VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 869 (2008)

(a) Income-tax---

----Income and expenses---No concept of earning income without incurrence of expenses.

2005 PTD (Trib.) 2161 rel.

(b) Income-tax---

----Composite business---Allocation of expenses---Assessee's business was composite business where certain expenditure had relation with various sources of income, despite it that there were certain expenditures which were directly relatable to any one of the sources of income---Expenditures which were general in nature or could not be assigned to any one source were to be prorated after proper scrutiny---Expenditure should be allocated to each head of income with the supporting evidence---Order passed by both the authorities below was vacated by the Appellate Tribunal in a manner that the assessee was directed to precisely submit the claim of expenses in a manner that its incurrence should be co-related to the nature of income so that it could be allocated to each specific head of income and Assessing Officer was directed to objectively analyze the claim and proceed properly by confronting the assessee.

(c) Income-tax---

----Value of export sales for proration of expenses---Foreign commission---Contention that sales were to be shown by deducting the commission was not tenable because the amount against sales had been realized for the total amount of goods shipped i.e. without any element for deduction of commission.

(d) Income-tax---

----`FOB Value'---Meaning---FOB means the expenses till the shipment of goods or consignment was to be borne by assessee as exporter---. Foreign commission paid, by no stretch of imagination, could be made part of expenses towards shipment.

(e) Income-tax---

----Prorating of expenses---Export sales---Deduction of foreign commission---Validity---Inclusion of foreign commission paid in sales was not with a view to allocate any expenditure but it was simply for the reason that the assessee had received the entire amount against the value of sales and the buyer had paid it as a price for the goods purchase---Expenditure of foreign commission had been incurred with a view to secure the business of export which, in no way, had any bearing on the value of sales proceeds realized---Value realized against the sales without any deduction which should be a basis for proration of expenditure.

(f) Income-tax---

----Proration of expenses---Duty drawback---Duty drawbacks represent the amount of custom duty rebates received on export of goods---Such duty drawbacks were taken by the assessee as part of export proceeds i.e. not offered for separate taxation under normal law but claimed as an amount on which tax had already been paid on a deduction by the bankers after realization of export proceeds---Duty drawbacks were to be taken as part of sales for proration of expenditure keeping in view the stance of the assessee itself.

2001 PTD 1030 ref.

1997 PTD (Trib.) 1143 not relevant.

(g) Income-tax---

----Duty drawbacks---Taxation of---Validity---Duty drawbacks had been allowed to be taken as part of export proceeds, thus were not chargeable to tax separately under normal law over and above the exports.

2001 PTD 1030 and 1970 PTD (Trib.) 879 rel.

(h) Income-tax---

----Proration of expenditure---Duty drawbacks---Inclusion of duty drawbacks in export sales for proration of expenditure---Validity---Duty drawbacks were the part of export sales so duty drawbacks shall be included in export sales for proration of expenditure to export sales and normal sales.

(i) Income-tax---

----Proration of expenditure---Foreign commission---Sales without deduction of foreign commission from export sales would form basis for proration of expenses towards export sales.

Muhammad Iqbal Kh. for Appellant.

Ghazanfar Hussain, D.R. for Respondent.

ORDER

EHSAN-UR-REHMAN (JUDICIAL MEMBER).---The title appeals are directed against combined first appellate order Nos.14-15, dated 15-8-2007 recorded by the learned CIT&WT (A), Zone-I, Lahore pertaining to the tax years, 2004 and 2005 but commonly the present proceedings are as a result of invoking section 122(5A) of the Income Tax Ordinance, 2001 in both the years which on failure at the first appellate stage have been brought before us.

2. Relevant facts in brief giving rise to filing of these appeals are that commonly for both the years, it is the allocation of expenses towards the capital gain and allocation of expenses towards dividend income vis-a-vis against the income liable to tax under normal law. In the tax year, 2004, the issue arose when the assessee for proration of expenditure towards export sales has firstly claimed as straightway deducted the foreign commission paid by remitting from Pakistan, and secondly deduction for duty drawbacks has been claimed from the exports for proration of expenses. The department for prorating the expenditure has not agreed to the stance of the assessee. Now we are required to dilate as to which figures of sales i.e. before or after such deductions ibid, would be for proration of expenses. The third issue for tax year is the allowability of the bad debts when provision for bad debts is being maintained by appropriation out of profit. It is only in tax year, 2004 that there are other issues; firstly as to whether the foreign commission incurred as expense and paid could be straightway deducted from the export sales or not for proration of expenses, secondly as to whether the duty drawbacks received are the part of the exports sales for proration of expenses and thirdly the treatment in respect of bad debts claimed viz the provision of bad debts.

3. As far as the common issue of taxability by allocating the expenses towards capital gain and dividend income, here we do not feel any hesitation in holding that there cannot be any concept of earning income without incurrence of expenses. This view has already been upheld by a full Bench's Order of this Tribunal reported as 2005 PTD (Trib.) 2161.

4. After perusal of the available record and on giving anxious thought to the arguments adduced before us, we form a considered opinion that no attempt from either side has been made in the directions of allocating of expenses in a proper manner. So on this issue, we vacate the order passed by both the authorities bellow in a manner that they assessee is directed to precisely submit the claim of expenses in a manner that its incurrence should be co-related to the nature of income so it could be allocated to each specific head of income. Since it is composite business case, where inevitably certain expenditure has relation to various sources of income despite it that there are certain expenditure which are directly relatable to any one source of income. Such expenditure which are general in nature or could not be assigned to any one source, these shall be prorated after proper scrutiny. The expenditure should be allocated to each head of income with the supporting evidence. The Assessing Officer is directed to objectively analyze the claim and proceed properly by confronting the assessee. Anyhow, a speaking order shall be passed explicitly evaluating/analyzing the contention with the basis for differing with the same.

5. For the tax year, 2004, the exclusion of foreign commission paid so as to prorate the expenses on the sales figures after deduction of the commission, is the stance of assessee/appellant. In this respect, before us it has been pleaded vehemently that the issue has become settled firstly that as per the Income Tax Return Format, it is required that net sales after deduction of commission and discounts are to be disclosed. Secondly, in the instant case, the Tribunal by accepting the plea of the assessee has allowed the relief vide order, dated 14-10-2006 in I.T.A. No. 4695/LB of 2003, etc. Thirdly that foreign commission is to be deducted from the sales as goods were exported on FOB basis.

6. In this regard, we have heard the learned representatives of both the parties and have perused the record.

7. As far as the first argument of the learned A.R. that sales are to be shown: by deducting the commission and sales, it is not tenable because the amount against Sales have been realized for the total amount of goods shipped i.e. without any element for deduction of commission. Here it is to be explicitly clarified that commission has been paid to foreign agent by remitting the amount from Pakistan. Such amount has been remitted out of Pakistan as per standing instructions to the Banks by assessee/appellant. The approval of such payment in foreign currency by the State Bank of Pakistan has no bearing in the tax proceedings before us. Secondly, FOB means the expenses till the shipment of goods or consignment is to be borne by assessee as exporter. The commission paid in no stretch of imagination can be made part of expenses towards shipment. Prior to introduction of presumptive tax, export rebate for income tax was allowed on the basis of export value than the entire amount of sales value without deduction of foreign commission paid was shown as export sales so that higher export rebate, accordingly the lesser amount of tax payable should be worked out. In the instant case, it is acknowledged vide aforesaid ITAT's order, dated 14-10-2006 that the claim of assessee for reduction was accepted but the learned Bench recording such findings has inadvertently not been made aware of the factual position i.e. how an expenditure can be reduced from the receipts which is not incidental with the shipment nor has been paid by the buyer nor the recovery is for the reduced amount i.e. after deduction of foreign commission from export proceeds, hence such findings are being declared as per incuriam. Another important factor which has been omitted to be taken cognizance is that inclusion of foreign commission paid in sales is not with a view to allocate any expenditure but it is simply for the reason that the. appellant assessee has received the entire amount against the value of the sales and the buyer has paid it as a price for the goods purchased, the expenditure of foreign commission has been incurred with a view to secure the business of export which in no way has any bearing on the value of sales, proceeds realized. In the circumstances, we are constrained to hold that it is the value realized against the sales without any deduction should be a basis for proration of expenditure.

8. On the issue of duty drawbacks, the reliance for deducting the duty drawbacks is on judgment of the Hon'ble Karachi High Court with citation as 2001 PTD 1030 where the following question was referred for answer:--

"Whether on the facts and circumstances of the case C.B.R. Circular No.14 of 1993 is applicable on the export rebates received on the exports made prior to financial year, 1991-1992. Whether on the facts and circumstances of the case C.B.R. Circular No.14 of 1993 is applicable on the export receipts, which are not subjected to withholding tax under section 50(5A) and exports not covered under section 80CC."

9. On this question, the following findings were recorded:--

"A bare perusal of para.4 of the Circular is sufficient to hold that an assessee cannot be charged to tax under section 80CC once it establishes that the consignment exported has already been subjected to withholding tax. The question as to whether the respondents had been subjected to withholding tax on its exportable consignment is established from the order, dated 24-9-1998 of the Income Tax Appellate Tribunal in I.T.A. No.977/KB of 1995-96 and other appeals. The relevant portion dealing with the aforesaid issue is contained in the third paragraph on page 1 of the Tribunal's order, which is as under:-

"The next objection is that the CIT(A) erred in maintaining addition in income of Rs.99,12,854 under section 80CC(4) of the Income Tax Ordinance, 1979. Mr. Shabbar Zaidi has submitted that the point in issue already stands decided in favour of assessee by the Tribunal vide judgment reported as 1997 PTD (Trib.) 1143. The learned D.R. has not denied the above fact. The addition, therefore, stands deleted. The appeal is allowed as above."

10. It is abundantly making clear that such findings have no bearing' on the issue which is before us i.e. adding the duty drawbacks in the sales for prorating the expenditure. The reliance placed on such judgment of the Hon'ble High Court by the Tribunal in the earlier orders was also not proper. Now, it is to be made clear that duty drawbacks represent the amount of custom duty rebates received on export of goods. Such duty drawbacks are taken by the assessee as part of export proceeds i.e. not offered for separate taxation under normal law but claimed as an amount on which tax has already been paid on a deduction by the banker after realization of export proceeds. So with this backdrop of the matter, the duty drawbacks are to be taken as part of sales for proration of expenditure keeping in view the stance of the assessee itself.

11. The learned A.R., has specifically referred to Full Bench's order of this Tribunal with citation as 1970 PTD (Trib.) 879 in support of his contention that already order passed by a Bench of equal strength is to be compulsorily followed by another Bench of equal strength and in case Bench of equal strength is to subsequently differ with the earlier order of a equal strength then the matter shall be referred to a Larger Bench after recording contrary findings.

12. We have given anxious thought to this citation 1997 PTD (Trib.) 879 but para. 15 of this order has set out exclusion from its scope when the earlier order or judgment is declared as per incuriam. Such earlier order on the issues of duty drawbacks and commission was cited before us by the learned A.R. has lost the legal value for following the same as on the issue of duty drawbacks, this Tribunal has placed reliance on a judgment of the Hon'ble Karachi High Court with citation as 2001 PTD 1030 wherein on the following question of law, the findings were recorded:--

"Whether on the facts and circumstances of the case C.B.R. Circular No.14 of 1993 is applicable on the export rebates received on the exports made prior to financial year, 1991-1992. Whether on the facts and circumstances of the case C.B.R. Circular No.14 of 1993 is applicable on the export receipts, which are not subjected to withholding tax under section 50(5A) and exports not covered under section 80CC."

13. The plain reading of above quoted question will be making it abundantly clear that duty drawbacks have been allowed to be taken as part of export proceeds, thus are not chargeable to tax separately under normal law over and above the exports. Whereas in the instant case before us, we are required to determine as to whether duty drawbacks are to be included in export to sales for proration of expenditure or not. So this is an entirely new situation where this Bench has recorded findings in the manner that Hon'ble Karachi High Court has held that duty drawbacks are the part of export sales so by respectfully following the same principle in the instant case, it is directed that duty drawback shall be included in export sales for proration of expenditure to export sales and normal sales. As far as the deduction of commission on sales here it is an entirely a new issued which has for the first time came to be adjudicated by this Bench where we have also directed that sales without deduction of such foreign commission from export sales would form basis for proration of expenses towards export sales. Even at the cost of repetition and for laying stress, it is held that commission has been paid to foreign agents from Pakistan after realizing the entire amount of sale proceeds, that is, sale proceeds value as per sale invoice. With such findings, the contention of the learned AR. for following the earlier order on the this issue has been found as factually and legally not tenable.

14. As far as the provision of bad debts is concerned, it has not at all been properly dilated upon by the Assessing Officer, therefore, this issue is also being remanded back to the Assessing Officer for proceeding strictly de novo as expressly laid down in law.

15. In view of the foregoing, both the appeals of the assessee stand disposed of in the above manner.

C.M.A./25/Tax (Trib.)Order accordingly.