2008 P T D (Trib.) 1040
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Khalid Siddiqui, Accountant Member
I.T.As. Nos.1373/LB, 4335/LB, 2947/LB of 1997, 5487/LB, 5378/LB of 1999, 2641/LB, 2996/LB of 2000, 3227/LB of 2002, 5162/LB, 5174/LB of 2003, 3922/LB to 3924/LB, 5129/LB to 5131/LB of 2004 and 1530 of 2005, decided on 23/01/2008.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence, etc.---Rejection of book version without confrontation---Assessment had been made on whimsical and fanciful grounds even without considering mandatory requirements of law---Law did not give any arbitrary, unguided, uncontrolled, or naked power to the Assessing Officer---Once it was admitted that books of accounts had been furnished by the assessee, there was no justification to reject the book version without confronting the assessee---Order of First Appellate Authority was vacated,' assessment order was annulled and Taxation Officer was directed to accept the declared version.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence, etc.---Additions out of profit and loss accounts---Additions were made on the basis of stock phrases and not only without meeting the mandatory requirements of S. 62 of the Income Tax Ordinance, 1979 but also without quoting even one instance of un-verifiability---Where books of accounts were being maintained and were produced before the Department, the disallowances should not be made without confronting the assessee and pointing out the defects in the books---Disallowances made by the Taxation Officer were deleted by the Appellate Tribunal.
2003 PTD (Trib.) 1668; 2007 PTD 1483 and 2007 PTD 345 rel.
(c) Income Tax---
----Credit for taxes---Assessee claimed credit for taxes deducted at source, but the same had not been allowed in terms of the claim filed with the returns---Taxation Officer was directed to look into the matter and the same be allowed in accordance with law.
(d) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23 & 62---Deduction---Bad debts written off---No justification was available regarding addition under the head `Bad Debts Written Off', as the Taxation Officer had made the additions only for the reason that suits for the recovery of the amounts were not filed and that the disputed amounts were not authenticated, despite the fact that books of accounts had been admittedly furnished and the assessee had not been confronted regarding the authenticity of the amounts---Disallowances made in that regard were deleted by the Appellate Tribunal.
Messrs FMC United (Pvt.) Ltd. I.T.A. Nos.836 to 839 & 3759/LB of 2003 and I.T.A. Nos.2061 to 2064, 5113 & 5114/LB of 2003 rel.
(e) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23 & 62---Deduction---Improvements on leasehold and claimed as a revenue deduction---Assessee being a cellular mobile phone company had built radio towers at various leased locations, which were shown in the financial statements as equipments---In order to protect and safeguard these radio towers, sheds were being built constructed on such premises---Expenditure on this account was claimed as revenue deduction, which according to Department should have been capitalized--Validity---Department in another case had itself allowed improvements on leasehold and as a revenue deduction---Equal treatment should have been extended to the assessee---Case was remanded for reconsideration with the directions to Taxation Officer to allow the similar treatment to the assessee as had been given to another assessee, or to give distinguishable factor from that case.
215 ITR 815, 105 ITR 389, 117 ITR 466, 130 ITR 385, 148 ITR 144, 130 ITR 305 & 148 ITR 99 ref.
N.T. No.06-34-TR-02923 rel.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 23, Explanation---Deduction---Mercantile system of accounting---Expenses were partly disallowed by the Taxation Officer for the reason that these had not been paid in the year in which these were booked in the financial statements---Assessee contended that under mercantile system of accounting, the expense was claimable and allowable on the basis of accrual, without any regard to the actual payment---Validity---Expressed provisions of law had made it clear whereby an explanation had been appended to S.23 of the Income Tax Ordinance, 1979 stating that under mercantile system of accounting, the expression "paid" means actually paid or incurred under such method of accounting---Departmental appeal was dismissed, while the appeal filed by the assessee on the issue was allowed by the Appellate Tribunal.
(g) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence, etc.---Disallowance out of profit and loss accounts without confrontation of defects from the books of accounts, or quoting any instance of un-verifiability, were deleted by the Appellate Tribunal.
(h) Income Tax Ordinance (XXXI of 1979)---
----Third Sched: R. 8(8)(e) & S.62---Depreciation allowance---Foreign currency loans from non-resident lenders---Loss on account of devaluation of local currency---Differential amount was claimed as revenue deduction---Addition by the Department on the ground that amount was not an admissible deduction as it was a notional loss and since the expense was not actually realized due to non-payment of the loan amount---First Appellate Authority annulled addition by stating that expense was admissible as the mercantile system of accounting was being followed---Such finding of First Appellate Authority being based on the settled law was upheld by the Appellate Tribunal and Departmental appeal was dismissed.
2004 PTD 151; 1991 PTD 171; 63 Tax 14 and 1993 PTD 1327 rel.
(i) Income Tax Ordinance (XXXI of 1979)---
----S. 52---Liability of persons failing to deduct or pay tax---Addition on account of `rent' expense for non-deduction of tax---Deletion of such expense as the provisions of S. 52 of the Income Tax Ordinance, 1979 were invoked---Validity---Assessee could not be subjected to double jeopardy and where proceedings under S.52 of the Income Tax Ordinance, 1979 were concluded, simultaneous disallowance of expenditure was not permissible---Finding of First Appellate Authority being supported by settled law were upheld by the Appellate Tribunal and Departmental appeal was dismissed.
2002 PTD (Trib.) 3118 rel.
(j) Income Tax Ordinance (XXXI of 1979)---
----S. 50 & Second Sched: Part-I, Cl.135---Deduction of tax at source---Exemption---Assessment years 1998-99 & 1999-2000---Income of the recipient was specifically exempt in the relevant period and no withholding was required---For assessment year 2000-01, assessee produced evidence that the recipient had already discharged the incidence of tax on its income, no adverse inference could have been taken on account of non-deduction of tax-s-First Appellate Authority deleted the addition for assessment years 1998-99 and 1999-2000 and set the same for assessment year 2000-01---No irregularity in such findings having been noticed the orders were maintained by the Appellate Tribunal and departmental appeals were dismissed.
1999 PTD (Trib.) 2172 rel.
(k) Income Tax Ordinance (XXXI of 1979)---
----Ss. 24(b) & 52---Deduction not admissible---Loans from non-resident lenders---Interest was payable against such loans---No actual payment was made and only interest expense had accrued---Such expense was disallowed on the grounds that no tax was withheld under S.24(b) of the Income Tax Ordinance, 1979---Assessee contended that since actual payment was not made, the incidence of withholding could not be said to have arisen---Validity---Incidence of withholding is attracted at the time of actual payment and the expense could not be disallowed by invoking S.24(b) of the Income Tax Ordinance, 1979 for non-deduction of tax in the year of accrual in the books of accounts simply for the reason that when an assessee was not by law required to deduct tax, he could not be expected to do so---Provisions of law were to be read and applied as a whole and the system of accounting could not be disturbed on impossible propositions---Tax was not required to be deducted at the time of accrual, the expense could not have been disallowed or upheld by the authorities below---Appeal of the assessee was accepted and the departmental appeals were rejected by the Appellate Tribunal.
1985 PTD 698 and 2003 PTD 589 rel.
(l) Income Tax Ordinance (XXXI of 1979)---
----Ss. 52 & 62---Liability of persons failing to deduct or pay tax---Corporate recharge expenses---Claim was disallowed on alleged non-withholding of tax at source---Addition was deleted by the First Appellate Authority on the ground that since the Assessing Officer had invoked S.52 of the Income Tax Ordinance, 1979, the assessee could not be subjected to double jeopardy through simultaneous disallowance---For assessment year 2000-01, the matter was remanded back for fresh adjudication on the basis of argument of the assessee that non actual payment was made the question of withholding did not arise in the year under consideration---No irregularity in the findings having been found, the departmental appeals were rejected by the Appellate Tribunal.
2002 PTD (Trib.) 3118 rel.
(m) Income Tax Ordinance (XXXI of 1979)---
----S. 23---Deduction---Provisions for obsolete stock---Claimed deduction on account of `provisions for obsolete stock' was allowed in view of the matter being already settled by the Appellate Tribunal and thus the Departmental appeal was dismissed.
I.T.A. No.706/LB of 2006 rel.
(n) Income Tax---
----Set-off of loss---Set-off of business loss against other income was held to be permissible.
Messrs Crescent Steel and Allied Industries Ltd., decided on 17-5-2007 rel.
(o) Income Tax Ordinance (XXXI of 1979)---
----S. 23---Deduction---Mark-up on running finance---Part of the claim was arbitrarily held to be capital expenditure---Expense being fully allowable under the law was wrongly disallowed by the Assessing Officer and the First Appellate Authority upheld the same without any justification, which was deleted by the Appellate Tribunal.
1993 PTD 758 rel.
(p) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence, etc.---Estimation of sale proceeds of fixed assets disposed of--,Estimated sale proceeds were reduced by the First Appellate Authority---Assessee contended that the case, with foreign shareholding, maintaining proper books of accounts which were even otherwise subject to internal and external audits, such addition/estimation, based on surmises and assumptions, was not comprehensible---Such being not supported by any provisions of law, or precedent was liable to be disapproved--Contention of the assessee was accepted and the addition was deleted by the Appellate Tribunal---Assessee's appeal was allowed and the cross appeal filed by the Department was dismissed.
(q) Income Tax Ordinance (XXXI of 1979)---
----S. 80C---Tax on income of certain contractors and importers---Pro -ration of expenses to income under S.80C of the Income Tax Ordinance, 1979---Assessing Officer pro-rated expense to activities covered within the scope of S.80C of the Income Tax Ordinance, 1979 on the basis which were contrary to the established parameters/basis for the attribution of common expenses---Matter was remanded for re-examination by the First Appellate Authority---Decision of the First Appellate Authority being well based was upheld by the Appellate Tribunal and the departmental appeal was dismissed.
(r) Income Tax Ordinance (XXXI of 1979)---
----S. 52---Liability of persons failing to deduct or pay tax---Royalty, payment of---No deduction of tax owing to the fact that royalty payments to residents did not fall under any of the withholding provisions of the Income Tax Ordinance, 1979---Since payee was also exempt from levy of tax and no withholding was required even logically speaking, matter was remanded by the First Appellate Authority---Order of First Appellate Authority was maintained there being no irregularity in the same; departmental appeal was dismissed by the Appellate Tribunal in circumstances.
(s) Income Tax Ordinance (XLIX of 2001)---
----S. 221---Rectification of mistake---Adjustment of brought forwarded losses worked out on the basis of relief allowed by the First Appellate Authority for prior years---Losses were curtailed by the Assessing Officer by invoking S.221 of the Income Tax Ordinance, 2001 on the ground that either the appeal effect orders were not issued, or on certain issues, the matter had been remanded back for re-adjudication---Decision of First Appellate Authority being based on an already settled principle was maintained and the appeal filed by the Department was dismissed by the Appellate Tribunal.
1997 PTD (Trib.) 1466 rel.
Asim Zulfiqar Ali, A.C.A. and Humayun Hayat, A.C.A. for Appellant (in I.T.As. Nos.1373/LB, 4335/LB, 2947/LB of 1997, 5487/LB of 1999, 2641/LB of 2000, 3227/LB of 2002, 3922/LB to 3924/LB of 2004).
Ghazanfar Hussain, DR (L.T.U.) for Respondent (in I.T.As. Nos.1373/LB, 4335/LB, 2947/LB of 1997, 5487/LB of 1999, 2641/LB of 2000, 3227/LB of 2002, 3922/LB to 3924/LB of 2004).
Ghazanfar Hussain, DR (L.T.U.) for Appellant (in I.T.As. Nos.5378/LB of 1999, 2966/LB of 2000, 5129/LB to 5131/LB of 2004, 5162/LB, 5174/LB of 2003 and 1530/LB of 2005).
Asim Zulfiqar Ali, ACA and Humayun Hayat, ACA for Respondent (in I.T.As. Nos.5378/LB of 1999, 2966/LB of 2000, 5129/LB to 3031/LB of 2004, 5162/LB, 5174/LB of 2003 and 1530/LB of 2005).
ORDER
Out of these seventeen appeals, ten are the cross appeals against three separate impugned orders of the learned C.I.T. (A), dated 30-6-1997 for the assessment year 1994-95, dated 30-6-1998 for the assessment year 1995-96 and consolidated order, dated 26-6-2004 for the assessment years 1997-98 to 1999-00.
Out of the remaining seven appeals, three have been filed. by the department, two are of the assessment year 2000-01 against the impugned order, dated 13-8-2003 regarding assessment under section 62 of the repealed Ordinance, 1979 read with section 239 of the Income Tax Ordinance, 2001 and regarding order passed by the Taxation Officer under sections 161/205 of the Income Tax Ordinance, 2001 while the third appeal by the Department is against the impugned order, dated 17-1-2005 for the Tax Year 2003 regarding order passed by the Taxation Officer under section 221 of the Income Tax Ordinance, 2001.
The remaining four appeals have been filed by the assessee out of which, two are for the assessment year 1992,93 against two separate impugned orders, dated 2-12-1996 regarding assessment under section 62 and order, dated 12-6-1997 regarding order of rectification under section 156 of the late Ordinance, 1979. The rest of the appeals filed by the assessee are for the assessment year 1993-94 against impugned order, dated 3-4-1997 and order, dated 3-4-2002 for the assessment year 1996-97.
The assessee, in this case, is a Private Limited Company engaged in the business of providing cellular services to mobile telecom users and operators under the name and style of INSTAPHONE. The assessee commenced operation in the assessment year 1992-93 and as such, the present appeals relate to years since inception. For the issue in appeals, the assessee also opted for Alternate Dispute Resolution Committee Mechanism and the matter was kept pending, but owing to the fact that the Committee did not dispose off the matter besides lapse of a period over three years, the assessee has insisted to pursue the present appeals.
We have heard the learned representative from both the sides and have also perused the impugned order of the learned C.I.T. (A), the assessment order, the record of the case and the case law referred from both the sides.
For the assessment years 1992-93, 1993-94 and 1996-97, only the assessee is in appeal regarding proceedings under section 62 of the repealed Ordinance, 1979. For the assessment year 1992-93, the assessee has filed two separate appeals, one is against the order of the learned C.I.T. (A) rejecting the application of the assessee requesting to rectify the order, dated 12-12-1996 as the appeal was dismissed on certain issues, with the remarks that "No other ground of appeal was pressed".
The assessee has contended that these remarks of the learned C.I.T. (A) are not correct, as all the grounds taken were pressed.
While perusal of the grounds in the appeal for this year i.e. 1992-1993, we have found that these grounds have already been taken in the appeal, with the remarks that "The learned C.I.T. (A) has erred in omitting to give a finding on the following issues". Therefore, the appeal filed by the assessee against the order of the learned C.I.T. (A), dated 12-6-1997 regarding order of rectification has become infructuous and is accordingly dismissed.
For the assessment year 2000-01, the department is in appeal regarding proceedings, both under sections 52 and 62 of the repealed Ordinance, 1979. Likewise, for the Tax Year 2003, only the department is in appeal against the direction of the learned C.I.T. (A), whereby the rectification order has been set aside for computation of brought forward losses in terms of principles already settled by this Tribunal. While the 'remaining are the cross appeals by both the parties.
Regarding the appeal filed by the assessee for the assessment year 1992-93, we have found that the learned C.I.T. (A) in the impugned order has decided the matter in the following manner:---
"The case has been discussed with the learned counsel for the appellant and assessment records have been perused. It appears that for the detailed reasons mentioned in the assessment order, all the disallowances made are fair and reasonable and these do not call for any interference. No other ground of appeal was pressed. As a result, the appeal for the assessment year 1992-93 fails."
Likewise, the assessing officer has made the assessment in the following manner:
"The assessee a Limited Company derives income by providing mobile telephone facility and services to its customers. Books of accounts were examined consisting of cash book, ledger along with supporting evidence. Profit and Loss Account expenses have been claimed excessively and also partly unverifiable. Hence, appropriate additions are being made and assessment is finalized accordingly."
After perusal of the findings of both the above said officers, we have found that both the officers have neither looked into any relevant positive evidence, not have given any significant basis for making a case against the assessee. The assessment has been made on the whimsical, fanciful creation of brain even without considering mandatory requirements of law. The law does not give any arbitrary, unguided, uncontrolled, or naked power to the assessing officer. Once, it is admitted that books of accounts have been furnished by the assessee, there is no justification to reject the book version without confronting the assessee. The impugned order of the learned C.I.T. (A) for the assessment year 1992-93 is, therefore, vacated, the assessment order is annulled and the Taxation Officer is directed to accept the declared version for this year.
The appeal for the assessment year 1992-93 filed by the assessee is allowed.
For the assessment year 1993-94, the assessee has objected the disallowances out of Profit and Loss A/c.
We have found that the additions are made on the basis of stock phrases and not only without meeting the mandatory requirements of B section 62 of the late Ordinance, 1979, but also without quoting even one instance of un-verifiability. Learned counsel representing the assessee has referred the following decisions reported as:---
2003 PTD (Trib.) 1668, 2007 PTD 1483 and 2007 PTD 345.
Wherein, it has been held that in the cases, where books of accounts are being maintained and are produced before the department, the disallowances should not be made without confronting the assessee and pointing out the defects in the books. The disallowances made by the Taxation Officer for the assessment year 1993-94 are, therefore, deleted.
Regarding the short credit of taxes, which is the issue raised by the assessee for the assessment years 1992-93 and 1993-94, we have found that the assessee claimed credit for taxes deducted at source, but the same has not been allowed in terms of the claim filed with the returns for these two years the Taxation Officer is directed to look into the matter and the same be allowed to the assessee in accordance with law.
The issue of bad debts written off has been raised by the assessee in the assessment years 1992-93 to 1994-95 and 1996-97. For the assessment year 1995-96, the department has filed appeal against the impugned order of the learned C.I.T. (A) setting aside of disallowance in this respect for further consideration.
It has been contended by the learned counsel for the assessee that in the initial years of operations, the assessee had a practice of not blocking the service beyond the security deposit limit pursuant to which, the customers started commercial use of the facility. This practice leads to accumulation of irrecoverable debts, which could not be recovered though various measures were taken. On realizing that the practice was resulting into loss, the assessee discontinued the same and started to block the facility beyond the security deposit limit he has submitted that it is for this reason that no such claim exists beyond the assessment year 1996-97.
We have found that the addition has been made in all these years primarily for the reason that the assessee did not file legal suits for the recovery of the amounts and that the disputed amounts were not authenticated. It has been argued by the learned counsel for the assessee that the assessee is a best Judge to determine, as to when a debit becomes irrecoverable and as such, nowhere does the provisions of law requires mandatory filing of legal suit. He has contended that the amounts involved, in individual cases, were so small that filing of legal suit was not only economically unviable, but keeping in view the market norms and practices, would have amounted to throwing away good money after bad money. He has, in this respect, referred the decision of this Tribunal, dated 26-2-2005 in the case of M/s FMC United (Pvt.) Ltd. in I.T.As. Nos.836 to 839 and 3759/LB/2003 (Assessment years 1997-98 to 2002-03 filed by the assessee and I.T.As. Nos.2061 to 2064, 5113 and 5114/LB/2003 (Assessment years 1995-96, 1997-98, 1999-2000 to 2002-03) filed by the department, wherein it has been held by this Tribunal that:---
"(12) We have given due consideration to the rival arguments and feel inclined that legal suits have no relevance with underlying provisions of law relating to admissibility of claim of bad debts. We also show our inclination to hold that filing of legal suit is not the only criterion for determination of genuineness of claim of debts. But even during pendency of legal suit, the department can have somersault to state that since the debts have not attained status of irrecoverability, those cannot be allowed. Anyhow, some material should brought on record wherefrom it could be established that genuine efforts were made for recovery of bad debts. We are also convinced that there is no cavil to this proposition that the assessee is the best Judge to determine as to whether debts have become irrecoverable or not. We also endorse the viewpoint that if out of the total amount actually written off, any sum is subsequently recovered that will automatically suffer incidence of taxation under the system of accounting regularly employed by the assessee. In the instant case sole reason advanced for disallowing the claim is non-filing of legal suits for recovery of bad debts but the fact remains as to whether the assessing officer has made any concrete effort to ascertain veracity of the assessee's contention especially when complete identifying particulars (the list) were provided during the course of assessment proceedings.
(13) We are also persuaded to subscribe to the learned AR's submission that the assessing officer was not justified in treating claim of bad debts in piecemeal. Such as to allow suo motu bad debts failing below Rs.2,00,000 and disallow those exceeding Rs.2,00,000 without first verifying genuineness of the claim. In no way, allowability of bad debt can be linked with the amount of claim as has been done by the assessing officer. We are also astonished to understand as how come the assessing officer has deemed fit to be necessary in not filing legal suits the extent of Rs.2,00,000 and stressed upon instituting legal suits by self conceiving threshold exceeding Rs.2,00,000 which act does not seem to be justified.
(14) Having taken regards to the foregoing discussion we hold that mere non-filing of suits is not the correct test for determining recoverability or irrecoverability of the claim, we are therefore unable to approve action of the assessing officer and its subsequent approval by the first appellate authority as their decision was mainly resting on criterion of non-filing of legal suits. Following the Tribunal's decision bearing I.T.A. No.5031/LB/2001 and acquiring strength from history of the case, whereby in similar circumstances the claim was allowed by the department in respect of preceding assessment year 1998-99 and there being no deviation in the method of accounting regularly employed by the assessee. The appeal Commissioner's order is hereby vacated and direct the assessing officer to allow the claim under this head in its totality".
After considering the above said findings of this Tribunal, we are of the view that in the present case also, there was no justification regarding addition under the head `Bad Debts Written Off', as the Taxation Officer has made the additions only for the reason that suits for the recovery of the amounts were not filed and that the disputed amounts were not authenticated, despite the fact that books of accounts have been admittedly furnished and the assessee has not been confronted regarding the authenticity of the amounts. The disallowances made in this regard are deleted.
All the five appeals for the assessment years 1992-93 to 1996-97 filed by the assessee on this issue are allowed, while the appeal filed by the department for the assessment year 1995-96 is dismissed on this score.
The issue of leasehold premises has been raised by the assessee for the assessment years 1994-95, 1995-96, 1998-99 and 1999-2000, while for the assessment year 1995-96, the department is in appeal against the remand order of the first appellate authority.
The assessee being a cellular mobile telephone company builds radio towers at various leased locations, 'which are shown in the financial statements as equipments. In order to protect and safeguard these radio towers, sheds are being built/constructed on such premises. The expenditure on this account is claimed as a revenue deduction, which according to the department should have to be capitalized.
It has been contended by the learned representative of the assessee that no enduring benefit accrues to the assessee regarding such construction and whenever radio network is shifted to another location, the sheds etc. are left and thus, do represent capital expenditure in real source. Reliance in this respect has been placed on the decisions reported as 215 ITR 815, 105 ITR 389, 117 ITR 466, 130 ITR 385, 148 ITR 144, 130 ITR 305 and 148 ITR 99. Learned counsel in this regard has also referred a parallel case, of another assessee having same nature of business bearing N.T.No.06-34-TR-02923 (Assessment year 2000-01), wherein the department has itself allowed improvements on leasehold land as a revenue deduction. According to the learned counsel, the proprietary demands that an equal treatment should have been extended to the assessee.
In view of the above said discussion, the appeals filed by the assessee on this issue is remanded back for reconsideration with the directions to the Taxation Officer to allow the similar treatment to the assessee as have been given to the above referred assessee, or to give distinguishable factor from that case.
Regarding the interest expense, the department is in appeal for the assessment year 1994-95, whereas the assessee is in appeal for the assessment year 1996-97. For the assessment year 1997-98, the department is in appeal against setting aside of addition regarding toll charges and dealer commission.
It is contended by the AR that the assessee follows mercantile' system of accounting under which, expenses are accounted for on accrued basis in the period to which these relate, whether actually paid or not. These expenses were partly disallowed by the Taxation Officer for the reason that these had not been paid in the year in which these were booked in the financial statements. It is argued that under mercantile system of accounting, the expense is claimable and thereafter allowable on the basis of accrual, without any regard to the actual payment. This position is clear even with reference to the expressed provisions of law, whereby an explanation has been appended to section 23 of the repealed Ordinance, 1979, stating that under such system of accounting, the expression "paid" means actually paid or incurred under the aforesaid method of accounting.
The departmental appeal for the assessment year 1994-95 on this issue is, therefore, dismissed, while the appeal filed by the assessee for the assessment year 1996-97 on this issue is allowed.
For the assessment year 1997-98, the departmental appeal on this issue is dismissed, as the learned C.I.T. (A) has set aside the issue for reconsideration.
Disallowances out of Profit and Loss Account expenses have been objected by the assessee in the assessment years 1992-93 to 1995-96, 1997-98 and 1999-00. The Department in the cross-appeals for the assessment years 1994-95, 1995-96, 1997-98 and 1999-00 has agitated against the relief while reducing the disallowances.
As the disallowances in all the years have been made, without confronting the assessee regarding defects in the books of accounts, or quoting any instance of unverifiability, therefore, placing reliance on the decision referred in the above paras, the disallowances are deleted.
The appeals filed by the assessee are allowed and the departmental appeals on this issue are dismissed.
The issue of Exchange Loss is the subject matter of appeals for the assessment years 1994-95 to 2000-01. Except for the assessment year 1996-97, in all other years, the department is in appeal. The departmental appeal for the assessment year 2000-01 is against the directions of learned C.I.T. (A), whereby the addition was set aside for re-examination.
The assessee had obtained foreign currency loans from non-resident lenders in respect of which, the assessee incurred loss on account of devaluation of local currency. The differential amount was claimed as a revenue deduction, assessee being maintaining books of accounts under mercantile system of accounting. It is not a disputed position that the provisions of Rule 8(8)(e) of the 3rd Schedule to the repealed Income Tax Ordinance, 1979 are not attracted in the present case and hence, the deduction was claimed as a revenue expenditure. It is the only objection of the department that it was a notional loss and since the expense was not actually realized due to non-payment of the loan amount, the amount was not an admissible deduction. In the years, where the learned C.I.T. (A) has annulled the addition, the reliance was placed on reported judgments on the subject, whereby the expense was held to be admissible on such basis, where mercantile system was being followed. The decisions of the learned C.I.T. (A) are based on the decisions reported as 2004 PTD 151, 1991 PTD 171 and 1993 PTD 1327, The findings being based on reported judgments are upheld.
The appeals filed by the department in this regard are, therefore, dismissed, as the learned C.I.T. (A) has deleted the addition placing reliance on the reported decisions.
In the assessment year 1996-97 the learned C.I.T. (A) decided the matter against the assessee on the ground that expense is allowable when actual payment is made. This finding of the learned C.I.T. (A) is contrary to the position clarified in reported judgments and against the principles followed under mercantile system of accounting. The order, being contrary to the established principles, is annulled. The appeal filed by the assessee for 1996-97 on this issue is allowed. The Taxation Officer is directed to allow the relief accordingly.
In the assessment year 2000-01 the learned C.I.T. (A) has set aside the addition, it seems that the assessee had claimed the deduction on realized basis as a matter of abundant caution with the view that when the position for earlier year would be settled through disposal of present appeals for all prior years, the matter in assessment year 2000-01 would also settle in consequence thereof. In the circumstances that the issue has already been set aside for this year the department has no risk. The appeal for this year filed by the department is therefore, dismissed.
In the assessment year 2000-01 the department is in appeal against deletion of addition regarding exchange gain. In this respect we have found that the assessee, owing to the department's practice in all the past years of not allowing exchange loss on accrual basis, excluded exchange gain amounting to Rs.13,214,000 from taxable income arguing that it was a notional income and since the expenditure was not allowed on notional basis, therefore, the same treatment should be given to the notional income. The first appellate authority has deleted the addition against which the department is in appeal.
Considering the fact that the assessee is arguing the allowability of exchange loss on notional basis, it has been conceded that the treatment for exchange gain should be at par with exchange loss under the principles of mercantile system of accounting. Since we are already upholding allowability of exchange loss on accrual basis for all the years, therefore, the departmental appeal on this issue is allowed.
For assessment year 1997-98 the department is in appeal against the deletion of the addition made by the assessing officer on account of `rent' expense for non-deduction of tax. The assessing officer also invoked the provisions of section 52 in this respect. The addition was deleted by the learned C.I.T. (A) by placing reliance on the decision reported as 2002 PTD (Trib.) 3118, whereby it has been held that an assessee cannot be subjected to double jeopardy and where proceedings under section 52 are concluded, simultaneous disallowance of expenditure is not permissible. The findings of the first appellate authority being supported by a reported judgment are, therefore, upheld and the appeal filed by the department for the assessment year 1997-98 on this issue is dismissed.
In the assessment year 1999-00, the assessing officer has disallowed expenditure on account of dealer's commission on the alleged non-deduction of tax. On the basis of arguments of the assessee, the addition has been remanded back by the learned C.I.T. (A) for re-adjudication after verifying the correct factual position. No interference in this respect is, therefore, required.
In the assessment years 1998-99 to' 2000-01, the interest payments to PKIC (Pak Kuwait Investment Company) was disallowed on the grounds that tax was not deducted under section 50 (7D).
The assessee for the assessment years 1998-99 and 1999-00' argued that the income of the recipient was specifically exempt in the relevant period under clause 135 of Part-I of the 2nd Schedule, no withholding was required. For the assessment year 2000-01, the assessee produced evidence before the authorities below that since the recipient m had already discharged the incidence of tax on its income, therefore, no adverse inference could have been taken on account of non-deduction tax. In this respect, reliance is placed on the decision reported as 1999 PTD (Trib.) 2172. The learned C.I.T. (A) has deleted the addition for the assessment years 1998-99 and 1999-00 and set aside the same for the assessment year 2000-01. The department has challenged these findings.
There being no irregularity in these findings, the orders are maintained lm and the departmental appeals are dismissed.
In the assessment years 1998-99 to 2000-01, the interest payments to the non-resident recipient Messrs Ericsson were disallowed for alleged non-deduction of withholding tax under section 50(3). For the assessment year 2000-01, simultaneous action under section 52 was also taken up.
It has been argued that the non-resident enjoyed exemption under clause 77A of Part-I of the 2nd Schedule to the repealed Ordinance, 1979 loan being extended for an industrial investment in Pakistan. Whether or not, the assessee qualifies to be an industrial undertaking remained the controversy. The learned C.I.T. (A) for the assessment years 1998-99 and 1999-00 has remanded the matter for obtaining specific clarification from C.B.R. on the issue, whereas for the assessment year 2000-01, the matter is remanded back for fresh examination of facts vis-a-vis both sections 52 and 62.
There being no defect in the findings of the learned C.I.T. (A), the departmental appeals are turned down.
The issue of interest payment to Messrs Millicom and Messrs Comvik is involved in the assessment years 1997-98 to 2000-01. While in the assessment years 1997-98 and 2000-01, the department is in appeal, for the two intervening years, the assessee is in appeal.
The facts are that the assessee obtained loans from aforesaid non-resident lenders against which the assessee was liable to pay interest. In all the four years, no actual payment was made and only the interest expense was accrued in terms of underlying loan agreements. The assessing officer in all the four assessment years disallowed the expense on the grounds that no tax was withheld under section 24(b) of the repealed Ordinance, 1979. The assessee contested the addition on the grounds that since actual payment was not made, therefore, the incidence of withholding could not be said to have arisen and thus, the basis of adverse inference were contrary to overall scheme conceived in the law. For the assessment year 1997-98, the addition was deleted on the ground that since separate action had been taken under section 52, therefore, double jeopardy could not be invoked. For the assessment years 1998-99 and 1999-00, the addition was, however, upheld, there being no separate action under section 52. So far as the assessment year 2000-01 is concerned, the issue was remanded for adjudication afresh for both proceedings under sections 52 and 62.
It is the assessee's contention based on two decisions of the Honourable High Court reported as 1985 PTD 698 and 2003 PTD 589 that the incidence of withholding attracts at the time of actual payment and the expense cannot be disallowed by invoking section 24(b) of the late Ordinance, 1979 for non-deduction of tax in the year of accrual in the books of accounts simply for the reason that when an assessee is not by law required to deduct tax, he cannot be expected to do so. The provisions of law are to be read and applied as a whole and the system of accounting cannot be disturbed on impossible propositions. In the circumstances, that the tax was not required to be deducted at the time of accrual, the expense could not have been disallowed or upheld by the authorities below.
In the light of position already settled in the aforesaid rulings, the appeal of the assessee is accepted and the departmental appeals rejected there being no infirmity in the appellate orders to that extent.
The issue of Corporate Recharge is involved in the assessment years 1997-98 and 2000-01 and only the department is in appeal. While for the assessment year 1997-98, the matter emanates from proceedings under section 62; the assessment year 2000-01 involves action both under sections 52 and 62 of the repealed Ordinance. The claim was disallowed on alleged non-withholding of tax at source. The first appellate authority for the assessment year 1997-98 has deleted the addition by placing reliance on the decision reported as 2002 PTD (Trib.) 3118 in the circumstances that since the assessing officer had invoked section 52 on the matter, the assessee could not be subjected to double jeopardy through simultaneous disallowance. For the assessment year 2000-01, the matter has been remanded back for fresh adjudication on the basis of the arguments of the assessee that non-actual payment was made the question of withholding did not arise in the year under consideration.
There being no irregularity in the findings, the departmental appeals are rejected.
Regarding the issue of sundry expenses in the assessment year 1998-99, we have found that the assessing officer disallowed certain expenses for alleged non-deduction of withholding taxes on the basis a reconciliation prepared from statutory withholding tax statement. The assessee produced a comprehensive working showing the amount of tax deductible and that deducted by the assessee. It was clearly established that the fault in withholding existed so as to permit a disallowance of Rs.8,571,000 as against an amount of Rs.37,303,200. The first appellate authority, after fully appreciating the position, restricted the disallowance to this extent.
The decision of the first appellate authority being based on the facts on record is maintained and the appeal filed by the department regarding sundry expenses for the assessment year 1998-99 is dismissed.
Regarding the issue of claim of depreciation, we have found that for the assessment year 1997-98, the department has challenged the order of the learned C.I.T.(A), whereby he had set aside the addition for re-examination regarding claim of depreciation.
The facts are that the assessee, claimed depreciation deduction for additions made during the year, however, the same was not allowed for want of verification. The learned C.I.T. (A) has directed the assessing officer to re-examine the matter after obtaining the underlying evidence and as such the order of the learned C.I.T. (A) does not suffer from any infirmity, which is therefore upheld and the appeal filed by the department is dismissed.
Regarding the addition under section 13(1)(e), we have found that in the assessment year 1994-95, the assessing officer observed a difference of Rs.2,044,577 in the financial statements and the details submitted' by the assessee during the assessment proceedings. The assessee was required to explain the difference, which has been explained through letter, dated 27-6-1997. The assessing officer, however, invoked the addition by stating that the difference was not explained. The learned C.I.T. (A) taking full cognizance of the entire circumstances including correspondences has deleted the addition observing the same to be not warranted in the case of the assessee. The department is in appeal against these findings.
After hearing both the sides and perusal of record, we are of the view that the decision of the learned C.I.T. (A) being based on appropriate reasoning, requires no interference. The appeal filed by the department is dismissed.
Regarding the issue of provision for obsolete stock, we have found that the assessee claimed deduction on account of `provision for obsolete stock' for the assessment years 1994-95 and 1995-96. While in the assessment year 1994-95, the departmental contention was upheld and the assessee is in appeal for the assessment year 1995-96, the addition was set aside, however, the department is in appeal.
Without deliberating on any legal proposition, the learned counsel for the assessee places reliance on decision of this Tribunal in I.T.A. No.706/LB/2006 (Assessment year 2000-01) in the case of Messrs Coca-Cola Export Corporation vide order, dated 31-10-2007 which itself is based on two earlier decisions of this Tribunal on the subject matter. The relevant paras are reproduced hereunder:---
"(5) On the contrary, the learned A.R. has opposed the arguments advanced by the learned D.R. It was submitted by the learned A.R. that obsolete stocks which were written off by the taxpayer represent moulds and cavities purchased from Pakistan Mineral Water Bottling Plant (Pvt.) Ltd. during the period July, 1995 to June, 1996 for the manufacturing of pet bottles. It was further stated that these moulds and cavities are no longer useable for manufacturing of pet bottles so these have been written off. It was further argued that these stocks were sold as scrap in pieces in order to avoid any unauthorized use by unscrupulous elements. Continuing with his arguments, the learned A.R. pointed out that in the assessment year 1996-97 and 1998-99 provision for obsolete stock was disallowed by the assessing officer on the basis that these expenses would be allowed, when the stocks were actually written off. He said, however, subsequently for the assessment year 2002-03 these stocks have been actually written off and, therefore, these should now be allowable being admissible expenses. The learned A.R. further stated that the reason on the basis of which these written off were not allowed as an admissible expense in the previous years is that these stocks were not actually written off. The learned A.R. summed up that in the light of observations made by the assessing officer in the preceding year, the said expense should have been allowed. To substantiate his contention the learned A.R. relied upon the judgment of the Tribunal passed vide I.T.A. No.5028/LB/1996 etc., dated 19-6-2003 whereby it has been held that:---
"In support of his contention the learned A.R. has relied on a judgment of the ITAT in I.T.A. No.3386/LB/1992-93, dated 13-1-1998 wherein it has been held that provision for obsolete spares is an admissible expense because such provision is based on quantified value of obsolete spares and stores and so it is a specific and definite provision and not merely a general provision. Since the facts of the assessee's case are identical to the facts of the case decided by ITAT, so it would be in the interest of Justice, if we follow the said decision of the ITAT and allow the. assessee's claim as admissible expense. The D.C.I.T., is, therefore, directed to allow deduction for the said provision."
In another judgment of the Tribunal passed vide I.T.A. No.8386/LB of 1992-93, dated 13-1-1998 it was observed by the Tribunal:---
"The contention of the learned A.R. appears to be correct because if certain spares, chemicals etc. have become obsolete, it is a definite loss to the company. Thus the provision made which is based on quantified value of obsolete spares and stocks is a specific and definite provision and not merely a general provision. Moreover, since the department has already allowed similar provision as deduction in earlier years there does not appear to be any justification for deviation for the year under consideration. The order of the learned C.I.T. (A) on this point is upheld."
(6) Both the parties have been heard and relevant orders perused along with judgments of the Tribunal placed on file. Perusal of the cited (supra) case clearly shows that the cases relied upon by the learned A.R. are on all fours to the case of the assessee.' Therefore, we are not inclined to interfere in the impugned order which is hereby maintained".
After considering the observation and findings, we are of the view that the matter being already settled by this Tribunal, the appeals filed by the assessee are allowed, while the appeals filed by the department on this issue are dismissed.
Regarding the issue of the set-off of other income against business loss, we have found that this matter is involved in the assessment year 1999-00 and the department feels aggrieved by the findings of the learned C.I.T. (A), whereby on the basis of settled position, the set-off of business loss against other income was held to be permissible. This position has recently been re-affirmed by this Tribunal vide order, dated 17-5-2007 in the case of Messrs Crescent Steel and Allied Industries Ltd. and thus, the departmental appeal is dismissed.
Regarding the issue of mark up on running finance, we have found that this issue is involved in the assessment year 1992-93 only, whereby the assessee is in appeal against the actions of the assessing officer, whereunder part of the claim was arbitrary held to be capital expenditure. The position on allowability of interest expense was settled way back by Honourable Supreme Court of Pakistan in a case reported as 1993 PTD 758, pursuant to which, no different view could be taken. The expense being fully allowable under the law was wrongly disallowed by the assessing officer and the learned C.I.T. (A) has also upheld the same, without any justification, which is, therefore, deleted and the assessee's appeal is accepted.
Regarding the issue of estimation of sale proceeds of fixed assets disposed off, we have found that in the assessment year 1994-95, the assessee disposed of certain assets in respect of which, the assessing officer estimated sales proceeds at Rs.1,00,000. On an appeal, the estimation was reduced to Rs.50,000. Both the assessee and the department are in appeal.
It has been contended on behalf of the assessee that in the case of the assessee, with foreign shareholding, maintaining proper books of accounts which are even otherwise subject to internal and external audits, such additions/estimation, based on surmises and assumptions, is not comprehensible. This being not supported by any provision of law, or precedent is liable to be disapproved.
The contention of the learned counsel having force is accepted and the addition made in this respect is deleted. The appeal filed by the assessee is allowed, while cross appeal filed by the department is dismissed.
Regarding the issue of pro-ration of expenses to income under section 80C, we have found that in the assessment year 2000-01, the assessing officer pro-rated expenses to activities covered within the scope of section 80C of the repealed Ordinance on the basis which were contrary to the established parameters/basis for attribution of common expenses. The learned C.I.T. (A) has remanded the matter for re-examination. The department has challenged these findings. The decision being well based is upheld. The departmental appeal on this issue is dismissed.
Regarding the issue of royalty to Pakistan Telecommunication Authority (PTA), we have found that this issue is involved in the assessment year 2000-01 only and the department is in appeal against setting aside. The matter relates to proceedings under section 52 only. The assessee paid royalty to PTA on which no tax was deducted owing to the fact that royalty payments to residents does not fall under any of the withholding provisions of the repealed Ordinance. Besides, the assessee argued that since PTA was exempt from levy of tax, therefore, no withholding was required even logically speaking. The learned C.I.T. (A) has remanded the matter for fresh examination. The order of the learned C.I.T. (A) is maintained there being no irregularity in it. The appeal filed by the Department is dismissed.
Regarding the departmental appeal for Tax Year 2003, we have found that in the return for Tax Year, 2003, the assessee claimed adjustment of brought forward losses worked out on the basis of relief allowed by the learned C.I.T. (A), while disposing the appeals for prior years. The Taxation Officer invoked the provisions of section 221 of the Income Tax Ordinance, 2001 (rectification) and curtailed the losses on the ground that either the appeal effect orders were not issued, or on certain issues, the matter had been remanded back for re-adjudication. The learned C.I.T. (A) had issued directions for computation of losses in the light of the order of this Tribunal reported as 1997 PTD (Trib.) 1466, where similar issue has been dealt with in unequivocal terms. The decision of the learned C.I.T.(A) being based on an already settled principle is maintained and the appeal filed by the Department is dismissed.
All the seventeen appeals, nine by the assessee and eight by the Department, are decided in the manner referred supra.
C.M.A./27/TXTOrder accordingly.