2009 P T D (Trib.) 677
[Income-tax Appellate Tribunal Pakistan]
Before Javed Masood Tahir Bhatti, Judicial Member and Iqbal Ahmed, Accountant Member
I.T.As. Nos. 107/KB and 169/KB of 2004, decided on 16/12/2008.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.24(g)---Deduction not admissible---Gratuity fund---Payment made to gratuity fund was allowed by the First Appellate Authority with the observation that "Taxation Officer disallowed the claim of payment made to gratuity fund as it was incurred in the earlier year while in all the previous years the provisions for gratuity were disallowed and subject to tax only after allowing any sum actually paid during that year"---Validity---If the principle adopted by the Taxation Officer was followed then any expenses on accrual basis would not be allowed as deduction in the year of accrual if mercantile system of accounting was followed---Section 24 (g) of the Income Tax Ordinance, 1979 it provided that deductions were not admissible to any sum paid to any provident fund, superannuation fund or gratuity fund not being a recognized provident fund, an approved superannuation fund, or a approved gratuity fund---Payments made to an approved gratuity fund was allowable deduction---Treatment meted out by the First Appellate Authority was in accordance with law which was upheld by the Appellate Tribunal and appeal filed by the department was dismissed.
I.T.As. Nos. 1674 and 1675/KB of 2002 distinguished 2007 PTD (Trib.) 2237 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R. 5-A, Cl. (E)---Finance Act (III of 1998), Preamble---Finance Act, (IV of 1999), Preamble---Finance Ordinance (XXV of 2001), Preamble----Rules for the computation of depreciation allowance---First year allowance---Disallowance of---Claim of first year allowance was disallowed by the Taxation Officer for the reason that inclusion of service industry in Clause-E of the Table annexed to R. 5A did not over-ride the pre-condition that such service industry should first be an industrial undertaking---Disallowance of first year allowance was maintained by the first appellate authority---Validity---"Service" in no way suggested process of manufacturing as the legislature while adding the word "service" in the Table had made it clear that the service provider like banking, insurance company were also termed as "industrial undertaking"---Legislature had intentionally omitted the words "engaged in the manufacture of goods and materials or the subjection of goods or materials to a manufacturing process"---Concept that only manufacturing industries were termed as industrial undertaking and as such first year allowance under R.5A of the Third Schedule to the Income Tax Ordinance, 1979 was to be allowable to only industrial undertaking who processed manufacturing activities was incorrect and illegal---Deletion of word had clearly established that service industries were also to be given the benefit of first year allowance which includes to social service provider---Taxation Officer was directed to allow the allowance to the assessee as provided in R.5A of the Third Schedule to the Income Tax Ordinance, 1979 regarding the first year allowance---Appeal was allowed by the Appellate Tribunal.
2004 PTD (Trib.) 1499 rel. 2004 PTD 1666 distinguished.
Rehmatullah Wazir, D.R. for Appellants (in I.T.A. No.107/KB of 2004).
Muhammad Arshad, F.C.A. and Zubair Abdul Sattar, F.C.A. for Respondents (in I.T.A. No.107/KB of 2004).
Muhammad Arshad, F.C.A. and Zubair Abdul Sattar, F.C.A. for Appellants (in I.T.A. No.169/KB of 2004).
Rehmatullah Wazir, D.R. for Respondents (in I.T.A. No.169/KB of 2004).
ORDER
Through these two cross-appeals the impugned order of the learned C.I.T. (A) dated 18-1-2003 has been assailed by both the parties. The Department has objected the impugned order regarding allowing the claim on account of gratuity while the assessee has objected the confirmation of the treatment meted out by the Taxation /Officer disallowing first year allowance under Rule 5A of the Third Schedule to the repealed Income Tax Ordinance, 1979.
2. We have heard learned representatives of both the sides and also perused the impugned order of the learned C.I.T. (A), the assessment order, relevant provisions of law and the case law referred from both the sides. We have found that the learned C.I.T. (A) has allowed the claim of payment made to the Gratuity Fund with the following observations:
"On perusal of the impugned assessment order I find that the learned Taxation Officer disallowed the claim of payment of Rs.14,999,000 made to the Gratuity Fund as it was incurred in the earlier years. The learned A.R. however, contended that in all the previous years the provisions for gratuity was disallowed and subjected to tax only after allowing any sum actually paid during that year Note 32.4 of the accounts reflects the position of gratuity as under:--
| Opening Balance | Rs. 14,998 |
| Charged for the year | Rs. 4,800 |
| Contribution to fund made during the year | Rs. (19,720) |
| Closing Balance | Rs. 78 |
It is further argued that any payment made to the approved gratuity fund is admissible deduction. This contention is also confirmed from the provisions of section 24 (g) of the I.T. Ord., 1979 which reads as under:-
24. Deduction not admissible
(g) ..
any sum paid to any provident fund, -superannuation fund or gratuity fund not being a recognized provident fund, an approved superannuation fund, or an approved gratuity fund."
It is evident from the above provision that any payment made to an approved gratuity fund is an allowable deduction. Since the appellant has made payment of Rs.19, 720, 000 to the approved gratuity fund, therefore, after deducting charge for the year amounting to Rs.4,800,000 balance payment has to be allowed. It is ordered accordingly."
While the treatment regarding first year allowance has been, confirmed by the learned C.I.T. (A) with the following observations:
"Regarding First Year allowance, the A.R. has contended that after insertion of the words "including service" in Clause-E of the table annexed to Rule 5A of the Banking Company Act would also be entitled to the first year allowance. On the other hand the learned Taxation Officer disallowed the claim of FYA for the reason that inclusion of service industry in Clause-E of the Table annexed to Rule 5A did not override the pre-condition that such service industry should first be an industrial undertaking. I agree with the findings of the Taxation Officer and therefore maintain the disallowance of FYA."
3. Learned Counsel representing the assessee regarding the first year allowance has contended that only criteria adopted by both the officers below for disallowing first year allowance under rule 5A of the Third Schedule to the repealed Ordinance, 1979 is that such an allowance can be allowed only to an industrial undertaking which is also a manufacturing industry only. It has been contended that this concept is negated by the insertion of the word "including service" vide Finance Ordinance, 2001 in the Clause-E of the table annexed to Rule 5A. In this regard, it is submitted that sub-clause (E) of Clause 5A of the Third Schedule is relevant. The Clause 5A is reproduced hereunder:
"5.A First Year Allowance.---Where any machinery, plant and equipment other than machinery, plant and equipment entitled to first year allowance under rule 5AA is installed by any industrial undertaking set up in Pakistan on or after the twenty-first day of November, 1997, and owned and managed by a company formed after the said date, exclusively for operating the said industrial undertaking, further depreciation by way of first year allowance in respect of the year of installation or the year in which such machinery, plant or equipment is used by the assessee for the first time for the purpose of his business or profession or the year in which commercial production is commenced, whichever is the later, shall he allowed at the rates specified in the table below:--
(A) Not Related
(B) Not Related
C(i) Not Related
C(ii) Not Related
C(iii) Not Related
D. Not Related
E. Other industries including services, social and agricultural sector other than the agriculture projects specified in entry C(iii), other than transport industry. Rates will be Forty Per cent of the written down value.
We have noted that the above referred Clause 5A was inserted by Finance Act, 1998 and the words "other than machinery, plant and equipment entitled to first year allowance under Rule 5AA" were inserted by Finance Ordinance,. 2001 and through Finance Act, 1999 the following words were omitted from this Article "engaged in the manufacturing of goods and materials or the subjection of goods or material to a manufacturing process."
After considering the above referred Clause we are of the view that "service" under no way suggests process ,of manufacturing as the legislatures while adding the word "service" in the table had made it clear that the service provider like banking, insurance company arc also termed as "industrial undertaking". We have further noted that in the above referred Clause 5A, the legislature has intentionally omitted the words "engaged in the manufacture of goods and materials or the subjection of goods or materials to a manufacturing process". We are of the view that the concept of the officers below that only manufacturing industries are termed as industrial undertaking and as such first year allowance and Rule 5A of the Third Schedule is to be allowable to only industrial undertaking who process manufacturing activities is incorrect and illegal. The deletion of word has clearly established that service industries are also to be given the benefit of first year allowance which includes to social service provider. The learned counsel representing the assessee in this regard has placed reliance on the decision of this Tribunal reported as 2004 PTD (Trib) 1499, wherein the issue under hand has been discussed in detail the relevant paras of the judgment are reproduced hereunder:--
"The Assessing Officer has interpreted the clause "industrial undertaking set-up Pakistan" used in the above provisions to mean as the industrial undertaking as defined in explanation to Rule 5 of the said schedule read with the meaning assigned to the clause in the First Schedule. The learned AR pointed out that the term has been defined in Para-B of Part-IV of the First Schedule but it has been specifically stated therein that the definition is relevant for the said Schedule i.e. the First Schedule only. Further he submitted that the Explanation to Rule 5 also provides as under:
"Explanation. As used in this clause "industrial undertaking has the same meaning as in the First Schedule."
To us the arguments of the learned AR carry substantial weight. In order to properly apprehend the provisions it would be worthwhile to reproduce the definition of "industrial undertaking" given in Para B of Part-IV to the First Schedule as under: --
........................................... .
B. As used in this Schedule:--
(1) "Industrial undertaking" means as undertaking which is set up or commenced in Pakistan on or after the 14th day of August, 1947, and which employs (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency, or (ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency and which is
(i) engaged in:
(a) the manufacture of goods or materials or the subjection of goods or materials to any process, which substantially changes their original condition;
(b) Ship-building;
(c) Generation, transformation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or
(d) The working of any mine, oil-well or other source of mineral deposits not being an undertaking to which the Fifth Schedule applies; or
(ii) Any other industrial undertaking which may be approved by the C.B.R. for the purpose of this clause.
8. A bare perusal of the above provisions shows that this definition is relevant for manufacture of goods or material ship building, generation etc., of electrical energy, working of mines etc., or any other industrial undertaking approved by the C.B.R. The provisions show that these do not apply in case of an industrial undertaking which provides services. On the other hand Rule 5A of Third Schedule which is under consideration indicates that the first year allowance is available apart from manufactures to other industries including service, infrastructure, social and agricultural sector etc. Thus the two provisions are different in that whereas the definition of "industrial undertaking" given in the first Schedule is confined to the manufactures etc., only the first year allowance is available both to manufactures and other industries which include service industries. In these circumstances the AR rightly argued that the definition given in Explanation to Rule 5 or given in the First Schedule to the clause "industrial undertaking" will not apply in case of the assessee which provides services. The other conditions as laid down in rule 5A apply in case of assessee and therefore the assessee was entitled to the allowance as given in Rule 5A of the Third Schedule. Accordingly it is held that the assessee be allowed allowance @ 40% as provided in Rule 5A."
We have found that the facts and circumstances of the instant case regarding the issue of first year allowance are identical to the above referred decision of this Tribunal although on behalf of the department, learned D.R. has placed before us the decision of this Tribunal reported as (2004) PTD 1666 but after perusal of the same, we have found that in the judgment this Tribunal has discussed the issue of exemption from tax on income to promote industrial activates for the purpose of export and in return to earn foreign exchanged for Pakistan. In this regard the word "industrial undertaking" has been considered but that case is distinguish-able as the facts of the case and the legal position is totally different. The impugned orders of both the officers below are, therefore, not approved and the Taxation Officer is directed to allow allowance to the assessee as provided in above referred rule 5A regarding the first year 'allowance. Consequently, the appeal filed by the assessee is allowed.
4. Regarding the appeal filed by the Department against deletion of disallowance made to the Gratuity Fund, we have found that the Taxation Officer has not disputed the fact that the payment in this regard has been made to the approved Gratuity Fund during the income year ended December 31, 2001 corresponding to assessment year 2002-2003 under review. The Taxation Officer has disallowed the same on the criteria that the Gratuity in question is relevant to the earlier years and the amount is not related to the income year thus not admissible.
Learned representative of the appellant-department has placed before us order dated 4-4-2003 on the appeal filed by Messrs Arabian Sea (Pvt.) Ltd. bearing I.T.As. Nos. 1674 & 1675/KB/20Q2 (assessment years 1998-99 & 1999-2000), wherein it has been held that the claims of expenses of previous year are not allowable. But we are of the view that the case referred by the learned D.R. is distinguishable from the facts and circumstances of the present case. On the other hand, learned representatives of assessee, in this regard, has contended that the learned Commissioner of Income Tax (Appeals) has rightly directed the Assessing Officer to allowed the claim as the conception of the Taxation Officer is incorrect. It has been contended that under normal taxation laws any provision made in the accounts is disallowed although the accounts are kept in Mercantile basis, even if, allowed in the particular year, it will again hit with the provision of unpaid liability carried over more than three years back in accordance with section 24(C) of the repealed Ordinance, 1979, without being very common and persuaded by the department. However, it is very clear that when such amount is paid in any year, is being allowed as a deduction in that particular year. It has been contended that provision made in the relevant year is disallowed and the actual payment is allowed. Learned counsel representing the assessee has submitted that this being constant policy of the assessee which has been followed by the department and in all the previous years, the provision of Gratuity is disallowed and subjected to tax only after allowing any sum actually paid during that year. Learned counsel has contended that the scenario has now changed when the assessee got the Gratuity Fund approved from the Commissioner of Income Tax. He has in this respect placed before us the letter dated 30-6-1999 issued by the Commissioner of Income Tax in response to application filed by the assessee for reorganization of the assessee-Bank Staff Gratuity Fund which shows that the Commissioner has approved the fund subject to the conditions laid down in Rule 2 of Part III of 4th Schedule to the repealed Ordinance, 1979. The learned counsel has also placed before us the Trust Deed of the assessee-bank regarding Staff Gratuity Fund. He has in this respect specifically drawn our attention to the sub-clause (B) of Clause 8 which says that the initial condition which the Bank shall made in respect of the past service of a person when he becomes a member, shall not exceed such person's salary for the last month of each financial year during the course of his past services with the bank. Explaining the position, learned counsel has submitted that on the approval, the assessee vide Bank transfer voucher transferred the amount to the credit of Bolan Bank Limited-Gratuity Fund Account. This has been reflected in the audited accounts of the Bank for the income year December 31, 2001 audit Note No.32.4 on page No.27 of the Annual Report 2001. This is also supported by the Bank statement of the approved fund. The accumulated provision under this head is also reflected in the preceding year column (i.e. 2000) as payable to define benefit plan at Rs. 14,998.00 as Note No.17 of the Annual accounts of the Bank (page-22). This being a provision has all along been taxed in relevant years and is distinctly disallowed. According to the learned counsel of the assessee it is therefore, evidenced, beyond any doubt that the amount has been paid. On behalf of the assessee, it has been contended that there are the specific provision regarding the approval of the Gratuity Fund which are given in Part-XIII of Income Tax Rules, 1982 which are not in accordance with the accounting principles but specified mechanism in this regard has been provided. Learned counsel has contended that the assessee in this case has not claimed any deduction in this regard in the previous assessment years and has only claimed after the approval of the Fund by the department. In this regard, the decision of this Tribunal reported as 2007 PTD (Trib) 2237 has been referred, wherein in the similar circumstances the claim of provision of staff retirement gratuity disallowed by the Assessing Officer was directed to be allowed. The relevant paras of the judgment are reproduced hereunder:-
"12. The claim of provision of staff retirement gratuity has been disallowed by the Assessing Officer under section 24 (g) of RO, 1979 as a sum paid to an unapproved gratuity fund. The learned A.R. on the other hand contended that the Bank is running a staff retirement gratuity scheme and provision for it is made from year to year. From 1-2-2001 a Gratuity Trust Fund was created and the amount lying in the gratuity account was being transferred to this Trust Fund's account. Moreover, the scheme has also been approved on 12-6-2003. The A.R. contended that the Assessing Officer was not justified to disallow this amount as this was allowable expense being an ascertained liability. Reliance was placed on reported case.
Cases referred to 2003 PTD (Trib.) 1189
Practically speaking in the case of provision for gratuity, provision for bonus and provision for bad debts. The opinion of the Honourable Supreme Courts has remained almost identical. The parameters for allowing these provision in the said judgment are:--
(i) That it should be ascertained liability.
(ii) It should be as per rules and regulation and terms of agreement reliable to said entity; and
(iii) that it should be as per normal methods of account maintained by such organization.
"That any ascertainable accrued liability is deductible under Mercantile System of Account."
The learned A.R. of the appellant further argued that the liability is not only ascertained liability but it is the actual payment by the Bank to the Gratuity Fund account which is more than the concept of ascertained liability.
Viewed in the light of observations of the above decision and the parameters fixed thereto, we are inclined to agree with the contention of the A.R. that the Assessing Officer was not correct to disallow the provision of Gratuity as inadmissible. The addition made is, therefore, deleted."
It is very clear that in the above referred decision, it has been held that the deduction was allowable when payment is made to the approved fund but the Taxation Officer has misconceived on the word "paid" as mentioned in the explanation (b) to section 23 (1) of the repealed Ordinance, 1979 which is reproduced hereunder:
"Explanation
23(1) .
(b) The expression "paid" as used in this section and sections 18, 24 & 31 means actually paid or incurred according to the method of accounting upon the basis of which income is computed."
It has been contended that the assessee has constantly followed Mercantile System as such the word "paid" should not have any meaning as adopted by the Taxation Officer. We find force in the contention made by the learned counsel for the assessee that if the principle adopted by the Taxation Officer is followed that any expenses or accrual basis would not be allowed as deduction in the year of accrual if Mercantile System of account is followed. We may in the regard refer the subsection (g) of section 24 wherein it has been said that deductions are not admissible to any sum paid to any provided fund, superannuation fund or gratuity fund not being a recognized provident fund, an approved superannuation fund, or an approved gratuity fund. This clearly show that the payments made to an approved gratuity fund is allowable deduction. The treatment meted out by the learned C.I.T. (A) in this regard being in accordance with law is therefore, upheld and the appeal filed by the department on the issue is dismissed.
5. The appeal filed by the assessee is allowed while appeal filed by the department is dismissed for the reasons discussed supra.
C.M.A./12/Tax(Trib.)Order accordingly.