VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 982 (2008)

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

----Ss.66-A & 62---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Proration of expenses---Sales were taken as inclusive of sales tax---When assessment was framed by proration of expenditure towards income under normal law assessable, the figures of sales were taken by the assessee as inclusive of sales tax and same was adopted by the assessing panel---Department noticed that by including the sales tax in sales for proration of the expenditure to it, was incorrect because it had resulted in higher allocation of expenditure towards normal sales as sales were to be net i.e. exclusive of sales tax---Validity---Including the sales tax in sales and then claiming it as expenditure in Profit & Loss Account was erroneous and prejudicial to the interest of Revenue as sales tax was not an expenditure but it was always by adjustment of payment and receipts of sales tax with its net effect was accounted for---Sales tax when charged in sales invoices and recovered was subject to adjustment against the sales tax on purchases made where the assessee had paid the amount---Such was erroneous as well as prejudicial to the interest of Revenue for the reason that on the one hand, the allocation of expenditure was by higher ratio than actual on the basis of net sales and higher amount had been charged to the normal tax regime---Straightaway deduction of sales tax had been as a part of Profit & Loss Account expenditure had double fold adverse effect on net income assessable under normal law---It was an admitted fact as well as a legally permissible practice that sales tax paid and received were liable to adjustments and/or excluding it from the sales---Treatment given in order under S.62 of the Income Tax Ordinance, 1979 was both erroneous as well as prejudicial to the interest of Revenue---Invocation of S.66-A of the Income Tax Ordinance, 1979 was maintained by the Appellate Tribunal.

1986 SCMR 968; 2002 PTD (Trib.) 1997; 1992 PTD 1671; 2002 PTD 1014; 2004 PTD 330; 2002 PTD 1699; 2002 PTD 2542; 1992 PTD 1681; 2006 PTD 2678; 2008 PTD (Trib.) 47; 1993 PTD 1113; 1993 PTD (Trib.) 1116; 2006 PTD (Trib.) 2680; I.T.A. No.134 of 1998; I.T.A. No.135 of 1998; I.T.A. No.78/LB of 1992-93; I.T.A. No.1591/LB of 1996; I.T.A. No.1952/LB/1996; I.T.A. No.1598/LB of 1996; I.T.A. No.4016/LB of 2001; I.T.A. No.3533 to 3535 of 1992-93 to 1994-95; Messrs Jamhoor Textile Mills Ltd., DCIT/WT, Circle-7, Coys. Zone-I, Lahore in the case of Messrs Gojra Samundri Sugar Mills Ltd. 1995-96 to 1997-98 and Assessment Order dated 21-12-2001 passed by the Income Tax Panel-IV, Special Zone, Lahore in the case of Messrs Lahore Textile & General Mills Ltd. Lahore pertaining to the assessment year 2000-01 ref.

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

----Ss.66-A & 62--Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Forwarding expenses---Proration of local sales and exports---No material had been brought by either party to resolve this factual controversy---It was a factual controversy as providing that it was relatable to local or export sales or to both, only then a decision over it could be made----Assessing Officer was directed that in re-assessment an opportunity to the assessee shall be allowed to explain its duly substantiated point of view.

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

----Ss.66-A & 62---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order--Financial charges proration of---Department was attributing the financial charges as not entirely chargeable to business carried on because the bank borrowings had been used for making advances to associated companies--Amount of net advances and accumulated losses in the balance sheet indicated that compulsorily funds were not available for advancing the loans to the associated companies from own available cash---Explanation submitted by the assessee had no relevance with the issue---Action of revising authority was maintained by the Appellate Tribunal but in the re-assessment, it was directed that another opportunity shall be afforded prior to drawing any adverse inference---Care should be exercised in proceeding for disallowing the expenditure in a manner that it should not be contrary to the facts and against the law.

Kh. M. Iqbal, A.R. for Appellant.

Dr. Malik Muhammad Khan, D.R. (IT.U.) Respondent.

ORDER

EHSAN-UR-REHMAN, (JUDICIAL MEMBER).----Through the titled application, it has been prayed that the following additional grounds may be admitted for adjudication upon the main appeal where it has inadvertently been left to be taken.

"That the charge of segregated taxes under sections 80CC and 80 D is illegal and against the scheme of section 80D."

2. In this respect, the learned A.R. has submitted that the abovementioned ground is arising from the impugned order and goes to the roots of the instant case. Further, it has been pleaded that the Bench shall adjudicate this issue instead of waiting any findings from the Larger Bench where the matter is yet pending. The learned A.R. has contended that the issue as a result of this additional ground can be decided in either way.

3. We have heard both the authorities on this issue and have perused the available record. We find it legal, far and proper to admit the additional ground for adjudicating the same in the main order which is as under:--

4. I.T.A. No:7490/LB of 2005---Assessment year 2000-01

The titled appeal is directed against the order dated 23-12-2005 passed under section 66A of the repealed Income Tax Ordinance, 1979. Relevant facts, in brief, leading to filing of this appeal are that the assessment was framed under section 66-A of the repealed Ordinance. From the opening para. Of the impugned order which for convenience is being reproduced below:

"The assessee a Public Limited Company derives income from manufacturing and sale of Textile Products. Income Tax record of the company was requisitioned and during the course of examination, it transpired that the assessment finalized under section 62 of the Income Tax Ordinance, 1979 at net loss of Rs.31,295,917 was erroneous insofar as it is prejudicial to the interest of revenue for the reason that to arrive at the assessed loss, ratio of export and local sales were worked out at 55.37% and 44.63% respectively by the Panel. The cost of sales and other expenses were also prorated in the same proportion. Further the Sales Tax and Excise Duty of Rs.55,766,318 were allowed as a P&L account deduction under the heading "Selling Expenses".

5. A show cause notice dated 23-5-2002 was issued which is also being reproduced verbatim et literatim:--

"A show cause notice under section 66A of the Income Tax Ordinance, 1979 was issued to the assessee vide the then Commissioner of Income Tax's Office No. 2571/66-A dated 23-5-2002 wherein, it was specifically confronted as under:--

"Ratio of export and local sales has been worked out at 55.37% and 44.63% respectively by the Panel and cost of sales and other expenses have also been prorated in the same proportion. It has further been noticed that sales tax and excise duty of Rs.5,57,66,318 was allowed as a P&L Account deduction under the head "Selling Expenses", whereas the said amount should have been deducted from gross sales in accordance with clarification issued by the CBR as per Circular No.3 of 1996 dated 18-3-1996. As a result of the treatment accorded to tile Excise & Sales Tax by the Panel ratio of local sales has increased as a result of which expenses allocable to local sales have also increased beyond the admissible limit. Deduction of this expense from sales would modify the ratio between export and local sales to 59.6% and 40.4% as tabulated hereunder:--

Your profit when prorated according to the above ratio would result in reduction of loss/enhancement of assessed profit attributable to local sales, since by virtue of inflated ratio of local sales more expenses have been unjustifiably attributable to local sales, resulting in under-assessment of income attributable to local sales.

(ii) Forwarding expenses claimed at Rs.23,63,048 have been allowed entirety against local sales in spite of the fact that there is no evidence on record to prove that they relate exclusively to local sales.

(iii) Compliance of the statement of accounts reveals that net advance of Rs.110,100(m) has been made to the associated undertakings, whereas there is accumulated loss of Rs.115.033(m). This means that part of the financial cost borne by you relates to the advances given to the associated undertakings. Since the financial charges attributable to the advances made to the associated undertakings do not relate to your business, the Panel should have made appropriate disallowance out of the said expense.

(iv) No tax was charged on local sales of Rs.35,51,08,736 under section 80D in addition to the tax determined as payable under sections 80C and 80CC of the Income Tax Ordinance, 1979."

6. The reply to the show cause notice was also submitted which is also being reproduced as under:--

"(1) Under new Ordinance, 2001, as per provision of section 153(2), the sales tax is part of sales. The subsection (2) reads as under:--

Subsection (2) of section 153

"The gross amount payable for a sale of goods shall include the sales tax, if any, payable in respect of the sales."

Thus, the reference to Circular No.3 of 1996 in presence of substantive provisions carries no weight under law.

(2) The forwarding expenses claimed at Rs.2,363,048 relates to the local sales business in the local market and hence, rightly claimed in the pro-ration as per circular No.5 of 2000 in the Order under section 62. Thus, your proposal is not supported by the record.

(3) The advances to the associated undertakings at Rs. 110,100(m) was out of self-generated sources in the proceedings under section 62, all these facts were before the then assessing panel comprising of officers not less than in rank as IAC. Thus, the present proposal on your part is simply change of opinion and nothing else. It is our standing practice that short-term bank borrowing has very restricted scope in its nature and always confined to the available stocks. Details in respect of bank balance and pledged amount has also been given. The position is like this that for opening of import of raw material LCs, initial investment of 10 to 20% is being made by the management of the company and the rest is being made by the banks. On arrival of raw material in Pakistan, the same is being kept pledged by the investor banks. It is well established that one is free to conduct his business either with his own capital or through banking borrowings. Since bank borrowings was used for business only so, no portion of interest on assumption base can be disallowed. Reliance is made on 1986 SCMR 968 and 2002 PTD (Trib.) 1997.

(4) That in loss cases only one tax under section 80D is leviable which will cover turnover from all sources including export sales."

7. The revising authority, Commissioner (Audit), LTU rejected such contentions as were taken in reply reproduced (supra) in a manner that taking the sales tax as part of the local sales for working out the ratio in respect of local sales and export sales were rejected as the appellant assessee failed to substantiate its stance. On failure to produce the documentary evidence that the forwarding expenses are purely relatable to local sales only, the contention on this issue was also rejected.

8. The contention of the appellant/assessee over the issue of allowability of interest/financial expenses was also not found convincing, so was rejected as the bank borrowings have not been utilized for own business but were advanced as loan to associated companies. The contention of the appellant was that the tax demand created under section 80D shall be reduced with the amount of tax deducted and paid under section 80CC of the repealed Income Tax Ordinance was also rejected being not supported by law. It is after one-by-one rejecting the contentions taken by the appellant/assessee that the assessment completed under section 62 vide order dated 29-12-2001 was taken as to be erroneous in so far as prejudicial to the interest of the Revenue which was cancelled and it was sent to the Taxation Officer for complying with the directions so as to determine the correct tax liability. Such order has been contested in appeal before this Tribunal.

9. The learned A.R. was asked to firstly comment on ground No.3 that as to how the impugned order apparently is time barred when it has been dated as 23-12-2005 cancelling the order dated 29-2-2001? In reply to this, it has firstly been submitted that show cause notice was dated 23-5-2002 which has been issued by the Zonal Commissioner of Income Tax on the point of transfer of jurisdiction to the Large Taxpayers Unit. The subsequent proceedings were taken over and finalized by the learned Commissioner (Audit), LTU. Secondly, there is an inordinate delay in finalization of proceedings after issuance of first shovel cause notice dated 23-5-2002. On the issue of order being hit by limitation, we do not find it plausible for the reason that undisputedly the proceedings have been completed within the period 'of limitation even on taking over the proceedings by another officer of equal rank on transfer of jurisdiction is also quite legal and proper. The learned A.R. has failed to support his stance by quoting any provisions of law or citation supporting such objection. The arguments of the learned A.R. in this context have no legal force, therefore, are rejected.

10. The learned A.R. as per grounds contended that cancellation of the conscientious assessment without bringing any positive evidence is error under law. In support of it, the learned A.R. referred to a number of citations. The attention of the learned A.R. was drawn that to determine as to whether it is an error under law, firstly the plain facts of the case shall be stated. It has further been stated that sales tax and excise duty is part of sales, so has rightly been included in sales for proration of expenditure to it. Sales inclusive of sales tax have rightly been done. Secondly, it has been claimed by the learned A.R. that forwarding expenses claimed relate to the local sales, thus, has rightly been claimed not for proration as these relate to the local sales. Thirdly, the claim for allowabillity of financial expenses is proper because the loans were advanced to associated undertakings out of self-generated sources and not out of the bank borrowings. Fourthly, the chargeability under section 80D of the repealed Ordinance has made on the entire sales but by creating the demand after deduction of tax paid under section 80CC is proper, therefore, no interference is called for on this score. The learned A.R. has reiterated the contentions as were taken in the reply to the show cause notice under section 66A ibid. The reply in verbatim has already been reproduced in this order, so its repetition is being avoided. The learned A.R. has referred to the following cases in support of his contentions:--

(i) 1992 PTD 1671; (ii) 2002 PTD 1014; (iii) 2004 PTD 330; (iv) 2002 PTD 1699; (v) 2002 PTD 2542; (vi) 1992 PTD 1681; (vii) 2006 PTD 2678; (viii) 2008 PTD (Trib.) 47; (ix) 1993 PTD 1113; (x) 1993 PTD (Trib.) 1116; (xi) 2006 PTD (Trib.) 2680; (xii) 2006 PTD 2678; (xiii) Lahore High Court, Lahore judgment dated 13-9-2001 in ITA No.134/98; (xiv) Lahore High Court, Lahore judgment dated 13-9-2001 in I.T.A. No.135/98; (xv) ITAT's order dated 7-3-2002 in I.T.A. No.78/LB/1992-93 etc. for assessment year 1998-99 etc.; (xvi) ITAT's order dated 17-1-1998 in ITA No.78/LB/1992-93 etc. for assessment year 1978-90 etc.; (xvii) ITAT's order dated 24-3-1997 in ITA No.1591/LB/1996 etc. for assessment year 1990-91 etc.; (xviii) ITAT's order dated 25-6-2003 in ITA No.1952/LB/1996 etc. for assessment year 1991-92 etc.; (xix) ITAT's order dated 30-4-2003 in I.T.A. No.1598/LB/1996 etc. for assessment year 1992-93 etc.; (xx) ITAT's order dated 14-11-2003 in ITA No.4016/LB/2001 etc. for assessment year 1997-98 etc.; (xxi) CIT(A), Zone-I, Lahore order dated 4-12-1995 in ITA No.3533 to 3535 for the assessment years 1992-93 to 1994-95; (xxii) Order dated 30-5-2002, 30-5-2002 and 20-6-2002 passed by the CIT/WT, Special Zone Lahore in the case of "M/s Jamhoor Textile Mills Ltd., Lahore for the assessment years 1996-97, 1997-98 and 1998-99; (xxiii) Assessment Order dated 31-4-2001 (sic) passed by the DCIT/WT, Circle-7, Coys. Zone-I, Lahore in the case of Messrs Gojra Samundri Sugar Mills Ltd. pertaining to the assessment years 1995-96 to 1997-98 and (xxiv) Assessment Order dated 21-12-2001 passed by the Income Tax Panel-IV, Special Zone, . Lahore in the case of Messrs Lahore Textile & General Mills Ltd. Lahore pertaining to the assessment year 2000-01.

11. The learned D.R. has opposed such submissions of the learned A.R. and requested for maintaining the order passed under section 66A of the repealed Ordinance.

12. We have heard both the learned representatives and perused the available record. The reported/unreported orders have also been minutely gone through by us. The situation for which we are required to deal with in the instant case is firstly determining of exact figures of local sales i.e. before or after the deduction of sales tax, excise duty for proration of the entire expenditure, secondly, the nature and type of expenditure which are to be prorated and which are not to be prorated. As for as first issue is concerned, it is by adding the figures of sales tax in the local sales that proration of expenditure has been made which has resulted in charging excessive amount of expenditure towards the local sales i.e. for assessing the income under normal scheme of tax by determining the net income for making it liable to tax. Originally by an assessment under section 62 of the repealed Ordinance, when assessment was framed by proration of expenditure towards income under the normal law assessable, the figures of sales was taken by the assessee as inclusive of sales tax and the same was adopted by the assessing panel. Now, it has been noticed by the department that by including the sales tax in sales for proration of the expenditure to it, is incorrect, because it has resulted in higher allocation of expenditure towards normal sales as sales are to be net i.e. exclusive of sales tax. The contention of the department carries weight because including the sales tax in sales and then claiming it as expenditure in P&L Account is erroneous and prejudicial to the interest of the Revenue as sales tax is not an expenditure but it is always by adjustments of payment and receipts of sales tax with its net effect is accounted for. The sales tax when charged in sales invoices and recovered is subject to adjustment against the sales tax on purchases made where the appellant/assessee has paid the amount. It is erroneous as well as prejudicial to the interest of the Revenue for the reason that on the one hand, the allocation of expenditure is by higher ratio than actual on the basis of net sales, thus higher amount has been charged to the normal tax regime and secondly straightaway deduction of sales tax has been as a part of P&L account expenditure has double fold adverse effect on net income assessable under normal law. So, the earlier treatment given by an order under section 62 instead of deduction of sales tax from sales is both erronous as well as prejudicial to the interest of Revenue. The contentions taken by the learned A.R. in support of the method of assessment under section 62 has never been supported by any citation or the principles of accountancy. It is an admitted fact as, well as a legally permissible practice that sales tax paid and received are liable to adjustments and/or excluding it from the sales. So the treatment earlier given in the order under section 62 is both erroneous and prejudicial to the interest of Revenue, therefore, on this issue, invocation of section 66A is maintained.

13. The second issue resulting in invocation of section 66A is as to whether forwarding expenses claimed relate to the local sales or not. Here no material has been brought by either party before us to resolve this factual controversy. It is a factual controversy as proving that it is relatable to local or export sales or to both, only then a decision over it could be made. So, on this issue, we are left with no other alternative except to direct that in the re-assessment an opportunity to the appellant/assessee shall be allowed to explain its duly substantiated point of view. Exactly, same is the position in respect of the financial charges where the Revenue/Department is attributing the financial charges as not entirely chargeable to business carried on because the bank borrowings have been used for making advances to the associated companies keeping in view the amount of net advances and accumulated losses in the balance sheet which is indicating that compulsorily funds are not available for advancing the loans to the associated companies from own available cash. The appellant, in reply, to it has altogether submitted an explanation which has no relevance with the issue confronted by the revising authority. Even before us, stress has been laid on citation instead firstly tendering any explanation over this factual contention of the Revenue. So, here also we deem it fair and proper to maintain the action of the revising authority but in the reassessment, it is directed that another opportunity shall be afforded prior to drawing any adverse inference. The care shall be exercised in proceeding for disallowing the expenditure in a manner that it should not be contrary to the facts and against the law.

14. As far as fourth issue which is the chargeability of section 80D by reducing the amount of tax deducted under section 8000, both the sections are of repealed Income Tax Ordinance, 1979. Here keeping in view the earlier order of this Division Bench, we uphold the invocation of section 66-A. It is quite relevant that the learned A.R. has pleaded for a decision in either way instead of keeping pending awaiting the order by a Larger Bench of this Tribunal.

15. The learned A.R. has taken three objections. Firstly, it is the change of opinion and secondly, it is arbitrary exercise of authority; and thirdly against a badly drafted order, so the provisions of section 66-A could not be invoked. The learned A.R. has referred to the orders of this Tribunal and other citations in support of these contentions. It is to be made very clear by holding that section 66-A of the repealed Ordinance has empowered the revising authority to come in action where there is something erroneous as well as prejudicial to the interest of the Revenue. We even on properly, going through the entire impugned order have still not been able to find out that it is an arbitrary exercise of authority or change of opinion/afterthought. Importantly and also that it was not invocation of section 66-A against a poorly drafted order. Action was taken under section 66-A because the treatment given by an order under section 62 on three different grounds was found to be erroneous as well as prejudicial to the interest of the Revenue which has elaborately been described in earlier paras. Again before the revising authority, the appellate authority has failed to submit any relevant material on the issue of forwarding expenses as well as on financial expenses exhaustively spelt out in the impugned order as well as in the preceding paras of this order. So the citations as quoted by the learned A.R. would become applicable only when the order under section 62 would have been proved before us as poorly drafted or suffering from change of opinion, therefore, we find that the orders quoted by the learned A.R. are not applicable in the instant situation as of the present case. The order drafted under section 62 of the repealed Ordinance is not a poorly drafted order as the revising authority has not declared it so but it is due to presence of four factors causing erroneousness and prejudicial to the interest of the Revenue that action was taken. Such action is being upheld by us.

16. In view of the foregoing discussion, the appeals of the assessee having no merit are dismissed.

C.M.A./36/Tax(Trib.)Appeals dismissed.