VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 230 (2008)

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

----S. 12(19)---Income deemed to accrue or arise in Pakistan---Assessee, a leasing company---Lease rent---Addition---Taxation Officer on the one side had accepted the return filed on the basis of lease rentals received and on the other he made addition on account of accrual basis by rejecting receipts basis---Validity---First Appellate Authority had rightly deleted the addition, as the Taxation Officer had accepted the revised return to offer lease rentals on receipts basis and then had rejected the same which was contradictory itself.

I.T.A. Nos. 1237, 1238, 3014 and 3015/LB of 2001 rel.

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

----S.23(1)(v), Third Sched., R.1---Deduction---Assessee, a leasing company---Leased out assets---Extra depreciation allowance---Disallowance of extra shift allowance on the ground that assessee was asked to furnish certificates of leases regarding number of working days; failing which claim of extra shift allowance was disallowed---First Appellate Authority accepted that the certificates were furnished but the same were not authentic---Assessee contended that depreciation on assets leased out by the taxpayer being a leasing company, was admissible by deeming provisions of law and no certificates of shift working were required but the assessee had furnished all the details and the certificates---Validity---Depreciation allowance was admissible as deduction from total income under the provisions of S. 23 (1) (v) of the Income Tax Ordinance, 1979 which states that depreciation allowance shall be admissible as per Third Schedule to Income Tax Ordinance, 1979 which provided that depreciation will be allowed in respect of assets specified therein---Since leased assets on which extra depreciation allowance had been claimed remained leased out for the whole year, they were eligible for extra shift depreciation allowance---Orders of officers below were vacated and the Taxation Officer was directed by the Appellate Tribunal to allow the claim of extra depreciation allowance.

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

----Third Sched., R.8 (5)---Sale proceeds---Assessee, a leasing company---Loss on sale of leased assets---Disallowance---Assessing Officer rejected the claim on the ground that no detail in respect of loss claimed on sale of leased assets were enclosed with the reply despite the mentioning of the same and entire claim of loss on sale of leased assets was disallowed---Validity---Loss on sale of assets represented the amount computed by deducting written down value of assets from sale proceeds---Term "sales proceeds" had been defined in R.8(5) of the Third Schedule to the Income Tax Ordinance, 1979---Proviso to R.8(5) of the Third Schedule provided rules for computing sales proceeds in the case of assets given on lease---Once the law had specifically mentioned the criteria that for computing gain/loss on assets given on lease, there was no justification for ignoring these provisions and treating these transactions as normal and disallowing the loss on sale of assets---Written down value of assets represented their value appearing in the depreciation schedule whereas the residual value received was also computed from lease schedules---Taxation Officer had charged lease rentals against the assets disposed of up to their disposal, so, there was no justification to ignore that on completion of lease term, these assets had to be handed over to the concerned persons and sale proceeds thereof should be computed according to the specific legal provisions---Disposal of assets also appeared in the depreciation schedule and could be cross verified from there---Once the assessee had filed complete books of accounts and details of lease rentals accrued and lease rentals received to the Taxation Officer there was no justification to ignore lease which had completed their term---No justification for the disallowance in this respect existed---Order in question was vacated by the Appellate Tribunal and Taxation Officer was directed to allow the claim of the assessee.

(d) Income Tax---

----Ad hoc addition---Disallowance of vehicle running expenses, communication and legal and professional charges---Addition was made without pointing out any specific instance of substantiating allegations with evidence---Such type of ad hoc disallowances were unjustified.

2006 PTD 1019 and 2007 PTD 345 rel.

(e) Income Tax---

----Limitation---Assessment order was served on October 24, 2005 whereas the date of order mentioned on assessment order was 30-6-2005 which showed that the assessment order was served on the assessee after almost four months of the date of order---Assessee contended that such assessment was barred by time---Validity---Held, there was no merits in the contention of the assessee regarding the time limitation issue.

2005 PTD (Trib.) 960 disapproved.

Rai Talat Maqbool, D.R. for Appellant (I.T.A. No.1424/LB of 2006).

Rizwan Bashir, F.C.A. for Respondent (I.T.A. No.1424/LB of 2006).

Rizwan Bashir, F.C.A. for Appellant (I.T.A. No.1269/LB of 2006).

Rai Talat Maqbool, D.R. for Respondent (I.T.A. No.1269/LB of 2006).

ORDER

Through these two cross appeals the impugned order of the learned C.I.T. (A) dated 1-3-2006 has been objected. The Department has objected the impugned order on the following sole ground:--

"That the learned Commissioner of Income Tax (Appeals) was not justified in deleting the addition of Rs.41,034,458 made under section 12 (19) of the Income Tax Ordinance, 1979 (Repealed) on account of lease rentals on accrual basis as it was made in accordance with the provisions of law and per facts of the case."

While the assessee has agitated the impugned order on the following grounds:--

"(1) That the learned C.I.T. (A) was not justified in holding time-barred assessment within ' time by giving meaningless reasoning.

(2) That learned C.I.T. (A) was not justified to maintain disallowance of extra shift allowance at Rs.21,773,609 by giving irrelevant findings against the facts of the case.

(3) That the learned C.I.T. (A) was not right to maintain unlawful disallowance of loss at Rs.6,576,044 on disposal of leased out assets and brought forward unabsorbed depreciation on leased out assets.

(4) That the learned C.I.T. (A) wrongly upheld disallowance of vehicle running expenses, communication, and legal & professional charges at Rs. 146,471 Rs.111,317 and Rs.46,800 respectively."

We have heard the learned Representatives from both the sides and have also perused the impugned order of the learned C.I.T.(A) and the assessment order.

Regarding the appeal filed by the Department, we have found that the Taxation Officer has made the addition in lease rentals under section 12(19) on the accrual basis while as per the contentions of the assessee the lease rentals were declared on the basis of receipts and the learned C.I.T.(A) has deleted the addition. The learned Representative of the department has contended that there was no justification for deletion of the addition as the Taxation Officer has made the addition in accordance with the provisions of law and as per facts of the case.

On the other hand, the learned Representative of the assessee is supporting the impugned order of the learned C.I.T. (A). In this respect he has contended that the Taxation Officer has made the addition in taxable income on account of leasing income. He has contended that the assessee has declared lease income at Rs. 229,961,222 but the Taxation Officer has assessed the same at Rs.27,099,5680. According to the learned counsel for the assessee the lease income was offered on receipt basis by revising return and the Taxation Officer has accepted the revised return with the observation that "Revised return has been filed by correctly taking into account amount of lease rentals received. Contention of the assessee was checked with record and found correct, therefore, no adverse interference is drawn and the same is accepted and taken up for the purpose of assessment." The learned counsel has contended that on the one side the Taxation Officer has accepted the return filed on the basis of lease rentals received and on the other he made addition on account of accrual basis by rejecting receipts basis which is self contradictory and the learned C.I.T. (A) has, therefore, rightly deleted the same. The learned counsel has contended that the Taxation Officer has not rejected the accounts or books of accounts as there is no finding that income could not be properly deduced from the method of accounting employed by the assessee. The books of accounts and records have been maintained as required under Companies Ordinance, 1984, applicable prudential regulations and International accounting standards, which are examined by internal auditors, statutory auditors and subject to special auditors which Security Exchange Commission of Pakistan may appoint from time to time. The learned counsel in this respect has also referred the provisions of section 12 (19) and has contended that it is an accepted principle of law that no addition can be made by rejecting the declared version without pointing out any concrete defect in the books of accounts. He has contended that the Assessing Officer has failed to follow the method of accounting adopted in leasing business and legal provisions and has not even followed the previous history of the case while making addition on mere conjectures and surmises which are not permissible under the law. The learned counsel in this respect has also referred the decision of this Tribunal dated 13-9-2003 in I.T.As. Nos. 1237, 1238, 3014 and 3015/LB of 2001.

After considering the submissions made by both the sides we are of the review that the learned C.I.T. (A) has rightly deleted the addition placing reliance on the decision of this Tribunal, as the Taxation Officer has accepted the revised return to offer lease rentals on receipts basis and then has rejected the same which is contradictory in itself.

The appeal filed by the department is, therefore, dismissed.

Regarding cross-appeal filed by the assessee, we have found that the Taxation Officer has made the disallowance of extra shift allowance with the observations that "assessee has claimed extra shift depreciation at Rs 21,73,609 through notice under section 62 and the assessee was C asked to furnish certificates of lease regarding number of working days; failing which claim of extra shift allowance was intended to be disallowed. In reply to the notice, the learned AR of the assessee vide letter dated 27-6-2005 contended as under:--

"Certificates of leases regarding number of working days are enclosed herewith.

Perusal of the reply and its annexure reveals that certificates as mentioned above were not enclosed, therefore, the entire claim of extra shift depreciation is disallowed being un-vouched/ unverifiable."

On behalf of the assessee it has been contended that the assessee is maintaining the books of accounts and all the details were furnished before the Taxation Officer as well as before the learned C.I.T. (A). He has in this respect placed before us the schedule of tax depreciation of leased assets of the year under review, the letter dated 19-11-2005 sent by Ahmad Fine Textile Mills to the assessee, letter dated 18-11-2005 sent by Chenab Ltd. to the assessee certifying that assets against lease facility taken from the assessee-company were used in triple shift for more than 300 days during the period from July, 1, 2001 to June 30, 2002. Copy of the audited accounts of this company has also been produced before this Bench. The learned counsel has also placed before us the certificate issued from Messrs Blessed Textiles Limited, Indus Tech Limited, Olympia Spinning & Weaving Mills Ltd., Jubilee Energy (Pvt.) Ltd., Siddiqsons Denim Mills Limited, Ibrahim Fabrics Ltd., Fazal Cloth Mills Ltd., D.G. Khan Cement Co., Ltd. and Irfan Textile (Pvt.) Ltd., wherein it has been certified that the assets against lease facility taken from the assessee-company were used in triple shift for more than 300 days, during the period from 1-1-2001 to 30-6-2002.

The learned counsel has contended that the learned C.I.T. (A) has upheld the disallowance made by the Taxation Officer with the observations that "the certificates filed are not authentic". The learned counsel has contended that the Taxation Officer has rejected the version of the assessee that the certificates were not furnished but the learned C.I.T.(A) has accepted that the certificates were furnished but according to him these certificates are not authentic. The learned counsel has contended that the depreciation on assets leased out by the taxpayer being a leasing company, is admissible by deeming provisions of law and no certificates of shift working are required but the assessee has furnished all the details and the certificates before the Taxation Officer as well as before the learned C.I.T. (A). These certificates have also been placed before this Bench.

We are of the view that the depreciation allowance is admissible as deduction from total income under the provisions of 23 (1) (v) of the Income Tax Ordinance, 1979 which states that depreciation allowance shall be admissible as per third schedule to the Ordinance. Rule 1 of the Third Schedule to the Ordinance states that depreciation will be allowed in respect of assets specified therein.

We find force in the contention of the learned counsel that since leased assets on which extra depreciation allowance has been claimed remained leased out for the whole year, they are eligible for extra shift depreciation allowance under the legal provisions mentioned above and, therefore, the orders of the officers below are vacated and the Taxation Officer is directed to allow the claim of extra depreciation allowance.

Regarding the disallowance of loss on disposal of leased out assets and brought forward unabsorbed depreciation on leased out assets, we have found that the Taxation Officer has disallowed the claim with the same observations that no details were provided. We have found that the Taxation Officer has rejected the claim with the following contradictory remarks "Examination of the reply and its annexures reveals that no detail in respect of loss claimed on sale of leased assets were enclosed with the reply despite the mentioning of the same, therefore, the entire claim of loss on sale of leased assets is disallowed".

On behalf of the assessee it has been contended that the above said comments of the Taxation Officer are against the facts of the case and all the details were provided and the Taxation Officer himself in the body of the assessment order has re-produced the notice issued to assessee wherein he has said that you have claimed loss on sale of leased assets at Rs.6,576,044 for the year under consideration. Working of the same has been furnished showing cost, WDV, sale proceeds and resultant loss/profit on disposal. Please provide documentary evidence in respect of sale proceeds/residual value in respect of each asset so that your claim could be examined as per Third Schedule to the Income Tax Ordinance, 1979, failing which an adverse inference would be drawn.

It has contended by the learned counsel for the assessee that the above mentioned observations were made by the Taxation Officer before the framing of the assessment order which clearly shows that complete wording of loss of leased out assets were provided by the taxpayer to the Assessing Officer.

We have found that the learned C.I.T. (A) has also upheld the disallowance repeating the above referred comments of the Taxation Officer without discussing any shortcoming on the part of the taxpayer, which has necessitated the disallowance.

We are of the view that loss of assets represents the amount computed by deducting WDV of assets from the sale proceeds thereof. The term "Sales proceeds" has been defined in sub-rule (5) of rule 8 of the Third Schedule to the Income Tax Ordinance 1979. Proviso to this sub-rule provides rules for computing sales proceeds in the case assets given on lease. We are of the view that once the law has specifically mentioned the criteria that for computing gain/loss on assets given on lease by the leasing company there was no justification for ignoring these provisions and treating these transactions as normal and disallowed the loss on sale of assets. The written down value of assets represents their value appearing in the depreciation schedule whereas the residential value received by the leasing company (taxpayer) is also computed from the lease schedules. The Taxation Officer has been charging lease rentals against the assets disposed off upto their disposal, so, there was no justification to ignore that on completion of lease term, these assets have to be handed over to the concerned persons and sale proceeds thereof should be computed according to the specific legal provisions as mentioned above. Disposal of assets also appear in the depreciation schedule and could be cross verified from there. The schedule of lease matured during the period ending June 30, 2002 have also been placed before us by the learned counsel for the assessee.

We are of the view that once the assessee has filed complete books of accounts and details of these rentals accrued and lease rentals received to the Taxation Officer there was no justification to ignore leases which have completed their term. We therefore, find no justification for the disallowance in this respect. The impugned order in this respect is vacated and the Taxation Officer is directed to allow the claim of the assessee.

Regarding the disallowance of vehicle running expenses, communication and legal and professional charges, we have found that the Taxation Officer has made the ad hoc additions without pointing out any specific instance or substantiating his allegations with evidence. These types of ad hoc disallowances are unjustified. The higher Courts as well as this Tribunal have always disapproved these actions on ad hoc disallowance and reliance in this respect is placed on the decisions reported as 2006 PTD 1019 and 2007 PTD 345.

The above referred disallowances made by the Taxation Officer are, therefore, deleted and the appeal filed by the assessee is allowed.

Regarding the first ground of appeal which is in respect of time barred assessment, we have found that the assessment order was served on the assessee on October 24, 2005 whereas the date of order mentioned on the assessment order is 30-6-2005 which shows that the assessment order was served on the assessee after almost four months of the date of order. The learned counsel in this respect placing reliance on the decisions reported as 2005 PTD (Trib.) 960 has contended that the assessment was barred by time but we are of the view that the Full Bench of this Tribunal has already dis-approved the view taken by this Tribunal in the above referred decision and, therefore, we find no merits in the contention of the assessee regarding the time limitation issue. Even otherwise the appeal filed by the assessee is allowed for the reasons discussed supra while the cross-appeal filed by the Department is dismissed.

C.M.A./108/Tax(Trib.)Order accordingly.