

?

51 Tax 222; I.T.As. Nos. 1695-1696/LB of 2000, dated 14-5-2003 and I.T.A. No.1506/LB of 2001, dated 13-10-2003 rel.

Amjad Zubair Tiwana, D.C.I.T. for Appellant.

Asim Zulfiqar Ali, A.C.A. for Respondent.

ORDER

NASEER AHMAD (ACCOUNTANT MEMBER).---These eight appeals, pertaining to a Government owned company, have been filed by the Commissioner of Income Tax, Large Taxpayers Unit Lahore assailing the appellate orders passed by the first appellate authority in respect of assessment years 1996-97 through 2001-2002. Mr. Amjad Zubair Tiwana, DCIT, the author of the orders which were the subject of appeals before the first appellate authority, represented the Department whereas Mr. Asim Zulfiqar Ali, ACA along with Mr. Humza Ashraf, ACA from A.F. Ferguson and Co., Chartered Accountants appeared on behalf of the respondent/assessee. In view of the fact that the common issues are involved in the subject appeals, therefore, these are being disposed off through this consolidated order.

I.T.As. Nos. 4944 to 4948 and 4954

(Assessment Years 1996-97 through 2001-2002)

2. Brief facts in these appeals are that the original assessments, for the assessment years under consideration were finalized under section 62 of the repealed Income Tax Ordinance, 1979 (hereinafter repealed Ordinance') through orders, dated 30-9-1998 (assessment years 1996-97 and 1997-98), 5-12-2000 (assessment years 1998-99 and 1999-2000), 2-4-2001 (assessment year 2000-2001) and 15-5-2002 (assessment year 2001-2002). In the assessment orders the declared version of the respondent/assessee was principally accepted by the Assessing Officer, however certain issues relating to excess perquisites and claim of depreciation etc. were raised which were taken up either through rectification application or appeals before the First Appellate Authority. These issues, which originated from the original assessment proceedings are not the subject-matter of the present appeals.

3. For assessment years 1996-97 and 1997-98 amendment proceedings were initiated through issuance of notice under section 122 of the Income Tax Ordinance, 2001 (hereinafter `new Ordinance') on 28-9-2002 in which the Assessing Officer showed intentions to allocate/ prorate part of the expenses claimed in the financial statements to the dividend income derived by the respondent/assessee which was admittedly chargeable to tax at a reduced rate of 5%. Similarly for assessment years 1998-99 through 2001-2002 the amendment proceedings were initiated through issuance of a similar notice, dated 7-10-2002. Feeling dissatisfied with the response of the respondent! assessee, the proceedings initiated under section 122 of the new Ordinance were finalized for assessment years 1996-97 and 1997-98 through consolidated order, dated 30-9-2002 and through consolidated order, dated 31-5-2003 for assessment years 1998-99 through 2001-2002.

4. Feeling aggrieved by the amendment proceedings, the respondent assessee filed appeals before the first appellate authority who, in view of separate appeals filed on different dates, remanded the matter back for fresh adjudication with following directions. (given in both sets of appeals).

"???.

Identify the different nature of income and the head under which these are to be classified. This exercise is to be done strictly on the basis of the facts of the case and specially keeping in mind the Memorandum of Association and the case laws referred to above.

Identify the expenses in addition to commission, if any, incurred "wholly and exclusively" for the purpose of earning dividend income. This exercise is to be done by the T.O. in accordance with the principle laid down by the I.T.A.T. in the judgment reported as 1992 PTD 1141.

If no expense is identified by the T.O. then no allocation of expenses can be made to Dividend income:

Provide adequate opportunity to the assessee for submitting its reply.

?.."

It is an admitted position that both the Department and the respondent/assessee accepted the decision of the first appellate authority given in the first round of appellate proceedings as no further appeal was filed by either party against the aforesaid findings of the first appellate authority. . In the remand proceedings, which were taken up together in respect of both the appellate orders, the learned Assessing Officer concluded that none of the expenses, claimed in the financial statements could be related to the dividend income of the respondent/assessee and in this way he proceeded to compute business loss in the hands of the respondent/ assessee. In computing the aforesaid business loss the learned Assessing Officer concluded that the entire receipts on account of `interest' and `dividend' qualify for classification as `income from other sources' whereas the receipts on account of `user charges' and `agency commission' are to be taken as business receipts against which entire expenditure qualifies to be an admissible deduction.

5. In the finalization of remand proceedings the Assessing Officer took a position that the aforesaid business loss is liable to be set off against the dividend income as against the contention taken by the respondent/assessee before the Assessing Officer that the business loss should be set off against the interest income. The effect of above rival positions was that the Assessing Officer wanted to reduce the income chargeable to tax at reduced rate whereas the respondent/assessee wanted to minimize the income chargeable to tax at corporate rate of tax. The Assessing Officer in drawing the above conclusion held that since the provisions of section 34 of the repealed Ordinance were of an exemption/concession nature, therefore, these were to be interpreted to the benefit of the Revenue. The Assessing Officer also held that the entitlement of an assessee, under the provisions of section 34 of the repealed Ordinance, is restricted to choose only the `head of income' and not the `source of income' within any particular `head of income'. Also in the remand proceedings, the Assessing Officer subjected to tax the income from Defense Saving Certificates, which had all along, in the entire earlier rounds of proceedings, were treated as exempt income.

6. The respondent-assessee feeling aggrieved by the remand order, dated 11-6-2004 again filed appeals before the first appellate authority assailing the above action of the Assessing Officer regarding the interpretation of section 34 of the repealed Ordinance. Before the first appellate authority the respondent/assessee also argued that the entire proceedings were void ab initio in view of the finding of Lahore High Court reported as 2005 PTD 1621 as subsequently confirmed by the-Supreme Court of Pakistan. It was the contention of the respondent/ assessee, in this respect, that since the very basis of the entire proceedings were illegal, therefore all subsequent proceedings were illegal also. The above argument of the respondent/assessee was based on another reported judgment in which it has been ruled that judicial pronouncements of a Court apply retrospectively to all pending cases and also to cases which have not become past and closed transactions. The first appellate authority in the consolidated appellate order, ,which is impugned before us, observed that not only the proceedings were illegal but also the interpretation of section 34 of the repealed Ordinance was contrary to the spirit and purpose behind the legislation. The aforesaid finding of the first appellate authority has forced the Department to file these appeals. The exemption in respect of income from Defence Saving Certificate, was also reinstated.

7. We have heard the arguments put forth by both the parties, examined the record and considered the case laws relied upon by the respective parties. The learned DR has vehemently argued that the findings recorded by the first appellate authority, being contrary to the law, are not maintainable, Opening the arguments on behalf of the Department the learned D.R. argued that the first appellate authority grossly erred in declaring the entire proceedings as illegal as the original action under section 122 of the new Ordinance was upheld by the first appellate authority in the first round of proceedings against which no further appeal was filed by the respondent/assessee. Since the upholding of the action by the first appellate authority and its subsequent acceptance by the respondent/assessee makes the matter a past and closed transaction, therefore, the plea of the respondent/assessee before the first appellate authority and its acceptance is contrary to law. In this context the learned D.R. also relied upon a judgment of Lahore High Court (2005 PTD 2430) wherein, in the context of section 65 of the repealed Ordinance, it was held by the learned Court that when the case is remanded by the first appellate authority, the issue of jurisdiction can be taken up before the Tribunal, and where that has not been done, it becomes a past and closed transaction and cannot be agitated before the High Court.

8. On the merits of the case the learned DR reiterated the stance taken in the reassessment order that provisions of section 34 of the repealed Ordinance being of an exemption/concessionary nature these are to be interpreted to the benefit of the revenue and not the taxpayer. In this respect the reference has been made to findings of both Indian and Pakistani jurisdictions where, in the context of exemption provisions of the above view has been confirmed. In connection with the taxation of the exempt income the learned DR conceded that the tax liability on this account resulted due to a mistake on the part of the Department and accordingly ground of appeal, on this issue, is not pressed.

9. The learned AR responding to the arguments of the learned DR argued that in view of the findings of the Lahore High Court (referred to above) in which proceedings initiated under section 122 of the new Ordinance, on the strength of S.R.O. 633(I)/2002, dated 14-9-2002, have been declared to be illegal and void, the learned first appellate authority acted fully in accordance with law while cancelling the entire proceedings. On the issue that the findings of the Lahore High Court also apply to the case of the respondent/assessee, reliance has been placed on a judgment reported as 1998 PTD 3866 where it was held that the retrospective effect of a judicial pronouncement, in pursuance of the interpretation of law, shall be applicable to all the pending cases as well as to the matters which have not attained finality and have not become closed and past matter. Commenting on the judgment relied upon by the learned D.R., it was argued that the facts and legal position of the judgment are distinguishable from the case of the respondent/assessee. In this respect it was submitted that in the reported judgment, relied upon by the learned D.R., the matter was agitated for the first time before the High Court whose jurisdiction is restricted to the matters arising out of' the order of the Appellate Tribunal. Secondly, the learned AR added, the judgment is also not relevant because section 65 as invoked in that case, was never interfered into or interpreted, in terms of its legality and validity, by any appellate authority as against the case of section 122 of the new Ordinance which has been held to be non-existent in the legal framework as was in force at the time of commencement of proceedings. It is the contention of the learned AR that when the original section has been held to be non existent then how could the subsequent proceedings can be regarded as valid.

10. On the merits, the learned AR submitted that the Assessing Officer has not been able to appreciate the facts and the ratio of judgment given in 51 Tax 222, the judgment relied upon not only before he Assessing Officer but also the first appellate authority. The ratio of the reported judgment is that the provisions of section 34 are substantive in nature and hence these should be interpreted to the benefit of the taxpayer which in fact is the purpose behind the enactment of these provisions. In the reported judgment it was held by their lordships, the learned AR further argued, that the action of the tax authorities of setting off the business loss against an income chargeable to tax at a. reduced rate is contrary to the spirit and purpose of section 34 of the repealed Ordinance. It was also argued that the contention of the Assessing Officer that provisions of section 34 are of an exemption/concessionary nature, is wholly misconceived as these extend a right to the taxpayer and hence these, in the light of well settled principles of law, are substantive provisions which arc always interpreted, in the case of a doubt or ambiguity, in the favour of the taxpayers.

11. After considering the lengthy arguments of the respective parties, we feel persuaded by the submissions put forth by the learned A.R. The provisions of section 34 are clearly substantive in nature and by no stretch of imagination can be held to be of exemption/ concessionary nature. The contention of the learned DR and the reliance on the case laws in this respect is wholly misconceived. The case laws relied upon by the learned D.R. relate to interpretation of exemption provisions which are not the subject-matter of the present appeals. In our view the -ratio of the judgment relied upon by the learned A.R. is a complete answer to the submissions of the learned D.R. The contention of the Department that entitlement of the assessec to set off loss suffered under a head of income is restricted to choose a `head of income' and not the `source of income' within a particular `head' is an attempt to restrict or narrow down the scope of a substantive provision which is neither the intention nor the purpose of this legislation. It would be appropriate if the related finding recoded by their lordships is reproduced hereunder as this precisely addresses the matter in hand:--

"(11) The perusal of section 24 makes it clear that it is the entitlement of the assessee to have his loss of profits, or gains in any year under any item mentioned in section 6 to be set off against his income, profits or gains under any other head in that year. The words used are "shall be entitled" and they seem to be giving to assessee an absolute right of having the loss set off against any other item under section 6. But if he does not avail of that entitlement or right, then he loses the general right of getting the loss set off against all the items mentioned in section 6 for the next or succeeding year and thereafter he has the limited right given under section 24(2) of Income Tax Act of getting his loss set off under income from the same head and from ho other head. We cannot allow a right given under subsection (1) of section 24 to be converted into a liability. In the present case the free reserves have been taxed and, therefore, the effect of setting off the loss against the free reserves is that the assessee gets a benefit of only 10% of the tax whereas if it had been allowed to carry on the loss to the next year then it could have not a set off against this loss towards an income from business or profession which would have been otherwise taxable at 50%. The net result, therefore, is that the assessee has in the total effect suffered the loss of saving 40% of his future tax. We are afraid that the same is against the spirit as well as the clear words of section 24 of the Income Tax Act."

12. The position taken by the learned D.R. in the present case, as held by their lordships, amounts to converting the right given under section 34 to a taxpayer into a liability. This is contrary to law and the intention behind the legislation. We would add that even otherwise the position of the Department, to set oft' the business loss against the dividend income, seems to be against the principles of equity particularly in the circumstances where if there had been a business income that would have been subjected to tax at the rate applicable to interest income c and not the dividend income. This is a simple case of comparing like with like under which principle again no room exists for setting off the business loss against the dividend income. No exception can be taken to the findings recorded by the learned first appellate authority in his detailed order whereby it has been concluded that the business loss computed in the case of the respondent/assessee was required to be set off against the interest income and not the dividend income as contended by the respondent/assessee. Similarly, we are also in agreement with the submissions of the learned AR that the entire proceedings are liable to be annulled in view of the clear verdict of Lahore High Court in (2005) 91 Tax 480 (H.C. Lah.) = 2005 PTD 1621. The strength drawn from 1998 PTD 3866 that the judicial pronouncements apply to all matters which have not attained finality is also well founded. The judgment relied upon by the Department, for the reasons advanced by the learned AR, is also distinguishable. Resultantly the appeals of the Department are dismissed on this account being devoid of any merit and substance. The appeals of the Department on the matter of exemption on Defence Saving Certificates, being withdrawn and not pressed, are also dismissed.

I.T.As. Nos. 5767 and 5768

(Assessment years 1996-97 and 1997-98)

13. Through these two appeals the Department has assailed the order of the first appellate authority, dated 3-7-2004 through which the learned first appellate authority annulled the consolidated rectification order, dated 31-12-2002 passed in respect of assessment years 1996-97 and 1997-98 under section 221 of the new Ordinance.

14. Facts in present appeals are that after finalization of amendment proceedings under section 122 of the new Ordinance through order, dated 30-9-2002 (facts already discussed above), the Assessing Officer initiated suo motu rectification proceedings on the grounds that rebate on donations to approved institutions, was wrongly allowed at corporate rate of tax as against the average rate of tax. Feeling not satisfied with the response of the respondent assessee the rectifications were carried out in the manner indicated in the show cause notice.

15. Feeling aggrieved by the rectification orders, the respondent/ assessee preferred appeals before the first appellate authority in which the action was contested to be barred by time in view of the fact that rectification was carried out after the lapse of statutory period of four years provided in section 156 of the repealed Ordinance, the 'provisions parallel to section 221 of the new Ordinance. The first appellate authority agreed with the contention of the respondent/assessee and cancelled the rectification order.

16. The Department, in appeals before us, has argued that the first appellate authority grossly erred in computing the period of four years from the date of original assessment orders passed under section 62 of the repealed Ordinance as the rectification was carried out in respect of amendment orders, dated 30-9-2002 passed under section 122 of the new Ordinance.

17. The learned AR, while responding to the submissions of the Department, argued that the rectification order could not be regarded to have been passed in respect of amendment orders, dated 30-9-2002 as the matter on which rectification was carried out was never the subject-matter of amendment proceedings. In this respect it was submitted that Courts have held that where any particular issue is not touched in subsequent proceedings the time limitation is computed from the original assessment order and not any subsequent order. The reliance in this respect was placed on findings recorded by this Tribunal in I.T.A. No. 1506/LB/2001, dated 13-10-2003 and I.T.A. Nos. 1695-1696/LB/ 2000, dated 14-5-2003.

18. We have given due considerations to the rival submissions and again feel persuaded by the arguments of the learned AR. The ratio of' the judgments relied upon by the learned A.R. is that where a rectification is carried out on a matter which is not the subject of subsequent proceedings the time limitation would always be computed from the date of original assessments. In the cases before us, based on discussions made above, it is not a disputed position that amendment proceedings never involved the computation of rebate on donations. Consequently the time limitation of four years would be considered from date of original assessments which obviously expired on 30-9-2002 i.e. three months before the date of the rectification order. The order of the first appellate authority holding that the rectification was barred by time is fully in accordance with law and does not call for an interference. Even otherwise, if for arguments sake, the contention of the learned DR is accepted that rectification was carried out in respect of amendment order, dated 30-9-2002, the same is again not maintainable because when amendment order has been held to be illegal then the subsequent rectification in respect thereof' is also not maintainable and illegal.

19. Resultantly all the departmental appeals are rejected being devoid of any merit or substance.

C.M.A./170/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Appeals rejected.