2009 P T D (Trib.) 1559
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Masood Ali Jamshed, Accountant Member
I.T.As. Nos. 4943/LB and 5929/LB of 2005, decided on 02/05/2009.
(a) Income Tax Ordinance (XLIX of 2001)---
----Ss.67 & 21(k)---Apportionment of deductions---Sale promotion expenses---Proration of sales promotion expenses, import sales and adding such to normal income---Assessee contended that no advertisement was made for goods imported for re-sale purposes and proration could not be made on the basis of presumptions---Department pleaded that sales promotion expenses comprised mainly of TV advertisement and were attributable to income from sale of imported goods as advertisement benefits related to both locally manufactured and imported goods---Validity---Appellate Tribunal had already adjudicated the issue and upheld the treatment of First Appellate Authority deleting the addition on account of proration of advertisement expenses with the observations that "since the expenditure made by the assessee did not qualify to be common expenditure as specified under S.67 of the Income Tax Ordinance, 2001, therefore, addition made on this account has rightly been deleted"---Appellate Tribunal did not find justification, for the addition made in this respect and deleted such addition following the previous judgment.
I.T.A. No.2164/LB of 2006 rel.
(b) Income Tax Ordinance (XLIX of 2001)---
----S.21(k)---Deductions not allowed---Assessing Officer treated the gift and presents and baby feeding schemes as excess perquisites under S.21(k) of the Income Tax Ordinance, 2001 and disallowed the claim of expenses---Assessee contended that gifts and presents were not given to employees, and they had no nexus with calculation of excess perquisites under S.21(k) of the Income Tax. Ordinance, 2001; that such items including certain company products, of nominal value given occasionally to customers, suppliers, and other business associates or external visitors as souvenirs that said expenses could not be added back as perquisites of the employees as such expenses were not in the nature of perquisites---Validity---Gifts and presents which were not given to employees of the company could not be included in the calculation of excess perquisites and could not be disallowed under S.21(k) of the Income Tax Ordinance, 2001.
Black's Law Dictionary ref.
(c) Income-tax---
---Obsolete stock, store and spare parts---Addition of---First Appellate Authority deleted the addition made on account of obsolete stock, store and spare parts---Validity---Appellate Tribunal had already adjudicated the matter in favour of the assessee and did not interfere in the order of First Appellate Authority---Departmental appeal was dismissed by the Appellate Tribunal on the issue.
(d) Income Tax Ordinance (XLIX of 2001)---
----S.23(5)---Initial allowance---Claim was disallowed of the reason that initial allowance was admissible from tax year, 2002 whereas in the taxpayer case the year, 2003 was a period of 12 months from January to December, 2002 and the initial allowance was not allowable---Assessee contended that amendment made in subsection (5) of S.23 of the Income Tax Ordinance, 2001 regarding the initial allowance was applicable from the tax year, 2003 and not from the tax year, 2004---First Appellate Authority found that amendments being remedial in nature were applicable to a tax year irrespective of the accounting period involved and directed to allow the initial allowance---Validity---Appellate Tribunal declined interference and appeal filed by the department on this ground was also dismissed.
I.T.A. No.2237/LB of 2005 and I.T.A. No.1223/LB of 2006 ref.
(e) Income-tax---
----Deferring of expenditure---First Appellate Authority deleted the addition made on account of deferring 50% of the expenditure to the next year following the judgment of Appellate Tribunal wherein it was held that "the expenditure is to be allowed in total if it is claimed by the assessee in its return---Based on such findings the assessee claimed the total expenditure without deferring to the subsequent year; and contended that no valid ground was available for deferring 50% of the expenditure to the next year---Validity---Directions made by the First Appellate Tribunal were in accordance with the directions of the Appellate Tribunal---No interference was required and the appeal filed by the department was dismissed.
I.T.As. Nos. 2519 and 2522/LB of 1999 ref.
(f) Income Tax Ordinance (XLIX of 2001)---
---S.34---Accrual-basis accounting---Actuarial losses---Claim of actuarial losses was disallowed for the reason that the claim was not admissible as it did not reflect in the accounts and conditions mentioned in S.34 of the Income Tax Ordinance, 2001 had not been met---First Appellate Tribunal deleted the addition with the observation that "the expenditure in this respect has been properly reflected in the accounts and meets all the conditions of S.34 of the 'Income Tax Ordinance, 2001 "---Since the calculation of the liability was complex and involves satisfied working by the Actuary and the conditions mentioned in S.34 of the Income Tax Ordinance, 2001 were also met, there was no justification in the addition in this respect---First Appellate Authority had rightly deleted the addition made---Order of First Appellate Authority was upheld by the Appellate Tribunal and departmental appeal was dismissed.
I.T.A. No.2164/LB of 2006 ref.
2004 PTD (Trib.) 1135 and 2006 PTD (Trib.) 76 rel.
(g) Income Tax Ordinance (XLIX of 2001)---
---Ss.27(c) & 20---Employee training and facilities---Deletion of addition on account of adjustment of selling expenses---Claim of external training- expenses and foreign visit expenses was disallowed and added back to the total income for the reason that S.27(c) of the Income Tax Ordinance, 2001 allows training expenses in connection with a scheme approved by the Central Board of Revenue and the external training had not been received in connection with a scheme approved by the Central Board of Revenue in terms of provisions of S.27(c) of the Income Tax Ordinance, 2001---Assessee contended that according to the requirement of business, the training expenses were incurred on employees of the company to enable them to gain/obtain such additional knowledge, which would increase the level of competency in relation to their assigned jobs; that purpose of the training was to enhance the job knowledge and skills of the employees and that such was a business expense allowable in full---Validity---Assessee-company was amongst the largest manufacturing concern of its type and had been expanding to increase the manufacturing activities in the country---Such visits to the factory and any expense thereon could not be said to have not been incurred for the purpose of business---Purpose of such visits includes visits by technical staff of the companies from which assessee had purchased machinery to advice on installation, working etc. of the machinery---Contentions of the assessee and the observation of the First Appellate Authority were based on the decisions of Superior Courts---First Appellate Authority had rightly deleted the addition---Department appeal was dismissed by the Appellate Tribunal.
PLD 1967 SC 524 and 2002 PTD 1535 rel.
Ghazanfar Hussain, D.R. for Appellant.
Asim Zulifqar, ACA for Respondent.
ORDER
Through these two cross appeals for the tax year, 2003 the impugned order of the learned CIT(A), dated 22-6-2005 has been objected. The assessee has objected the impugned order regarding up-holding the treatment made by the Taxation Officer prorating sale promotion expenses to import sales and adding these to normal income and treating the gift and presents and baby feeding schemes as excess perquisites under section 21(k) of the Ordinance, 2001 while the department has objected the impugned order on the following grounds:--
"(1) That the learned CIT(A) was not justified in deleting the addition on account of obsolete stock, store and spare parts at Rs.13.86(M), without any cogent reasons.
(2) That the learned CIT(A) was not justified in directing to allow expenditure prorating royalty and technical fees amounting to Rs.9.95 (M) to export sales on the basis of turnover, instead of identifiable portion amounting to Rs.5.08 (M), without any plausible reasons.
(3) That the learned CIT(A) was not justified in directing to allow initial depreciation allowance on building amounting to Rs.53.64 (M), without any valid reason.
(4) That the learned CIT(A) was not justified in deleting the addition on account of deferring 50% of the expenditure to the next year, without any cogent reason.
(5) That the learned CIT(A) was not justified in deleting the addition on account of actuarial losses amounting to Rs.65.45 (M), without any valid reason.
(6) That the learned CIT(A) was not justified in deleting the addition at Rs.17,152,658 on. account of administration and selling expenses, without any cogent reason."
We have heard the learned Representatives from both the sides and have also perused the impugned order of the learned CIT(A), the assessment order and the order relevant record of the case.
The learned counsel representing the assessee regarding the proration of sale promotion expenses to import sales and adding these to normal income has contended that a particular head of expenditure is prorated between income from normal sale and from imported goods on the basis of the actual identifiable expenditure incurred for specific products. He has contended that it was explained to the Taxation Officer as well, as before the learned CIT(A) that the taxpayer has not incurred any expenditure for imported goods such as Lactogen-I, Lactogen-2, and Nan. The reason being for non-advertisement is the regulation of the World Health Organization, according to which such infant feed cannot be advertised. He has contended that it is an admitted fact that no advertisement is done for Lactogen-1, Lactogen-2 and Nan and, therefore, no advertisement expenditure is to be prorated to sale of these products. He has in this regard also referred the products such as fox mint, fox mix fruit, lion bars etc. which are also not advertised and therefore, there is no question of proration of the advertisement expenditure. He has argued that even if we follow the Taxation Officer's view it would have not disturbed the claim of the assessee as no proration could be required between the normal and presumptive income. According to the learned counsel it is an admitted fact that no advertisement is done for goods imported for re-sale purposes and, therefore, proration cannot be made on the basis of presumptions. He is of the view that the TV advertisement represents only 25% of the total advertisement and sales promotion expenditure. Learned counsel has contended that for the sake of argument if any proration is to be done it should be to the extent of TV advertisement instead of the total expenditure. He is therefore, of the view that if the proration is made the allocation in this respect is to be restricted to the extent of TV advertisement only. Learned counsel has contended that the addition in this respect is against the previous history of the case but the learned CIT(A) has upheld the treatment meted out by the Taxation Officer as mentioned in the impugned order on the basis of history without considering the fact that this Tribunal has already not approved the addition made in this regard vide order, dated 8-11-2007 in I.T.A. No.2164/LB of 2006.
On the other hand, the learned DR is supporting the treatment meted out by the officers below. He has contended that the sales promotion expenses are comprises mainly of TV advertisement and are attributable to income from sale of imported goods as advertisement benefits both locally manufactured and imported goods. According to the learned DR the learned CIT(A) has, therefore, up-held the treatment metted out by the Assessing Officer keeping in view the previous history of the case.
We have considered the arguments from both the sides. We are of the. view that this Tribunal has already adjudicated this issue while deciding the appeal filed by the department for the tax year, 2004 in the above referred I.T.A. No.2164/LB of 2006 vide order,. dated 28-11-2007 and has up-held the treatment of the learned CIT(A) deleting the addition on account of proration of advertisement expenses with the observations that "since the expenditure made by the assessee did not qualify to be common expenditure as specified under section 67 of the Income Tax Ordinance, 2001, therefore, addition made on this account has rightly been deleted. "
In view of the above referred arguments of the learned counsel and following the above referred decision of this Tribunal, gated 28-11-2007 we find no justification for the addition made in this respect, which is, therefore, deleted.
Regarding treating the gifts, presents and baby feeding schemes as excess perquisites under section 21(K) of the Ordinance, 2001, we have found that the Taxation Officer has disallowed the claim of expenses in terms of provisions of section 21(K) of the Ordinance. On behalf of the assessee it has been contended that the gifts and presents are not given to employee, therefore, they have no nexus with calculation of excess perquisites under section 21(K). These are the items including certain company products, of nominal value given occasionally to customers, suppliers, and other business associates or external visitors as souvenirs. These expenses cannot therefore, be added back as perquisites of the employees. It has been contended that these expenses are not in the nature of perquisites. This is due to the established position of law that the relation of employment implies that an employee is given the remuneration for services performed by him. Such remuneration is given at regular intervals, usually a month time, which includes some fixed pay, allowances and perquisite given under the terms of employment. Such allowances and perquisites are part of employee's salary and enter into the computation of excess perquisites unless otherwise exempted. For a perquisite to be taxable in the hands of the employee it has to be directly beneficial to the employee and has to be quantifiable as well. He has in this respect referred the method of computation of excess perquisites laid down in section 21(k) of the Ordinance. The excess perquisites to be added-back in total income under section 24(K) of the Ordinance is the expenditure paid by the employer on the provision of perquisite, allowance or other benefits to an employee in excess of fifty per cent of his salary excluding such perquisites, allowances or other benefits. The learned counsel in this regard has also referred the relevant part of the subsection (k) of section 24 which is re-produced hereunder:--
"(k) any expenditure paid or payable by an employer on the provision of perquisites and allowances to an employee where the sum of the value of, the perquisites 'computed under section 12 and the amount of the allowances exceeds fifty per cent of the employee's salary for a tax year (excluding the value of the perquisites or amount of the allowances" (Emphasis is ours)
He has in this respect submitted that the term provision has been defined in the seventh edition of Black's Law Dictionary as:--
Provision: (1) a clause in a statute, contract or other legal instrument.
(2) A stipulation made before hand" (emphasis is ours)
He is of the view that from the above it is clear that the above referred first meaning is not applicable in this case. However, the second one fully explains the term as used by the legislature. The term `stipulation' has been defined in the Black's Law Dictionary, the relevant portion of which is reproduced below for reference:--
"Stipulation: A material condition or requirement in any agreement; esp. a factual representation that is incorporated into a contract as a term" (emphasis is ours)
According to learned counsel from the meaning of the above mentioned words read with section 24(i), we can infer that any expenditure incurred by an assessee consequent to a material condition or requirement in an agreement made before hand (salary contract) for perquisites, allowances or other benefits to any employee in excess of fifty percent of his salary excluding perquisites, allowances or other benefits would be added back to the income of the taxpayer under section 21(k) of the Ordinance. The payments under a contract of employment are previously agreed payments for compensation or remuneration for services provided by an employee and are payable at regular intervals by employer. All other expenditure on employee by employer is subjective and/or department on certain factors other than material condition or requirement in the employment agreement. As the legislature does not provide for taxation of such perquisites, allowances or other benefits, which do not form a material condition of requirement for expenditure under the employment agreement, the contention to include the rest of expenses in the statement is legally incorrect and unwarranted. Further, section 21(k) of the Ordinance, as a whole disallows business expenses, which would otherwise have been allowable, if this section was not there. As the section has an effect of enhancing the tax liability of the taxpayer, it should be interpreted in strict and narrow meaning .as conferred from its plain reading.
The learned counsel in this regard has also referred section 12(2) wherein the salary has been define as under:--
"12(2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including--
(a) any pay, wages or. other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions);
(b) any perquisite, whether convertible to money or not;
(c) the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee's duties of employment;
(d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the empower, other than expenditure incurred on behalf of the employer in the performance of the employee's duties of employment;
It has been contended by the learned AR that the legislature has specifically provided that expenses that are incurred in performance of employee's duties of employment consequent to such employment shall not be part of perquisites. This is so because such expenses are not any benefit to the employee but are incurred to facilitate the conduct of business (sometime paid by the employee and reimbursed to him by the employer). It is for this reason that such expenses/reimbursements are not part of perquisites/income of the employee.
On the other hand, the learned DR has contended that the benefits/perquisites are to be determined as per provision of the Income Tax Ordinance and not as per employment agreement. According to the learned DR every perquisite/allowance/benefit paid to the employee is always "a business expense. According to him if the same is not a business expense it is otherwise not admissible in term of section 20 of the Ordinance, 2001. He has contended that excess perquisites/ allowances/benefits computed under section 21(c) are paid to employees for business performance and disallowance is only made when the maximum exceeds 50% of the basic salary, therefore, the claim of expenses has rightly been disallowed by the Taxation Officer in terms of provision of 21(K) of the Ordinance which has rightly been upheld by the learned CIT(A).
The learned representative of the assessee in the rebuttal of the above referred arguments of the learned DR has contended that section 21(K) is not applicable as the claim of expenses in this respect have not been given to employees. He has contended that baby feeding schemes and Eid gifts expenses cannot be disallowed due to the meaning of the employment defined in the Ordinance, 2001 in section 22(2). He has contended that in the past these expenses have always been allowed and in this respect never any disallowance has been made but the learned CIT(A) has not considered this position also.
After considering above referred arguments of both sides, we have found force in the arguments raised by the learned counsel for the assessee. We are of the view that the gifts and presents which are not given to employees of the company cannot be included in the calculation of excess perquisites and cannot be disallowed under section 21(k) of the Ordinance, 2001.
Regarding the remaining expenses, we are of the view that these are also not paid in relation to the performance of the duties of the employment. Even otherwise no such disallowance has been made in the previous assessment years. The additions made in this respect are, therefore, deleted and the appeal filed by the assessee is allowed.
Regarding the cross appeal filed by the department we have found that the addition made on account of obsolete stock, store and spare parts has been deleted by the learned CIT(A). The learned counsel representing the assessee has placed before us the order of this Tribunal, dated 28-11-2007 in the case of the taxpayer in ITA No.2164/LB/2006 (Tax year, 2004) wherein the appeal filed by the department has been dismissed and the deletion of the addition of the similar nature made by the Taxation Officer and deleted by the learned CIT(A) has been up-held with the observations that "the store and spares characterized as stock and trade written off can be claimed as admissible expense in P&L account."
We, therefore, in view of the above facts, circumstances and legal position find no warrant for interference in the impugned order of the learned CIT(A) in this respect as this Tribunal has already adjudicated the matter in favour of the assessee. The appeal filed by the department on this issue is dismissed.
Regarding the direction of the learned CIT(A) to allow expenditure prorating royalty and technical fees to export sales on the basis of turnover instead of identifiable portion, we are of the view that the ground as famed by the appellant-department is vague, as the learned CIT(A) has not given any such direction in the impugned order but has held that since the expenditure is identifiable, therefore, it should be allowed on actual basis and not on turnover basis.
The appeal filed by the department on this ground, therefore, is also dismissed.
Regarding the direction of the learned CIT(A) to allow initial depreciation allowance on building, on behalf of the assessee, the order of this Tribunal, dated 2-7-2007 in I.T.A. No. 2237/LB of 2005 (Assessment year 2002-2003) and I.T.A. No.1223/LB of 2006 (Tax year, 2003) in the case of Messrs Kohi Noor Textile Mills Ltd. has been placed before us wherein after discussing the issue in detail it is directed that the claim of initial depreciation could be allowed and the learned CIT(A) in the present case has allowed the same after considering the legal position which has been discussed in the impugned order in detail. We have found that in this case the Taxation Officer has disallowed the claim for the reason that the initial allowance is admissible from tax year, 2004 whereas in the taxpayer case the tax year, 2003 is a period of 12 months from January to December, 2002 and, therefore, the initial allowance is not allowable.
On the other hand, it has been contended by the learned counsel of the taxpayer that amendment made in subsection (5) of section 23 of the Ordinance, 2001 regarding the initial allowance is applicable from the tax year, 2003 and not from the tax year, 2004. The learned CIT(A) after discussing the matter at length has come to the conclusion that the amendment being remedial in nature as supported by the C.B.R. circular are applicable to a tax year irrespective of the accounting period involved and, therefore, has directed to allow the initial allowance.
After considering the above referred case-law and the legal position, we find no warrant for interference in this respect also. The appeal filed by the department on this ground is also dismissed.
Regarding the deletion of addition on account of deferring 50% of the expenditure to the next year, we are of the view that the ground as framed by the department in this respect is also vague. Even otherwise on behalf of the taxpayer the order of this Tribunal, dated 31-10-2001 in the case of the assessee for the assessment years 1994-95 and 1997-98 in ITA Nos. 2519 and 2522/LB/1999 has been placed before us wherein it has been observed that:--
"the perusal of assessment order reveals that as per statements of accounts filed along with the returns for all the years under consideration the assessee by itself deferred the 50% of sale promotion expenditure for the next year while working out the income. Further no rectification application has admittedly been filed by the assessee on the issue before the Assessing Officer, first appellate authority or the ITAT. The issue raised by the learned AR of the assessee at this stage without having been agitated through specific grounds of appeal also does not arise out of the orders of both the authorities below. The assessee has been allowed the 1/2 of the sale promotion and advertisement expenses as claimed by him in our opinion the Assessing Officer was justified in allowing the amount of expense keeping in view the claim of assessee. Under the circumstances of the case, the issue could not be raised at this stage."
The learned CIT(A) has deleted the addition with the observations that:--
"this Tribunal has clearly held that the expenditure is to be allowed in total if it is claimed by the assessee in its return. Based on the direction of this Tribunal the assessee has claimed the total expenditure without deferring to the subsequent year, therefore, there is no valid ground for deferring 50% of the expenditure to the next year."
We are of the view that the directions made by the learned CIT(A) are in accordance with the directions of this Tribunal and, therefore, no interference in this respect is required and the appeal filed by the department on this ground is also dismissed.
Regarding the actuarial losses we have found that the Taxation Officer has disallowed the claim for the reason that the claim is not admissible as it does not reflect in the accounts and conditions mentioned in section 34 have not been met.
On behalf of the assessee it has been contended that the calculation of retirement benefits liability is worked out by a person specialized in the field of Actuarial working. This calculation requires specialized knowledge of the subject and involves complex and detail formulas. The Actuary (Nauman Associates) has worked out the liability as at December, 31, 2002. In his report he has identified that the liability of the Gratuity and Pension Funds exceeds the fair value of plan assets of the funds resulting in a loss which represents definite liability to be borne by the employer the present taxpayer. It has been contended that the liability in this respect has been properly booked in the accounts at Note 7.1 and 7.2 on the basis of the reports submitted by Nauman Associates. In this respect it has been contended that according to Income Tax Laws the expenditure is to be allowed where provision for expenditure is definite and calculated on the basis of reasonable grounds.
The learned AR giving an overview of accounting treatment and reporting made in accounts for employees' benefits, related actuarial valuation and law governing the above mentioned treatment of actuarial losses and financial reporting has explained that the financial statements of the company are prepared under the Companies Ordinance, 1984: Under section 234(3) of the Ordinance it is mandatory requirement to follow the International Accounting Standards (IAS) 'which are now called the International Financial Reporting Standards (IFRS) and are reproduced below for reference:
"(3) Subject to the provisions of this Ordinance:
(i) such International Accounting Standards and other standards shall be followed in regard to the accounts and preparation of the balance sheet and profit and loss account as are notified for the purpose in the official Gazette by the Commission."
He has contended that the standard dealing with employee benefits is IAS 19, which requires valuation of the employee related liabilities by an expert actuary at least once in three years which according to learned AR is in our case is carried out each year by Nauman Associates, reknowned and reputed Chartered Actuaries to determine the liability at a reasonably accurate amount.
According to the learned AR the IAS requirement and procedure for determination of liabilities related to employee benefits would be as follows:--
(1) Determine the employees benefit obligations in return for the performance of their services
(2) Determine the present value (PV) of employee benefit obligations using actuarial valuation method
(3) Determine the present value of any plan assets
(4) Determine the total amount of actuarial gains and losses (included in the PV of benefit obligations) and the amount of those actuarial gains (added to the PV) and loss (deducted from the PV) that should be recognized
(5) The netting off of the above amounts results in employees benefit liability recognized in accounts.
Learned counsel has submitted that the determination of the first three elements necessarily requires to consider different financial and demographic parameters like salaries, employee turnover and mortality rates, interest rate (discounting factor), expected and actual return on plan assets. When from one year to another, any or all of these factors is changed, it results in change in either the value of benefits obligation or the fair value of plan assets and the result is either actuarial gain or loss.
He has argued that effect of these adjustments can be either gain or loss and that these cannot be normally factored/weighed by an ordinary person and requires actuarial experts, and even then there may be changes in these estimates which can materially affect the profit or loss. The issue now arises whether and how much of these actuarial gains/losses should be recognized.
He has contended that the IAS, in order to avoid fluctuations/ manipulation in the profit/loss, has, therefore, provided that fluctuations resulting due to changes in these actuarial assumptions should be recognized over a spread period if, and to the extent, they exceed a certain limit/corridor. Although it is pertinent to note that in some countries (like UK) the recognition of the entire actuarial gains and losses is required. He has in this respect 'referred the relevant text from the IAS which is re-produced hereunder:--
"(92) In measuring the defined benefit liability under paragraph 52, an enterprise should recognize a portion (as specified in paragraph (93) of its actuarial gains and losses as income or expense if the net cumulative unrecognized actuarial gains and losses as at the end of the previous reporting period exceeded the greater of;
(i) 10% of the present value of the defined benefit obligation at that date; and
(ii) 10% of fair market value of any plan assets at that date,
(93) The portion of actuarial gain and losses to be recognized for each of defined benefit plan is the excess determined under paragraph 92 divided by the expressed average remaining lives of the employees participating in that plan .."
He is of the view that from the above, it is clear that matter of recognition can arise only if there is an obligation. The PV of obligation obviously includes the actuarial losses which are yet unrecognized. It is for this reason that the actuarial losses are deducted from the total obligation instead of being added to it (as shown in the accounts). Now the IAS has restricted the recognition to the extent that it comprises of actuarial gain or losses beyond a certain limit i.e. the actuarial gain or loss recognized is the amount determined in excess of corridor limits (explained above) as above divided by the average remaining lives of the employees, although it entirely arose in one year. As a result, although the actual liability is for the amount equal to present value of plan obligations, for the purpose of accounts and financial reporting under the CO 1984. It is accounted for in excess of 10% corridor limit, over a certain period.
He has contended that the unrecognized loss is in fact a part of the liability determined by the actuary. The actuary has determined the liability but this determined liability has not been recognized in full due to the application of the IAS.
He is of the view that for the purpose of determining taxable' income under the Ordinance, the provisions of the Ordinance would prevail unless some other law has specifically provided for some relief. The other laws may be relevant in determining the nature of some expenses but they cannot be held applicable for tax purpose. This view was recently endorsed by this Tribunal in the case reported as 2004 PTD 1135 while dis-agreeing the contention raised by the taxpayer. The relevant text of the judgment of the Tribunal is reproduced below:--
" We agree that' for determination of the words `pertaining to accounts' the definition of the International Accounting Standards would be relevant. However, we do not agree that the pattern suggested by the International Accounting Standards can be made binding for the purpose of assessment under the Income Tax Law. It hardly needs mentioning that the Income Tax Ordinance is an independent law and its purposes are entirely different ."
It is apparent from above that despite requirement of the CO 1984 to not to recognize certain part of liability, the amount is fully allowable under the Ordinance as all the conditions contained in the Ordinance itself have been met and any treatment shown in accounts for financial reporting purpose cannot be made a basis to determine its taxability under the Ordinance."
We have found that the learned CIT(A) has deleted the addition made in this respect with the observations that:--
"the expenditure in this respect has been properly reflected in the accounts and meets all the conditions of section 34 of the Ordinance, 2001."
The learned CIT(A) has observed that he has gone through the relevant provision of law and since the calculation of the liability is complex and involves satisfied working by the Actuary and the conditions mentioned in section 34 are also met, therefore, these is no justification in the addition in this respect.
The learned counsel representing the assessee has in this respect referred the decision of this Tribunal, dated 28-1-2007 in ITA No.2164/LB/2006 for the tax year, 2004 in the case of the assessee wherein the appeal filed by the department has been dismissed for the reason that the addition was made without issuance of show-cause notice to the assessee and, therefore, the learned CIT(A) has deleted the addition which has been upheld by this Tribunal. The learned counsel representing the assessee has placed before us the decision reported as 2004 PTD (Trib.) 1135 wherein it has been held as follows:--
"However, this gives an obvious conclusion that the declared profit is subject to scrutiny and the same can increase or reduce the profit. It means the assessee can still remain entitled to certain expenses which are allowable to him under law but the same have not been claimed in books but in Income tax return. A simple example of such a claim is depreciation of machinery for working in double shifts or in triple shifts."
On behalf of the assessee in this respect a decision of this Tribunal reported as 2006 PTD (Trib.) 76 has also been referred.
Keeping in view all these facts and circumstances of the case, we are of the view that the learned CIT(A) has rightly deleted the addition made in this respect. The impugned order is upheld and the appeal filed by the department is dismissed.
Regarding the last issue which is in respect of deletion of addition on account of adjustment of selling expenses, we have found that the Taxation Officer has disallowed the claim of external training expenses and foreign visit expenses for the reason that even in the new Income Tax Ordinance, 2001 specific provision exists which is under section 27(c) which allows training expenses in connection with a scheme approved by the C.B.R. only. According to the Taxation Officer in the case of assessee external training has not been received in connection with a scheme approved by C.B.R. in terms of provisions of section 27(c), therefore, the said expense is being disallowed and added back to the total income of the assessee.
On behalf of the assessee it has been contended that staff training was conducted in accordance with the requirements of our business. The aforesaid training expenses were incurred on the employees of the company to enable them to gain/obtain such additional knowledge, which would increase the level of competency in relation to their assigned jobs. As the purpose of the business is to enhance the job knowledge and skills of the employees, it is a business expense allowable in full. In this respect section 20 of the Ordinance has been referred which provided for deduction in computing income; which is reproduced hereunder:
"(1) Subject to this Ordinance, in computing the income of a person chargeable to tax under the head "Income from Business" for a tax year, a deduction shall be allowed for any expenditure incurred by the person in the year to the extent to which the expenditure is incurred in deriving income from business chargeable to tax."
It has been contended that from above provision of law it is clear that, any expenditure that has been incurred by an employee would be allowable as deduction in computing income. Learned AR contended that no business can afford to spend money which will not contribute to the profitability thereof. Similarly a businessman is the best Judge to decide the strategic direction of the company and to invest in human assets, or even other fixed assets and to provide training to them. Therefore, these expenses are business expenses incurred in improving the profitability of the company by enhancing the productivity of their people, and should bee accordingly allowable in full.
The learned counsel in this respect has placed reliance on a case-law reported as PLD 1967 SC 524 wherein the Honourable Supreme Court of Pakistan has held that the sums laid down by the assessee on the training abroad is in the nature refund covered by section 10(2)(xvi) of the Income Tax Act, 1922. (The corresponding section of Income Tax Ordinance, 1979, is section 23(1)(xviii)) and is, therefore, an allowable business expense. According to learned AR since the expense is covered under residuary clause (xviii) of section 23 and not under special clause (xv) of section 23, therefore, the `generalibus specialia derogant' was clearly not attracted. Therefore, the same should not be rejected on this ground since these were incurred wholly and exclusively for the purpose of the business.
The learned counsel has submitted that the above referred judgment of the Hon'ble Supreme Court has also been followed by the Honourable High Court in its judgment reported as 2002 PTD 1535.
Regarding the Foreign visits expenses it is contended by the learned counsel that these expenses are incurred in respect of visits made by personnel other than employees etc., to the factory premises. In this respect it has been explained by the learned AR that the company is amongst the largest manufacturing concern of its type and has been expanding to increase the manufacturing activities in this country. For this purpose such visits to the factory and any expense thereon cannot be said to have not been incurred for the purpose of business. Purpose of these visits includes visits by technical staff of the companies from which Nestle has purchased machinery to advice on installation, working etc. of the machinery.
After considering the above referred arguments of the learned counsel of the assessee and the observations of the learned CIT(A) which are based on the decision of the Hon'ble Supreme Court of Pakistan and the Hon'ble High Court we find no warrant for interference in the impugned order, as he has rightly deleted the addition.
The appeal filed by the department on this ground is, therefore, also dismissed.
The appeal filed by the assessee is allowed to the extent and in the manner referred above while the cross appeal filed by the department is dismissed for the reasons discussed supra.
C.M.A./73/Tax (Trib.)Order accordingly.