2009 P T D (Trib.) 1281
[Income-tax Appellate Tribunal Pakistan]
Before Khalid Waheed Ahmed, Chairperson and Istataat Ali, Accountant Member
I.T.As. Nos.569/IB, 629/IB and 631/IB of 2005, decided on 20/01/20.
November, 2008.
(a) Income tax Ordinance (XXXI of 1979)---
----S. 62--Assessment on production of accounts, evidence etc.----Trial production---Commercial production---Taxation on profit earned during "trial production"---Validity---No concept of "trial production" or "commercial production" in the income tax law---Such is for internal management/working of a business concern that it treats the production of initial stages as on "trial basis"---Income or loss had to be assessed on the basis of account books and tax liability for the relevant period had to be worked out accordingly---Nevertheless question of "trial production" viz-a-viz "commercial production" had its relevance in cases where question of exemption from tax was materially involved because in that case it had to be determined as from which date the commencement of period of exemption had to be reckoned--Since the question of exemption from tax was not involved in the present case, the income/loss of the company during the so-called "trial production" period shall be assessable under normal law---Treatment given by the Assessing Officer was correct and order of First Appellate Authority being extra-legal was vacated by the Appellate Tribunal and appeal on this point was accepted.
2004 PTD 1653; (1971) 23 Tax 4 (Trib.) and 2006 PTD 2474 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.30---Income from other sources---Interest income---Income on account of interest on bank deposits was assessable under S.30 of the Income Tax Ordinance, 1979 as "income from other sources".
2004 PTD 2255 (SC Pak.) rel.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.31(1)(b)---Deduction---For claiming any expenditure its relationship with its purpose was essential---If the loan was obtained for the purposes of business, then interest on loan will be allowed as expenditure against business income---If the money was borrowed for the purpose of earning interest income, then the interest paid on borrowed money will be allowable as deduction against income from interest---Assessee obtained loan for the purposes of business, and claimed the interest paid on this loan as deduction from business income in the shape of "financial charges"---Assessee will not be entitled to claim that interest paid on borrowed capital was allowable as deduction from interest income---Entire amount of interest paid on borrowed money had been claimed and allowed as deduction from business income and no further deduction was admissible on the same score against interest income.
1999 PTD (Trib.) 708 rel.
2005 PTD 2086 and 1972 PLD 186 distinguished.
(d) Income-tax---
----Appeal---Non-adjudication of certain issues---All grounds of appeal raised before the First Appellate Authority had to be adjudicated on merits--Company's profit/loss during the so-called "trial production" period was assessable under normal law---First Appellate Authority was directed that assessee's grounds of appeals should be decided on merits.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.80D---Minimum tax on income of certain persons---Levy of surcharge on minimum tax---Validity---Tax under S.80D of the Income Tax Ordinance, 1979 was payable as minimum liability and surcharge could not be added to it---Surcharge was includible in the tax payable under normal law and then the liability under normal law was compared with liability under S.80D of the Income Tax Ordinance, 1979 and higher of the two became payable under the law---No surcharge was leviable on tax liability under S.80D of the Income Tax Ordinance, 1979, the same being the minimum tax---Assessee's appeal on this point was accepted by the Appellate Tribunal.
1989 PTD (Trib.) 1199; 1994 PTD 1171 and 2008 PTD (Trib.) 1884 rel.
Naeem Ayaz, P.C.A. for Appellant.
Muhammad Asif and Muhammad Zaheer Qureshi, D.Rs., for Respondent.
ORDER
ISTATAAT ALI (ACCOUNTANT MEMBER).---These appeals have been filed by the department as well as assessee against order, dated 24-3-2005 passed by the CIT (Appeals-I) Islamabad. The assessee has filed separate appeal against CIT(A)'s order, dated 22-3-2005 relating to issue of rectification under section 221.
2. As per facts the assessee, a listed public limited company, derives income from manufacture and sale of fertilizers. Return was filed declaring Nil income for a period of six months ending on 31-12-1999. This return was accompanied by a copy of audited accounts, which showed that sales of Rs.3,350,930,432 were made during the period under consideration but instead of declaring the same as on account of "commercial production" the same were declared as component of un-allocated expenses, which in turn were declared as one of the items of "capital work in progress". In other words, the sales were shown as sales from "trial production" and resultant income/loss was capitalized. The Assessing Officer observed that during the period ending on 30-.6-1999 sales of Rs.546,192,000 had already been shown as part of "trial production". Since, the assessee's return did not qualify for self-assessment, therefore, proceedings were started for assessment under normal law. For the reasons recorded in assessment order under section 62, dated 30-6-2003 the assessee's contention was not accepted and income was computed in the following manner:--
| (i) Loss as per manufacturing/trading and profit and loss account. | (1,542,717,000) |
| (ii) Interest on foreign currency account. | (Rs.6,433,966) |
| (iii) Balance | (1,549,150,996) |
| (iv) Additions out of items of "cost of sales". | Rs.43,145,200 |
| (v) Additions out of "selling and distribution expenses". | Rs.61,618,800 |
Add:
| (i) Interest income on local currency | (already taken into |
| depositedor Rs. 1,069,843 under section 30 | account in the computation) |
| (ii) Income from sale of fixed assets | (already taken into account in the computation) |
| (iii) Exchange risk cover fee | Rs.27,361,000 |
| (iv) Addition under section 25(c) | Rs.25,616,813 |
| (v) Addition under section 24(c) | Rs.163,298,656 |
| (vi) Exchange risk cover fee (ERCF) (added back as a capital expense) | Rs.600,127,000 |
| Total additions | Rs.921,127,469 |
| Balance income (loss) | (628,023,527) |
3. The assessee filed appeal contesting the treatment of "trial production" as "commercial production" assessing the company's income as business income, additions in P&L account, addition under section 24,(c), addition under section 25(c), disallowance of "exchange risk cover fee", disallowance of depreciation on exchange risk cover fee assessment of interest income under section 30 and charge of additional tax under section 87. Learned CIT(A) vide his impugned order, dated 24-3-2005 directed that declared results should be accepted on the basis of "trial production". About additions in P&L account, he gave following orders:--
"I have considered the arguments and perused the order. In view of the foregoing facts and circumstances of the case and decision on the issue regarding trial/commercial production, the additions become irrelevant. However, if warranted, the trade discount treated as commission is to be re-considered, in the light of the decision in the case of Messrs Fauji Fertilizer Co. Ltd. whereas addition of liabilities under section 25(c) exchange gain risk cover fee, selling and distribution expenses, tax depreciation, be reconsidered in accordance with decision contained with reference to trial/commercial production in the preceding paragraphs and AR's contentions."
4. The department has filed second appeal against this order on the following grounds:--
(i) That the order passed by the learned CIT(A), Zone-I, Islamabad is bad in law and against the facts of the case.
(ii) The learned CIT(A) was not justified to hold that production for the year under consideration was not commercial production.
5. The assessee has also filed second appeal against the same order on the following grounds:--
(i) The learned CIT(A) has erred in upholding the learned taxation officer's action of assessing income amounting to Rs.1,069,893 earned on local currency deposits under the head "income from other sources" under section 30 of the repealed Income Tax Ordinance, 1979.
(ii) Without prejudice to above ground, the learned CIT(A) has further erred in upholding the learned taxation officer's action of not allowing any expenditure under section 31 of the repealed Income Tax Ordinance, 1979 (Ordinance) against the "income from other sources" assessed by him under section 30 of the Ordinance.
(iii) The learned CIT(A) has also erred in setting aside the learned taxation officer's action of assessing "Exchange differential receivable against FERI cover" amounting to Rs.600,127,000 which is a debit balance sheet item, instead of deleting the same.
(iv) The learned CIT(A) having held that the appellant was in "trial production" and thereby following issues contested in appeal before him by the appellant have become irrelevant was not justified in giving any further directions on these issues.
6. Trial production:----Learned AR stated that during the period under consideration the company was being operated on "trial" basis. In fact a huge project was being installed. Various contractors were engaged in construction/installation of building, machinery and infrastructure. The project was not in complete shape at the closing date of the year under appeal because the contractors had not handed it over to the company. The desired level of capacity and output could not be achieved during the period of "trail production". The management had notified to different Government organizations about commencement of "commercial production" w.e.f. 1-1-2000 and different notifications/ letters were accordingly issued. Learned AR stated that profit earned during the "trial production" period was capitalized and reduced from the cost of machinery. Depreciation was accordingly claimed on cost of machinery so reduced. No P&L account was drawn for the period under appeal.
7. Learned AR stated ,that Tribunal in its judgment reported as 2004 PTD 1653 held that income/loss earned during "trial production" is to he considered as part of capital, hence not taxable under normal law. He stated that Tribunal while settling in the issue of "trial production" vide aforesaid order relied on another judgment reported as (1971) 23 Tax 4 (Trib.) and held that loss of raw materials for testing the machine in the process of installation of the factory is nothing but an additional cost for the machinery and the same has to be treated as capital loss. Learned AR stated that Peshawar High Court in its judgment reported as 2006 PTD 2474 held as under:--
"The production cannot be termed as commercial merely for the reason that the goods, so produced are sold in the open market. After all anything produced by a factory has to be utilized and its sale in the open market is one of the modes of trial production where feed back from the consumer market is obtained about the produced goods. In the entire taxation regime the status of production has never been categorized into trial or commercial production merely on the ground of its sale in the market or on the quantum of sale proceeds."
8. It was stated by learned DR that there is no concept of "trial production" or "commercial production" in the Income Tax Ordinance. He stated that income or loss on account of business is assessable under the law. The concept of "trial production" viz-a-viz "commercial production" is relevant only when the question of exemption from tax is involved. He stated that in this case no question of exemption form tax is involved, hence the question of "trial production" or "commercial production" is absolutely irrelevant. He stated that sales of more than three billion rupees were made and sale proceeds in the shape of' cash, were accordingly received by the company. Cash on account of sale proceeds came in company' kitty. He stated that facts of the case reported as 2000 PTD (Trib.) 1653 are totally different. He further stated that this decision placing reliance on an irrelevant reported case, was made by the Single Bench and is not, therefore, binding for this forum. He further stated that company is operating a huge project, whose production started w.e.f. 1-1-2000. It was company's obligation to draw a trading account as well as P&L account and work out its income or loss for the period under consideration. He emphasized that when production is being made and sales are being effected, then question of business being on "trial" or "commercial" level is not relevant for the purposes of taxation. It is for company's internal consumption that it has decided that production of certain period of initial stages should be treated to be on "trial" basis. So far as taxation is concerned, the business conducted even during "trial" period is of "commercial" nature. He pressed that when sales of more than three billion rupees were made, it is not understood as to why the production was still being treated to be on "trial" basis. He added that even if the business was being conducted on "trial" basis, company's income or loss was assessable in normal course. However, where question of exemption of tax is materially involved, then it may be significant to first determine as to whether-the production was being obtained on "trial" basis or on "commercial" scale. Since, in this case, the question of exemption from tax is not involved, the concept of "trial production" is also not involved.
9. We have considered arguments of both the sides in the light of the relevant material available before us and we are inclined to agree with learned DR that there is no concept of "trial production" or "commercial production" in the income tax law. This is for internal management/working of a business concern that it treats the production of initial stages as on "trial basis". So far as the taxation matters are concerned, the income or loss has to be assessed on the basis of account books and tax liability for the relevant period has to be worked out accordingly. Nevertheless question of "trial production" viz-a-viz "commercial production" has its relevance in cases where question of exemption from tax is materially involved because in that case it has to be determined as from which date the commencement of period of exemption has to be reckoned. Since, in this case the question of exemption from tax is not involved, the income/loss of the company during the so-called "trial production" period shall be assessable under normal law. The treatment given by the Assessing Officer is, therefore, correct and impugned order of learned CIT(A) being extra-legal is vacated and departmental appeal on this point is accepted.
10. Taxability of interest income:---At the time of hearing it was stated by learned AR that interest income represents profit on monies temporarily deposited in bank account which forms integral part of company's business. Profits and gains arising out of the said interest income are directly related/linked to the manufacturing unit. He stated that saving bank accounts were opened and operated by the company for running the business. The interest income earned from these accounts is also related to "trial production and is not taxable.
11. It was stated by learned DR that Hon'ble Supreme Court in its decision reported as 2004 PTD 2255 has clearly ruled that interests earned on deposits in the banks squarely falls in the scope of "income from other sources" assessable under section 30 of the Income Tax Ordinance, 1979. The deposits in the banks are providing a separate income to the assessee. Learned DR contended that at the present the aforesaid judgment of the Supreme Court is very much in field and as such has a binding effect.
12. We have given due consideration to arguments of both the parties and we are inclined to agree with learned DR that a clear decision has been given by the Hon'ble Supreme Court of Pakistan through its judgment reported as 2004 PTD 2255 holding that interest income is assessable under section 30 as "income from other sources". In the presence of this clear verdict of Hon'ble Supreme Court no other opinion can be formed or expressed on this point. We, therefore, hold that income on account of interest on bank deposits is assessable under section 30 as "income from other sources".
13. Deduction of expenses against interest income.---It was stated by learned AR that while subjecting interest income to tax as "income from other sources", the Assessing Officer did not allow financial charges admissible under section 31(1)(b) of the Income Tax Ordinance, 1979. He stated that certain amount of money was borrowed from bank(s). This borrowed money along with other funds, was kept in the bank account of the company on which interest was earned in due course of affairs. The Revenue is treating this interest income as "income from other sources". He stated that the company paid interest on the amount borrowed from bank(s). He contended that interest paid in lieu of borrowed money is admissible deduction from interest income. He stated that the Revenue has not allowed any deduction from this income whereas it has been settled in cases reported as 2005 PTD 2086 (LHC) and PLD 1972 (H.C. Kar.) 186 that the assessee was entitled to claim expenses in the shape of interest paid to financial institutions in respect of loan obtained for the purposes of such income. It was an expenditure incurred for earning the interest and should have been allowed as deduction from business income.
14. Learned DR stated that the assesses had already claimed all expenses incurred in respect of interest on borrowed amount in the form of "financial charges" and the same have already been allowed as deduction from business income. He stated that only those expenses are admissible under section 31 of Income Tax Ordinance, 1979 which are incurred for earning income under section 30 of Income Tax Ordinance, 1979. 11c stated that if the money is borrowed from bank(s) for the purposes of business then interest paid on such borrowed money will he allowed as an expenditure against business income. If the money was borrowed for earning interest income, only then the interest paid on borrowed capital will be allowed a deduction from interest income. He stated that case-law cited by learned AR is distinguishable because facts and points of this case are different than those discussed there. He stated that the Hon'ble Supreme Court in its decisions, dated 7--11-2006 in the case of AES Pak. Gene. (Pvt.) Ltd. in Civil Petitions Nos. 2211 and 2212 of 2005 and the Tribunal in its judgment reported as 1999 PTD (Trib.) 708 have clearly settled that if money was borrowed for the purposes of business, the interest paid on such borrowed money will be allowable as deduction from business income and it will not be allowed as deduction from interest income. Learned DR emphasized that since the assesses had already claimed all expenses in the shape of "financial charges" against business income, no further deduction is admissible on this account against "income from other sources".
15. We have given due consideration to arguments of both the parties and we are inclined to agree with learned DR that for claiming any expenditure its relationship with its purpose is essential. If the loan was obtained for the purposes of business, then interest on loan will be allowed as expenditure against business income. If the money was borrowed for the purpose of earning interest income, then the interest paid on borrowed money will be allowable as deduction against income from interest. In this case the assessee obtained loan for the purposes of business, and claimed the interest paid on this loan as deduction from business income in the shape of "financial charges". I will not be entitled to claim that interest paid on borrowed capital is allowable as deduction from interest income. The entire amount of interest paid on borrowed money has been claimed and allowed as deduction from business income and no further deduction is admissible on the same score against interest income. Assessee has not been able to establish that interest was paid to earn income assessable as "income from other sources". The Hon'ble Supreme Court in its afore referred judgment has already held that payment of interest on the capital generated/borrowed for starting a business venture would not be adjustable against the income accruing by investing/utilizing the generated/borrowed capital or part thereof and earning interest thereon. Onus is on the assessee to establish that each rupee of expenditure claimed as deduction was wholly and necessarily incurred for the purpose against which it is being claimed as deduction. This assessee has not been able to prove that money was borrowed for earning interest income. The Revenue has successfully established that money was borrowed for business purposes and not for the purpose of earning interest income. In the light of these facts and circumstances we hold that the assessee is not entitled to claim interest on borrowed money as deduction from interest income. Assessee's appeals on this point arc not maintainable.
16. Non-adjudication of certain issues by CIT(A).---It was stated by learned AR that CIT(A) was not justified to hold that issues relating to certain additions in P&L account had become irrelevant after his verdict that company was being operated on "trial production" basis. The details of these items are as under:--
(a) Taxation Officer's action of making ad hoc disallowances @ 20% out of
| Salaries, wages and benefits. | 17,407,000 |
| Travel and Transportation. | 2,824,200 |
| Communication, establishment and other expenses. | 9,562,000 |
| Production transportation. | 41,756,800 |
| Other selling expenses. | 19,862,000 |
(b) Taxation Officer's action of disallowing under section 24(c) of the repealed Income Tax Ordinance, 1979 of the appellant's claim on account of "Trade discount" by treating the same as "commission".
(c) Taxation Officer's action of making additions under section 25(c) of the repealed Income Tax Ordinance, 1979 in respect of liabilities which do not fall within the ambit of' the said section.
(d) Taxation Officer's action of making disallowance of "exchange risk cover fee" by contending that the said expenditure represents capital expenditure and not revenue expenditure.
(e) Short allowance of tax depreciation.
17. Learned DR however, defended the action of both the authorities below. We have taken into account the submissions of learned AR and we are of the view that all the grounds of appeal raised before CIT(A) have to be adjudicated on merits. This opinion is fortified by our decision that company's profit/loss during the so-called "trial production" period is assessable under normal law. In view of this position of the matter, the case is remanded back to CIT(A) with the directions that assessee's grounds of appeals relating to aforementioned items should be decided on merits. Assessee's appeal on these points shall be treated as pending before CIT(A). Both the assessee as well as department should provide a copy of this order to the concerned CIT(A) for disposal of pending appeals.
18. Surcharge on tax under section 80D.---The Assessing Officer found that surcharge @ 5% is leviable on tax under section 80D amounting to Rs.16,754,652. He, therefore, after following necessary procedure charged surcharge of Rs.837,733 @ 5% of tax of Rs.16,754,652 under section 80D vide his order, dated 27-1-2004 under section 221. The assessee filed appeal against this rectification order, which was rejected by learned CIT(A) vide his order, dated 22-3-2005. The assessee has filed second appeal contesting that CIT(A) was not justified in upholding the levy of surcharge on minimum tax payable under section 80D.
19. It was stated by learned AR that the Assessing Officer could not make rectification under section 221 because rectification has a very limited scope whereas in this case no mistake floating on record was there which could warrant rectification. He stated that it has been decided by higher appellate authorities in the cases reported as 1989 P1'D (Trib.) 1199, 1994 PTD 1171 and 2008 PTD (1'rib.) 1884 that only mistakes floating on the surface of record are rectificable. He contended that the Assessing Officer otherwise could not rectify this case because surcharge is not leviable on minimum tax payable under section 80D. Learned DR stated that action of Assessing Officer is correct and CIT(A) after taking into consideration all legal aspects of the matter has rightly upheld this treatment.
20. We have considered this issue in the light of arguments of both the sides and we are inclined to agree with learned AR that tax under section 80D is payable as minimum liability and surcharge cannot be added to it. Surcharge is includible in the tax payable under normal law and then the liability under normal law is compared with liability under section 80D and higher of the two becomes payable under the law. No surcharge is leviable on tax liability under section 80D, the same bet the minimum tax. Assessee's appeal on this point is accepted. Orders of both the authorities below relating to this point, are vacated and surcharge levied as per above mentioned details is deleted.
21. All the appeals are decided in the manner and to the extent as indicated above.
C.M.A./61/Tax (Trib.)Order accordingly.