VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 121 (2008)

(a) Income Tax Ordinance (XLIX of 2001)---

----S. 122(5A)---Amendment of assessment---Show-cause notice---Issuance of Show-cause notice was on presumption as Revising Authority out-rightly taken the Income Tax returns/statements documents as erroneous as well as prejudicial to the interest of revenue and confronted issues needing further investigation.

(b) Income Tax Ordinance (XLIX of 2001)---

----S.122(5A)---Amendment of assessment---Erroneous and prejudicial to revenue---Scope---Taking as being erroneous and prejudicial to revenue should not be based on surmises and unsupported assertions.

(c) Income Tax Ordinance (XLIX of 2001)---

----S.122 (5A)---Income Tax Ordinance (XXXI of 1979), S.66A---Amendment of assessment---Holding of inquiries---Contents of the provisions of S.122(5A) of the Income Tax Ordinance, 2001 did not empower the holding of inquiries, which was unlike the provisions of S.66A of the repealed Income Tax Ordinance, 1979.

(d) Income Tax Ordinance (XLIX of 2001)---

----Ss. 29(1)(a)(i) & 122(5A)---Bad debts---Written off---Deletion of addition---Advance was made for down stream integration of business---On failure of that company to run project, some amount was recovered and balance irrecoverable amount was written off by the assessee---Amending Authority did not challenge the sustaining of losses by the said company and also the short/lesser amount recovered by the assessee---Show-cause notice was confined to the sole ground that the amount written off was previously not included in the taxpayer's income from business chargeable to tax---Amending Authority did not advert to the pleadings of the taxpayer wherein it was specifically explained that assessee had incurred trading loss which was rightly claimed as expenditure against the profit chargeable to tax under the law---Instead of appreciating explanations, Amending Authority enlarged the allegations and tried to make out a new case regarding the purpose of the advance and its justification---Such observations could not be justified on unsupported assertions---Order of adjudication, based on grounds which were not mentioned in the show-cause notice, was void---Department had totally failed to dislodge the sustaining of loss in the shape of short -recovery of the amount caused by failure to profitably run the project resultantly disposing of the same---Allowability of such irrecoverable amounts by bringing it within the scope of provisions of S. 29 (1)(a)(i) was totally misconceived--Order passed by the First Appellate Authority was confirmed by the Appellate Tribunal and departmental appeal failed on merits of the case.

1999 PTD 2851; 1999 PTD (Trib.) 1700; Shahid Hameed v. Income Tax Officer 1976 PTD 347=PLD 1976 Lah. 1626; CIT Karachi v. Shabir and Company 1966 SCC 260; Commissioner of Income Tax v. Sir S.M. Chitnavis (1932) 59 I.A. 291; 1982 PTD 20; (1966) 13 Tax 163 H.C. Lah.; 1967 SC 524; CIT Karachi v. Shabbir & Co. Kar. 1966 SCC 260; 1982 PTD 20; PLD 1985 SC 109; 1992 PTD 576 1976 PTD 437; PLD 1976 Lah. 1626; Gillanders Arbuthnot and Company v. Commissioner of Income Tax (Civil Reference No.7 of 1961 ref.

1987 SCMR 1840 rel.

(e) Income-Tax---

----Bad debts---Irrecoverable debt writing off and claiming as expenditures, in the course of business and incidental to business, was allowable as it was a trading loss.

C.I.T. Karachi v. Shabbir and Company Karachi (1966) SSC 260 and 1982 PTD 20 rel.

(f) Income Tax Ordinance (XLIX of 2001)---

----Ss. 20(1), 29(1)(i)(a) & 122(5A)---Deductions in computing income chargeable under the head "Income from business"---Transaction in the shape of advance to other unit and thereafter claiming of loss was charged as expenditure caused by short recovery was duly governed by principle of "commercial expediency"---Revising authority misdirected itself by restricting the allowability to the extent of S.29(1)(i)(a) of the Income Tax Ordinance, 2001---Writing off irrecoverable amount was an allowable expenditure under S.20(1)of the Income Tax Ordinance, 2001---Clause (a) of subsection (1) of S. 29 of the Income Tax Ordinance, 2001 dealt with writing off such bad debts which were shown after making sales but clauses (b) and (c) subsequent to clause (a) in subsection (1) of S. 29 of the Income Tax Ordinance, 2001 were quite capable of allowing relief to the assessee because the debt had been actually written off in the accounts and there Were reasonable grounds for believing the debts were irrecoverable, which had never been disputed in the entire proceedings by the Department---Bad debts had rightly been allowed by the First Appellate Authority in circumstances.

1982 PTD 20 rel.

Ghazanfar Hussain, D.R. for Appellant.

Ashiq Hussain for Respondent.

ORDER

Titled appeal is directed against the order dated 29-4-2006 so, as to adjudicate the grounds Nos.7 to 10, as the grounds Nos.1 to 6 Precisely pertaining to assumption of jurisdiction under section 122(5A), the competency of the Additional Commissioner to amend the order in terms of section 120(1) and as to whether the impugned order under section 122(5A) is violative of judgments of Honourable High Court, which have already been adjudicated by a Full Bench by an order dated 22-3-2007, whereby on these legal premises the Department/Revenue's contentions were accepted and relief allowed at the first appeal was vacated. As far as the merit of the case i.e. legality of initiating proceedings under section 122(5-A) of the Income Tax Ordinance, 2001 and the basis for invoking under section 122(5A) ibid., the matter has been referred to this Division Bench for adjudicating upon legality of the proceedings as well as the factual and legal controversies regarding the following additional/ add backs:--

(i) Addition on account of bad debts claimed by Rs.155,194,000 the respondent.

(ii) Addition of account of excess perquisites Rs. 534,000 under section 21(k).

(iii) Addition on account of provision for Rs.935,000 doubtful receivables.

(Section referred to in this order are of the repealed Income Tax Ordinance, 1979).

Briefly facts in brief are that Income Tax return was treated as assessment order under the provisions of section 120(1) of the Income Tax Ordinance 2001. Show-cause notice under section 122(9) was issued on 2-8-2006 for amending the assessment by confronting the additions by expressing the opinion that the Income Tax return relating to income and tax, statement and documents filed under relevant provisions of law are erroneous as well as prejudicial to the interest of revenue for the reason that short recovery of amount, from Messrs Rupafab Ltd., an associated undertaking, on final settlement of total receivable, it was claimed as bed debt, is not the expenditure for the year, as it does not fulfil the conditions laid down in section 29(1), by elaborating it further, the Amending Authority has stated that bad debt is an amount which has already been included in person's income whereas it is not so, hence it could not be charged as expenditure. Secondly, it was confronted that provisions for doubtful receivable as per section 34 read with section 20(1) would be allowable only when all the events that determine liability have occurred and amount of such liability could be determined with reasonable accuracy. Thirdly, it was confronted that the perquisites/ allowances paid exceed 50% of the basic salary, which is making liable for addition of the amount exceeding 50% of the basic salary in terms of section 21(k). The reply to such notice was duly submitted. Regarding the first issue confronted, it was brought into the notice of the revising authority that un-recovered amount from Rupafab Ltd., claimed as expense was due to the impossibility to recover the full amount even by apportionment out of sale proceeds of Messrs Rupafab, so agreed to .get lesser amount against this total receivable amount by the respondent/ assessee. The contention was also taken that it was on approval by Board of Director that amount was advanced to Messrs Rupafab for establishing down stream integration so that the yarn converted into fabric, dyed, printed and finished at Rupafab could be exported by the respondent/ assessee company. It was as per approval of the Board of Directors and also in accordance with the object clause of memorandum of association that the entire dealings took place. The entering into a settlement with Rupafab management 'on its inability to pay back full amount even by apportionment of such realized amount, that recovery of the full amount payable to the respondent company became impossible, so as per provisions of section 20(1) it was claimed as an expenditure. Claim of such irrecoverable amount as loss/expense was supported being governed by commercial expediency was by referring to the different case law. In respect of the doubtful receivable and also on the question of excess perquisite i.e., exceeding 50% of basic salary the contention of respondent company was also rejected. Resultantly, the assessment was amended by making addition for all the three issues discussed as in the earlier lines. Such matter when was brought before the learned first appellate authority that it was observed that such un-recovered amount of loan has never been claimed so under section 29 because section 29 deals only with bad debt which was included in person's income from business chargeable to tax i.e., in other words amount arising on sale of goods or for services rendered which was earlier charged to tax on accrual basis but later on turned to be irrecoverable, but it was not the case as it was lesser recovery of the amount which would be allowed under section 20.

The learned C.I.T.(A) deleted all the three additions and held that the assessment order under section 120(1) of the Ordinance was neither erroneous nor prejudicial to interest of revenue.

The learned DR questions the appellate order passed by the learned C.I.T.(A). Lt has been urged that there was no justification for the respondent to advance interest free loan to Messrs. Rupafab Ltd., without any security/collateral and that the respondent had not previously added up the amount of Rs.155,194,000 in the computation of taxable income. The claim of its deduction as bad debt under section 29 of the Ordinance was, therefore, questioned. The learned DR contested that the respondent could not take advantage of the losses incurred by the above said company. It was pointed out that the respondent did not spell out the purpose of the loan and in view of the facts and circumstances of the case, there was little justification for the respondent to advance the loan to a concern which was not feasible. But when the attention of the learned DR was drawn to the assessee/respondent's reply to Revising Authority, wherein the purpose was fully explained, nothing was submitted by the learned DR. The learned DR reiterated the reasons recorded by the Revising Authority regarding the addition made under the head excess perquisites and provision for doubtful receivable but facts as stated in the impugned order were not denied.

The learned AR, on the other hand, supported the appellate order passed by the learned C.I.T.(A). It has been submitted that the show-cause notice under section 122(5A) of the Ordinance, was based on presumptions and it was investigative in nature. The learned AR pressed the point that the learned C.I.T.(A) was fully justified to rely on the judgment of this Tribunal cited as 1999 PTD 2851 to the effect that where a revisional authority proposes to investigate without first establishing the error resulting in loss of revenue show-cause notice was not sustainable in the law. The learned AR further fortified the arguments by referring to 1999 PTD (Trib.) 1700, where Tribunal has declared that in exactly identical circumstances the entire proceedings were illegal. The learned AR pointed out that show-cause notice was based on three factors: Firstly, the respondent had claimed bad debt of Rs.155,194,000 which was not admissible under section 29 of the Ordinance because the amount was not previously included in the respondent's income from business chargeable to tax, secondly, that the respondent had claimed a provision for doubtful receivables to the tune of Rs.935,000 and thirdly, that a sum of Rs.534,000 was inadmissible as excess perquisites in terms of section 21(k) of the Ordinance.

The learned AR pointed out that the basis confronted were purely based on presumptions and incorrect calculation. The objection regarding excess perquisites was considered by C.I.T.(A) at page 14 of the appellate order and found that excess perquisites, after proper calculation according to law, were zero. As the Taxation Officer had not taken "Bonus" as part of basic salary and medical expenses were exempt in terms of Clause 139 of Part-I of Second Schedule to the Ordinance. Thus, the basis were evidently incorrect. The learned DR failed to point out any error in the calculation of salary and perquisites by the C.I.T.(A). Regarding the disallowing or adding back the learned C.I.T.(A) found that the amount of Rs.935,000 was in fact the input tax paid under the Sales Tax Act, 1990, on the diesel oil purchase for which refund applications were submitted under section 66 of the Sales Tax Act, 1990. Sales Tax Department did not allow the refund so the amount was written off even on failure pursuing the matter in the Appellate Forums. This proved to be a based on mere conjecture made without any enquiry. It was further pointed out that the disallowance of the trading loss of Rs.155,194,000 was made without considering the relevant legal provisions. The learned AR drew our attention to the following para from the impugned order:--

"It is usual in business that loans/advances are written off for variety of reasons. For instance there may be difference between the parties and the person may settle the matter with the debtor and choose to write off a portion of the amount due. In such circumstances, the claim will not fall under section 29. But such outgoings debited to the profits would however be instances of trading loss and, except when they are out of advances made on capital account."

By quoting para supra, it has been pleaded by the learned AR that the learned C.I.T.(A), therefore, held that the amount in question was admissible trading loss incurred in course of business when in terms of section 18 of the Ordinance profits and gains of business carried on by a person at any time in the year are to be assessed for Income Tax purpose.

The learned AR dilated upon the issue and pointed out that the Revising Authority did not advert to the pleadings of the respondent in the proper perspective and unnecessarily restricted the issue to the application of the section 29 of the Ordinance. The Revising Officer did not apply mind to the agreement regarding sale and purchase of shares dated 23-1-2004 between Messrs. Rupafil Ltd and Rupafab Ltd. etc., although it was referred to at page 4 of the impugned order. The agreement clearly recites that Messrs Rupafab had been set up with the intention of down stream integration and it was proposed that the yarn manufactured by Spintex Limited and Rupafil Limited should be converted into fabric, dyed, printed and finished at Rupafab for export. To reinforce the submissions, the affidavit of the managing director of Messrs Rupafil Ltd. was also filed by the (sic) advance was business consideration and the amount was advanced in view of commercial expediency. Support was drawn froma judgment of the Honourable High Court in the case of Shahid Hameed v. Income Tax Officer cited as 1976 PTD 347 = PLD 1976 Lah. 1626, wherein it was held "the Income Tax Officer is not to substitute his own thinking for that of the assessee to see as to how the business should have been run. He must look at the business the way it had actually been conducted. The assessee knows his circumstances better and it is entirely for him to see which role to accept or reject".

The learned AR argued that section 18 of the Ordinance, 2001 charges tax on the "profits and gains" of the business. Trading loss may occur due to untoward incidences like robbery, fire, fraud and other losses which may eat up profits and gains of the business-leaving the taxpayer with lesser available funds out of current capital. Such trading losses are to be reduced, from income under section 18 of the Ordinance. Reliance was placed on the judgment of the Honourable Supreme Court of Pakistan in the case of C.I.T., Karachi v. Shabir and Company cited as 1966 SCC 260. The learned AR referred to the following findings recorded therein:--

"Subsection (1) of section 10 of the Act (Corresponding to section 18(1)(a) of the Ordinance) declares that the tax shall be payable by an assessee under the head "profit and gains of business, profession of -vocation" in respect of the profits or gains of any business, profession or vocation, carried on by him. As was pointed out by Lord Russel of Killowen, in Commissioner of Income Tax v. Sir S.M. Chitnavis (1932) 59 I.A. 291 "what are chargeable to Income Tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year, account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. But the losses must be losses incurred in that year". For this computation ordinarily commercial methods have to be kept in view, in order to arrive at the balance of profits and loss for the year. Even though, therefore, there may be no specific provision in the law, providing for the deduction claimed in this case, such a deduction would be permissible under subsection (1) of section 10 of the Act, provided that the loss in question is found to be incidental to the business of the assessee and therefore, a trading loss". References were also made to the judgment of Sindh High Court, Karachi cited as 1982 PTD 20 and Lahore High Court, Lahore cited as (1966) 13 Tax 163 (H.C. Lah.). In the former case, the Honourable Court held "an amount of money spent, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying of the business may be treated as trade expenditure": In the latter case, the Honourable Court approved the observation of Romer L.J. "profits or losses in a year of trading cannot be ascertained unless a comparison be made of the circulating capital as it existed at the beginning of the year with the circulating capital as it exists at the end of the year".

It was pointed out that the learned C.I.T.(A) had rightly overruled the observation of the Revising Officer regarding the principle; special provisions exclude the general provisions, in view of the authoritative judgment of the Honourable Supreme Court cited as PLD 1967 Supreme Court 524. The Honourable Court held that the said principle applies only where subject matter of law is the same; while in the present case, the subject matter of trading loss is much wider than that of bad debts.

The learned AR by drawing support from the principles as laid down in the following citations has contended that the irrecoverable amount has rightly been charged as expense to profit of the year:--

(I) 1966 SCC 260 C.I.T. Karachi v. Shabbir & Co. Karachi, (II) 1982 PTD 20, (III) PLD 1985 SC 109, (IV) 1992 PTD 576, (V) 1976 PTD 437 and (VI) PLD 1976 Lah. 1626.

Gillanders Arbuthnot and Company v. Commissioner of Income Tax (Civil Reference No.7 of 1961 decided on 15-11-1965).

We have considered the rival arguments. Available record has been perused anxious thought has been given to the relevant provisions of law. We have minutely, gone through the various case law cited at bar before us. The appellate order passed by the C.I.T. (A) on the merits of the case is unexceptionable. The Revising Authority issued show-cause notice wherein at the very outset has outrightly taken the Income Tax returns/statements documents as erroneous as well as prejudicial to the interest of revenue, therefore confronted the issues needing further investigation so the issuance of notice was on presumptions. It is established law that taking as being erroneous and prejudicial to revenue should not be based on surmises and unsupported assertions. Such show-cause notice is even nullity in the eye of law. Here we would not be reluctant to hold that the contents of the provisions of section 122(5A) of the Income Tax Ordinance, 2001 do not empower the holding of inquiries, which is unlike the provisions of section 66A of the repealed Income Tax Ordinance, 1979. So the initiating and concluding of the proceedings on this score cannot be lawful. The show-cause notice was evidently issued without proper enquiry in material facts and ultimately by inquiry for the scheme of events surfaced, the proceedings were to be under the relevant provisions and not under section 122(5A) ibid. The advance of Rs.306,153,000 by the respondent was made in the tax year, 2003 for down stream integration of business with Messrs. Rupafab Ltd. on the failure of the company to run project that only Rs.150,959,000 could be recovered and balance irrecoverable amount was written off by the respondent in the circumstances duly explained in earlier part of this order. The Amending Authority did not challenge the sustaining of losses by the said company and also the short/lesser amount recovered by the respondent/company. In fact, the show-cause notice was confined to the sole ground that the amount written off during the year was previously not included in the taxpayer's income from business chargeable to tax. The Amending Authority did not advert to the pleadings of the respondent/taxpayer wherein it was specifically explained that the respondent had incurred trading loss which was rightly claimed as expenditure against the profit chargeable to tax under the law. Instead of appreciating the explanations put forth on behalf of the respondent, the Amending Authority enlarged the allegations and tried to make out a new case regarding the purpose of the advance and its justification. Such observations could not be justified on unsupported assertions. The Honourable Supreme Court of Pakistan held in the judgment cited as 1987 SCMR 1840 that the order of adjudication, based on ground which was not mentioned in the show-cause notice, is void. The impugned order under section 122(5A) was passed without meeting with the preconditions of the law. Even otherwise, the Revising Authority did not advert to the relevant principles of law enunciated by the Honourable Supreme Court of Pakistan and High Courts on the points involved. The appellate order passed by the C.I.T. (A) is, therefore, confirmed and the departmental appeal on merits of the case fails.

The department has totally failed to dislodge the sustaining of loss in the shape of short recovery of the amount due from Messrs Rupafab caused by failure to profitably run the project resultantly disposing of the same. The allowability of such irrecoverable amounts by bringing it within the scope to provisions of section 29(I)(a)(i) is totally misconceived.

As far as the deleting of addition on account of doubtful receivable the fact that refund of sales tax when became irrecoverable that it has been written off by claiming as expenditure. The taking place of events in this way has not been challenged, so by this it has been proved that it was not a provision but actual writing off irrecoverable refund claimed. Thirdly, the addition on account of excess perquisites by invoking the provisions of section 21(k) has been proved as incorrect. Nothing credible in this respect these two impugned additions could be brought on record by the department even before us. So the impugned order by deleting these two additions is maintained because it is not suffering from any factual or legal infirmities.

It is in section 20 that deductions have been specified from the income chargeable under the head income from business. As per section 20(1) expenditure when incurred for the year is to be allowed and vide, Finance Act, 2004 expenditures shall be wholly and exclusively for the purposes of business. The Revising Authority has never contested this writing off of irrecoverable amount as not wholly and exclusively for the purposes of business. The principles as laid down in the quoted judgment with citation as [(1966) SSC 260 C.I.T. Karachi v. Shabbir and Company Karachi and also in the judgment with citation as 1982 PTD 20, the irrecoverable writing off and claimed as expenditures, is in the course of business and incidental to the business which is allowable as it is a trading loss. The Revising Authority misdirected itself by restricting the allowability to the extent of section 29(1)(i)(a). The writing off irrecoverable amount is an allowable expenditure under section 20(i) also. The transaction in the shape of advance of Rupafab and thereafter claim of loss was charged as expenditure caused by short recovery is duly governed by principle of "commercial expediency" laid down in the reported judgment (1982) 45 Tax (sic) (Honourable High Court), hence has rightly been held as allowable at the first appeal stage. The clause (a) of subsection (1) of 29 is dealing with writing off such bad debts which are after making sales but clauses (b) and (c) subsequent to clause (a) in subsection (1) are quite capable of allowing relief to the respondent/assessee because the debt has been actually written off in the account and there are reasonable grounds for believing that debt is irrecoverable, which has never been disputed in the entire proceedings by the department.

Before us and also the first appeal stage the department has totally failed to prove its case on factual as well as on legal premises, therefore, keeping in view the discussion supra we are inclined to up-hold the impugned order for the reasons as cited therein and also per our detailed contemplation supra. The departmental appeal being devoid of any merit is dismissed.

C.M.A./100/Tax (Trib.)Appeal dismissed.