2010 P T D (Trib.) 1568
[Income-tax Appellate Tribunal Pakistan]
Before Nazir Ahmad, Judicial Member and Mian Masood Ahmad, Accountant Member
I.T.As. Nos.727/LB to 730/LB of 2009, decided on 25/01/2010.
(a) Income Tax---
----Stay order---High Court restrained the Taxation Officer from passing the final order till the next date of hearing---Stay granted by High Court, on the pervious date, was not extended---Extension in stay could not be presumed so as to nullify the proceedings ---If the appellant had honestly believed the existence of a stay order, it would have taken recourse to the contempt of court proceedings---Such course of action having not been adopted, the appellant may not be allowed to taken advantage of its acquiescence in the continuation of the proceedings.
(b) Income Tax---
---Stay order---No intimation---Effect of---Absence of intimation of a stay order issued by the High Court was not a valid defence for the State functionaries to proceed in the matter---Restraint or stay order becomes operative from the moment it is announced---Despite no knowledge of such order, any proceedings subsequent thereto, shall remain unlawful.
1993 PTD 332 rel.
(c) Income Tax---
----Stay order---Proceedings which, for one reason or the other, continue during the validity of a stay order, or after the issuance of stay order, granted by the High Court would not become ipso facto void or nullity in the eyes of law; it was for the court, granting the stay, to rule upon the validity of such proceedings.
I.T.A. No.2407/LB of 2000 rel.
(d) Income Tax Ordinance (XLIX of 2001)---
---S. 122---Income Tax Rules, 2002, R. 68---Amendment of assessment---Notice of amended assessment---Jurisdiction---Assumption of----Appellant contended that as the Taxation Officer did not issue the required/prescribed statutory notice; the assumption of jurisdiction by the Taxation Officer became void in the eyes of law; and that there was a difference between the `requirement of issuance of a statutory notice' and `requirement of providing an opportunity of being heard'---Validity---Rule 68 of the Income Tax Rules, 2002 gave an option to the Commissioner for issuance of a notice or letter which had to be in the manner or pro forma specified in Part-II of the First Schedule to the Income Tax Rules, 2002---Commissioner or the Taxation Officer, in exercise of its delegated powers, could either issue a notice or a letter---If the Taxation Officer opts to issue a notice then it had to be in the pro forma specified in Part-II of the First Schedule to the Income Tax Rules, 2002; if, however, he opts to issue a letter, then it had to be in the manner of that pro forma---Taxation Officer when deems it sufficient to issue a letter only then necessarily it is to be in the manner specified in the Rules---Letter could be in the manner of pro forma if the requirement of the Rule 68 would be satisfied i.e. the intentions, basis and requirements of the intended action, as those in the notice, were fully disclosed in the letter issued by the Taxation Officer---Requirement of R.68 of the Income Tax Rules, 2002 would stand satisfied through the issuance of letter---Show-cause notice in the present case, was though in the shape of letter but fully disclosed the intention of the Taxation Officer as also the basis of intended actions besides his requirements---Issuance of notice under S.122 of the Income Tax Ordinance, 2001 was not mandatory and law required to provide the taxpayer an opportunity of being heard---Non-issuance of notice was not fatal---Objection raised by the appellant was overruled by the Appellate Tribunal.
1992 PTD (Trib.) 1587 and 2006 PTD 2066 ref.
(e) Income Tax Ordinance (XLIX of 2001)---
----S.122---Income Tax Ordinance (XXXI of 1979), S.65---Amendment of assessment---Notice---Opportunity of being heard---Difference between the provisions of S.122, Income Tax Ordinance, 2001 and S.65 of Income Tax Ordinance, 1979---Under S.65 of the Income Tax Ordinance, 1979 the proceedings were initiated by issuance of a notice and the assessing authority may take the cognizance of the case by issuing the notice; as the statute itself provides for a specific action in a very explicit manner thus the non-issuance of the notice was fatal and incurable mistake---Under S.122 of the Income Tax Ordinance, 2001 there was no statutory requirement for issuance of notice to initiate proceedings and instead subsection (9) of S.122 of the Income Tax Ordinance, 2001 spoke of providing an opportunity of being heard to the taxpayer.
(f) Income Tax Ordinance (XLIX of 2001)---
----S.12 (2) (d)---Salary---Perquisites---Payment of 50% above the remuneration---Addition---Taxpayer contended that actual expenses for vehicle running incurred by the Executives were reimbursed on actual expenses basis, which had been incurred by them on behalf of the employer-company in performance of their duties; and such payments stood excluded from the definition of `salary' and perquisites under S.12 (2)(d) of the Income Tax Ordinance, 2001 as the addition had been made on the presumptions that the company maintained vehicles had been provided to its executives for free use---Validity---For immediate preceding year under the similar facts the Assessing Officer had curtailed the claim of expense on account of reimbursement of expenses for vehicle running by 50%---Appellate Tribunal ordered that the addition shall be reduced in all the years by an amount equal to 50% of the payments under the head "reimbursable expenses for vehicle running".
(1994) 208 ITR 649; 1992 PTD 1161 and 2007 PTD (Trib.) 1055 ref.
(g) Income Tax Ordinance (XLIX of 2001)---
----Ss.28(1) (b), 77(4) & 2(1A)---Depreciation on assets transferred from leased assets to own assets---Residual value---Claim of excess depreciation in respect of assets transferred was calculated and added to the income on the ground that such assets had to be transferred from leased assets to own assets on the residual value---Assessee contended that transfer of assets front the category of leased assets to own asset was past and closed transaction for all intents and purposes; and if the Assessing Officer had any reservations about the claim of cost of acquisition of subject leased assets, he should have first further amended the assessment order; and Taxation Officer was not legally justified to go against the history of the case---Validity---First transfer of assets front the category of leased assets to own assets took place during the tax year, 2003---For the tax year, 2003, the case was properly audited and the issue of claim of depreciation was thoroughly scrutinized, which included the claim of depreciation in respect of assets transferred---To the extent of transfer of assets, it was a past and closed transaction which had attained finality---Without recourse to any retrieval action, the Taxation Officer dealing with the tax year, 2004 was not competent to challenge the veracity or legality of the figures representing written down value of assets brought forward from tax year, 2003---Amended assessment order for the tax year, 2003 was in a way had become hit by limitation so as to debar the Taxation Officer, conducting proceedings for tax year, 2004 onward, from taking any retrieval action---Order of Assessing Officer and endorsement by the First Appellate Authority amounted to side lining express provision of law contained in S.122 of the Income Tax Ordinance, 2001.
Ellahi Cotton Mills Ltd. v. CIT 1997 PTD 1555 and Caltex Oil (Pak.) Ltd. v. CIT 2007 PTR 46 Kar. ref.
(h) Income Tax---
----Estoppel, principleof---Applicability---Scope---No estoppel where an action of one Assessing Officer is statedly held to be in violation of law by a successor in office but there are limits and parameters of such shelter.
(i) Income Tax---
----Administration of justice---Order passed by an officer, which he was duly competent to pass, deserves due respect front his successors.
(j) Income Tax---
----Written down value---Computation of---Written down value of assets shall be computed by taking their cost of acquisition.
(k) Income Tax Ordinance (XLIX of 2001)---
----S.76(5)---Cost---Foreign Exchange loss---Expenses claimed on account of exchange loss was disallowed being notional and being capital in nature---Assessee explained that he had obtained foreign currency loan to finance the debt portion of its expansion project; and such exchange loss represented the loss incurred due to devaluation of currency---Validity---Expenses incurred was thoroughly scrutinized and some of these expenses had also been proportionately disallowed; while partially disallowing total financial expenses, the Assessing Officer had nowhere objected to the admissibility or otherwise of the interest portion/financial charges attributable to repayment of foreign currency loan---In the absence of objection to repayment of foreign currency loan and interest thereupon, the Taxation Officer could not proceed to reject the claim of resultant exchange loss---Exchange loss claimed by the assessee was directed to be allowed in circumstances.
1991 PTD 171; Sutlej Cotton Mills v. CIT (1979) 116 ITR 1; 2007 PTD (Trib.) 2109 and 1989 PTD 602 rel.
(l) Income Tax Ordinance (XLIX of 2001)---
----S. 76(5)---Cost---Provisions of S.76 (5) of the Income Tax Ordinance, 2001 were applicable to a loan used for acquisition of asset---Since the proceedings of foreign currency loan had not been used for acquisition of any asset, the exchange difference arising on repayment of foreign currency loan was not hit by mischief of S.76 (5) of the Income Tax Ordinance, 2001.
1991 PTD 171; Sutlej Cotton Mills v. CIT (1979) 116 ITR 1; 2007 PTD (Trib.) 2109 and 1989 PTD 602 rel.
Sutlej Cotton Mills v. CIT (1979) 116 ITR 1 and 2007 PTD (Trib.) 2109 ref.
(m) Income Tax Ordinance (XLIX of 2001)---
----Ss.67, 28(1A), 6 & 7---Income Tax Rules, 2002, R.13(3)(a)---Apportionment of deductions---Profit on debt, financial costs and lease payments---Curtailment of financial expenses--- Investment in shares---Purchase of capital assets---Assessee was confronted with the issue that investment in acquisitions of share had been made out of borrowed funds, since the assessee had deficiency of funds available for purchase of capital assets as well as for smooth running of business operations thus, why claim of financial expenses should not be disallowed proportionate to investment in shares as cash generated from the operating activities was much less than the cash utilized for investment activities warranting utilization of interest based on borrowed money for investment activities, and there was no rebuttal of the conclusion that the assessee had made investment in acquisition of shares out of long term loans and long term Murabaha, and assessee had not been able to present any evidence in terms of cash book and bank statement showing availability of money other than borrowed money on the dates money was advanced for investment in shares---Assessee contended that Taxation Officer disallowed the claim of exchange loss on foreign currency loan and the assessee had utilized such foreign currency loan on expansion of business by acquisition of capital asset while the same foreign currency loan was treated as related to investment in shares and markup of this loan was curtailed, and contradictory treatment of interest expenses and exchange loss of such loan and of other loans obtained for business purposes established beyond any doubt that the curtailment of financial charges were on flimsy grounds, without establishing the relation of loans with the investments and without any legal basis---Validity---Taxation Officer had unnecessarily saddled the assessee with uncalled for pecuniary burden without factual or legal basis, at some places even taking up contradictory stances---While curtailing financial expenses the Taxation Officer attributed its application towards acquisition of share and on the other hand, while dealing with the `exchange loss' he categorically held that the same had been consumed towards expansion project---One loan cannot be consumed for two different payments---Assessing Officer proportionately disallowed the financial expenses incurred by the assessee during the full 12 months period while the investment in acquisition of share was made in the month of July, 2004 and August, 2004 towards the end of accounting period which was 30-9-2004---Taxation Officer had applied general formula without looking into the facts as to whether the borrowed money was obtained in previous year or obtained during the year before the date of investment/after the date of investment---Taxation Officer without considering the nature and utilization of funds qua allowance of financial expenses even in the immediately preceding years, had curtailed the same without any reasonable cause---Nexus of borrowed funds with the investment in acquisition of share did not stand established---Figures were picked up to reach certain conclusions with the objective of curtailment of financial expenses--- Taxation Officer had only taken into consideration the interest bearing funds while non-interest bearing funds had been ignored-Non-interest bearing resources were available with the assessee in addition to interest bearing resources---Assessing Officer's working that assessee's own sources were tide to fixed assets and stocks was not borne out from record in. view of the details obtaining in the balance-sheet---Taxation Officer restricted his analysis to the cash flow statement ignoring the other entries of the financial statements ---Comparative chart of cash inflow and cash outflow presented by the Department had also the same lacuna---Data presented by the assessee had successfully explained the sources of investment in shares---Apportionment of financial expenses and additions were found non-maintainable by the Appellate Tribunal in circumstances.
2003 PTD (Trib.) 1449 p.1452; 2006 PTD 103; 2007 PTD (Trib.) 1509; 1986 SCMR 968 and 1987 PTD 149 ref.
(n) Income Tax Ordinance (XLIX of 2001)---
----S.21(g)---Companies Profits (Workers' Participation) Act (XII of 1968), S.3(b) & Sched., Cl.2(2)---Deductions not allowed---Interest on payments to Workers' Profit Participation Fund---Assessee claimed deduction on account of payment of interest on contribution to Workers' Profit Participation Fund---Assessing Officer. disallowed the same on the ground that such interest appeared to be in the nature of fine or penalty paid in violation of rules and regulations of Companies Profits (Workers' Participation) Act, 1968---Validity---Payment of interest did not fall within the category of "find or penalty paid or payable for the violation of any law, rule regulation" as stipulated under S.21(g) of the Income Tax Ordinance, 2001---Perusal of relevant provisions of Companies Profits (Workers Participation) Act, 1968 established that the payment of interest was statutory obligation upon the companies liable to said levy---Interest payment became due with effect from the first day of the financial year when it was practically not possible for a company to determine even its profit not to speak of its liability with regard to Workers' Profit Participation Fund---Disallowance was held to be not maintainable and the same was deleted by Appellate Tribunal.
(1973) 90 ITR 373 (PSH); (1978) 113 ITR (Cal.) and (1985) 153 ITR 275 (Dehli) irrelevant.
1997 PTD (Trib.) 301 rel.
(o) Income Tax Ordinance (XLIX of 2001)---
----S.67---Income Tax Rules, 2002, R.13 (3) (a)---Apportionment of deductions---Dividend income---Allocation of administrative expenses to dividend income proportionately---Validity---Section 67 of the Income Tax Ordinance, 2001 specifically required that the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of activity to which the amount relate---Catch provided in law was determination of nature and size of activity involved for earning an income and incurrence of expense in relation to size and nature of the activity---Earning of dividend needed no hectic activity---Formula provided in R.13(3)(a) of the Income Tax Rules, 2002 could not be applied blindly---Rule 13(4) of the Income Tax Rules, 2002 specifically draws attention of the Authority to consider the nature and source of each class of income---While earning dividend income, a very little activity was required as compared to earning of business income; both could be taken or considered on equal footing---Having announced dividend the dividend warrants were dispatched to the share-holders, which was deposited into bank and the amount was realized by bank itself---Even tax was deducted before issuance of warrant---Practically, a very little expenditure was involved---Taxation Officer without consideration of nature and source of income had unilaterally reckoned the activity involved for earning dividend income and unilaterally applied the formula given in R.13(3)(a) of the Income Tax Rules, 2002---Apportionment of administrative expenses was found not on reasonable basis and could not be sustained in the eyes of law---Addition was not upheld by the Appellate Tribunal in toto and was maintained to the extent of Rs.5000, 000.
2009 PTD (Trib.) 869 and 2005 PTD (Trib.) 2161 ref.
Shahbaz Butt and Hamid Masood, F.C.A. for Appellants.
M. Asif, D.R. and Sajjad Haider Rizvi, LA for Respondents.
ORDER
The titled four appeals have been instituted on behalf of a public limited company. These are directed against four separate appellate orders, all dated 23-6-2009, which were recorded by the learned CIT(A), RTO, Lahore. Since the four appeals involve identical issues, except few which are peculiar to one year or the other, these are taken up together and disposed of through this common order.
Besides usual grievances of the appellate order being against the facts of the case and bad in law, the appellant feels aggrieved on account of violation of a stay order dated 27-1-2009 issued by the honourable Lahore High Court in Writ Petition No.574/2009, non-issuance of statutory notices under section 122 of the Income Tax Ordinance, 2001 (the Ordinance), curtailment of depreciation allowance as also whole and partial disallowance of certain expenses claimed under various heads in the Profit and Loss Accounts. Disallowance of expense claimed under the head `interest paid on deposits' as well as in respect of `interest paid to Workers' Profit Participation Fund' (WPPF) has also grieved the appellant. Lastly, it is the levy of minimum tax which is assailed.
Appellant's accounting period relevant to the tax year, 2004 ended on 30-9-2003. Later on, for tax year, 2005 two separate returns were filed: one for the period ending 30-9-2004 and the other for the period 1-10-2004 to 30-6-2005. For the tax year 2006, the return was filed for the period 1-7-2005 to 30-6-2006. These would be referred to in this order as four years.
The return for the tax year 2004 filed on 30-9-2004 was later on revised on 17-9-2007 by carrying forward the unabsorbed component of depreciation allowance which was disallowed in tax year 2003 vide assessment order dated 30-6-2007. The revised return was subjected to action under section 221 by the taxation officer vide order dated 29-9-2007 to allow tax credits as also carry forward of minimum tax. Following is the position of returns and amended/rectified assessments for the tax year 2004:
| Return filed under Section 120 Income/Loss Returned Rs. | Revised Return Rs. | Rectification under section 221 | Amendment under section 122 (5A) |
| (1,25,255,312) | (1714183062) | (1714183062) | 1709395771 |
| | Presumptive income 124211013 | | |
| Tax NLR | 56912139 | 56912138 | 57500301 |
| Tax PTR | 621055 | 1242110 | |
| Total Tax | 57500301 | 57533194 | 58154248 |
| Refund | (101321158) | (68196163) | 15867283 |
Both the returns pertaining to tax year, 2005 and the return for the tax year, 2006 had been filed in the due course of time. Perusal of record shows that on 21-12-2008 the appellant received show-cause notice for the tax year, 2004 from Audit Wing of LTU, Lahore under section 122(9) read with section 122(5A) of the Ordinance proposing to amend the assessment deemed to have been finalized under section 120(1) of the Ordinance. Statedly, it was duly replied on 14-1-2009. Meanwhile, Enforcement Wing of LTU, Lahore issued a show-cause notice on 30-12-2008 to further amend the deemed assessment order as rectified under section 221 of the Ordinance for the tax years, 2006 and 2007. The said Audit Wing issued a show-cause notice on 15-1-2009 under section 122(9) read with section 122(5A) of the Ordinance showing intention to amend the deemed assessments for the tax years, 2004, tax year, 2005 (I), tax year 2005(II) and tax year, 2006. On behalf of the appellant, it was objected that the deemed assessment order, in terms of section 122(3) of the Ordinance stood merged into the rectification order under section 221 of the Ordinance. The Audit Wing, thereafter, issued a corrigendum intimating that the notices dated 15-1-2009, issued in respect of the four returns under consideration, should be treated as having been issued in respect of orders existing in field under section 122(3) read with section 221.
The Audit Wing after the usual volley of notices, replies and discussion with the learned representatives of the appellant passed the amended assessment orders which are all dated 14-2-2009. No action appears to have been taken by the Enforcement Wing in respect of show-cause notices issued by it. The learned CIT(A) confirmed the amended assessment orders in toto.
Grounds of appeal taken in all the years regarding treatment of other income and donations having not been pressed stand rejected. Various issues which require adjudication in the light of the contents of the assessment orders, the appellate orders being impugned before us and the grounds of appeal as also the arguments of the learned representatives of the two parties are taken up one by one.
(1) Continuation of proceedings after issuance of Stay Order.
As per record the honourable Lahore High Court issued a restraint order on 27-1-2009 in W.P. No.574/2009 (Ibrahim Fibers v. CIT etc.) in following terms:-
In the meantime, the final order shall not be passed till the next date of hearing.
The case came up for hearing again on 18-2-2009 when the following proceedings were recorded:--
18-2-2009Mr. Shahbaz Butt, Advocate, for the petitioner. Mr. Shahid Jameel Khan, Advocate for the respondents
Latter, states that this case is not maintainable for the simple reason that the matter can be decided within the judicial hierarchy and the appeal provided in law itself. Further, against a show-cause notice no writ petition should be allowed.
(2) While on the other hand, the petitioner's contention is that no remedy provided against an order under section 113(2)(c).
(3) The said provision has specifically been inserted in 2004. Its application on the surplus of the earlier years is the issue which requires detailed discussion. The case, therefore, is admitted for regular hearing.
(4) The respondents wants to file written statement he is allowed to do so within two weeks from today.
(5) Relist thereafter.
The learned counsel for the appellant, appearing in support of the titled appeals, vehemently contests that the taxation officer has proceeded in violation of the stay order issued by the honourable Lahore High Court, Lahore which fact alone is sufficient, according to him, to vitiate whole of the proceedings. He urges that all the four assessment orders need to be declared null and void having been passed in violation of the restraint order referred to earlier. He fortifies his arguments by relying upon Shoaib Bilal case reported as 1993 PTD 332 = 67 Tax 233 where it was observed by the honourable Lahore High Court, Lahore:--
Moreover, as already held, the assessment order was passed after the stay order has been granted by this Court and, therefore, is a nullity in the eyes of law.
The learned DR, duly assisted by the learned Legal Advisor submits that violation of restraint order is not a ground of appeal and as such this point cannot be raised at this stage of the proceedings. He adds that the issue of validity of restraint order was never agitated before the Taxation Officer nor the learned CIT(A). He emphasizes that, this being so, an argument which does not arise out of the assessment order or the impugned order cannot be presented before the Tribunal. According to him, the restraint order issued by the honourable Lahore High Court was never brought into the knowledge of the Taxation Officer. He concludes his arguments on this issue by contending that it is not clear from the record as to which proceedings before the Taxation Officer were subject-matter of the restraint order dated 27-1-2009.
We have considered the rival arguments on the issue. As noted earlier the honourable Lahore High Court restrained the Taxation Officer from passing the final order till the next date of hearing which appears to be 18-2-2009. The order passed by the honourable Lahore High Court on 18-2-2009, as reproduced earlier, exhibits that the stay granted on 27-1-2009 was not extended. Under the circumstances extension in stay cannot be presumed so as to nullify the proceedings subsequent to 18-2-2009. The ratio settled in the case of Shoaib Bilal does not bail out the appellant because it is not applicable in the facts of the case before us. We may, however, clarify here that absence of intimation of a stay order issued by the honourable Lahore High Court is not a valid defence for the State functionaries to proceed in the matter. It is by now settled by the Superior Courts that the restraint or stay order becomes operative from the moment of its announcement. Despite no knowledge of such order, any proceedings subsequent thereto shall remain unlawful. We quote from the case of Shoaib Bilal:--
It is well-settled that stay order, unlike injunctions, operates from the moment, it is passed irrespective of the time of its communication. Authority, if any needed can be found in Haji Abdul Jalil v. Javed Ahmad 1983 SCMR 869, Bakhtawar etc. v. Amin etc. 1980 SCMR 89 and the leading case, namely, Karamat v. Raja PLD 1949 Lahore 100.
There is another aspect of this issue. If the appellant had honestly believed in existence of a stay order after 18-2-2009, it would have taken recourse to the contempt of court proceedings. The course of c action having not been adopted, the appellant may not be allowed to take advantage of its acquiescence in the continuation of the impugned proceedings.
Further, the proceeding which, for one reason or the other, continue during the validity of a stay order, or after the issuance of a stay order, granted by an honourable High Court do not become ipso facto void or nullity in the eyes of law. It is for the honourable Court, granting the stay, to rule upon the validity of these proceedings. We are guided in this behalf by the following observations of our learned brothers recorded in their order in I.T.A. No.2407/LB/2000 (assessment year, 1993-94).
So far as passing of the order in the presence of a restraining order is concerned, the dates disclosed by the AR and the facts in relation thereof also create a very strong doubt about the department's working. This, however, is a matter which can be taken before the honourable High Court as further initiation to the said extent is the power and' jurisdiction of the said superior judicial authority.
Since there was no restraint order in field from 18-2-2009 onwards, we need not go into merits of rival arguments on the issue. As a result of above discussion, the arguments presented on this issue fail.
2. Assumption of Jurisdiction.
Opening his arguments, the learned counsel submits that the Taxation Officer assumes jurisdiction in a particular case through issuance of a certain notice which in the present case would be notice prescribed under Rule 68 of the Income Tax Rules, 2002 (the Rules) read with section 122 of the Ordinance. He urges that any defect or lacuna in assumption of jurisdiction is always fatal to the proceedings. He argues that since in the present case the Taxation Officer did not issue the required/prescribed statutory notices, therefore, assumption of jurisdiction by the Taxation Officer becomes void in the eyes of law. He explains that there is a difference between the requirement of issuance of a statutory notice and requirement of providing an opportunity of being heard. Further, that the requirement of issuance of a notice cannot be substituted by writing a letter to the taxpayer. The learned counsel adopts as part of his own submissions, the following observations of Mr. Farhat Ali Khan, the then Chairman of ITAT, handed down by him the case reported as 1992 PTD (Trib.) 1587 (at page 1593) dated 8-8-1992:--
(10) In law there are errors of jurisdiction and errors in jurisdiction. An error of jurisdiction is said to be that which is the result of inherent lack of jurisdiction. If an assessing officer has no jurisdiction to frame an assessment order against an assessee for any reason whatsoever his order would suffer from error of jurisdiction. However, if he has jurisdiction to proceed with the matter and in exercise thereof he commits errors in arriving at some finding or decision, it is called an error in jurisdiction. Mr. Justice Manzur Qadir, an illustrious legal personality of Pakistan, has dealt with this issue in a decision of Lahore High Court reported as PLD 1963 Lahore 391 when his Lordship was its Chief Justice. According to his Lordship objection raised to the proceedings is different from objection raised in the proceedings and thus his lordship has referred to the error of jurisdiction by the former and error in jurisdiction by the latter expression. If an assessing officer commits an error of jurisdiction, the proceedings before him are said coram non judice (this expression literally means "in the presence of a person who is not a Judge") and if he delivers an order or decision or judgment is called a nullity as it is result of an error of jurisdiction which is merely incurable. (Please see Wharton's Law Lexicon, 14th Edition and Black's Law Dictionary, 5th Edition.).
He further invites our attention to the fact that legal objections were raised before the Taxation Officer as also during the course of proceedings before the learned CIT(A).
The learned DR, having conceded that no notice under section 122 was issued, argues that the notice mentioned in section 122(1) is not a mandatory notice. He urges that the said notice is not even directory in nature what to speak of the same being a mandatory one. He explains his point of view by referring to section 237 where the C.B.R. (now F.B.R.) stands authorized to frame rules for the purpose of the Ordinance and goes on to say that while the Rules were framed in 2002 subsection (5A) of the said section 122 was introduced through Finance Ordinance, 2003. He infers that the Rules introduced in 2002 were not applicable to amendments in the Ordinance made subsequent to 2002. At this stage, he refers to the provisions of section 67 dealing with "apportionment of deductions", to bring home the point that the section was there since the promulgation of the Ordinance, still, C.B.R. was specifically authorized vide subsection (2), to make Rules under the said section 237 for the purpose of apportioning deductions. He points out that no such enabling provision was made available after insertion of subsection (5A). Adopting another line of argument, he submits that subsection (5A) of section 122 is a subservient to subsection (9), however, Rule 68 does not find any mention in said subsection (9) where the only requirement laid down is provision of an opportunity of being heard. According to the learned DR, since subsection (5A) read with subsection (9) of section. 122 does not require issuance of a notice, therefore, no objection can be validly taken as to assumption of jurisdiction by the Taxation Officer in the present case. In his opinion, a provision is mandatory only if the consequences of its non-compliance are provided in the statute and if not it remains only a directory in nature. To assert that procedural lapses are not to vitiate the proceedings further reliance is placed upon the case cited as 2006 PTD 2066. He urges that subordinate legislation is not to override or expand the main legislation. Lastly, he fortifies his submissions by relying upon the case of Messrs Fauji Oil Terminal to bring home the point that Taxation Officer is only to exercise jurisdiction and not to assume jurisdiction, therefore, the question of assumption of jurisdiction by the Taxation Officer does not arise.
We have heard the rival arguments and have benefitted from the case-law referred to by the learned representatives. Before proceeding further the legal provisions referred to by the learned representatives are reproduced for convenience of reference:
Section 65 of repealed Income Tax Ordinance, 1979.
Additional Assessment.---(1) If, any year, for an reason;
(a) any income chargeable to tax under this Ordinance has escaped assessment; or
(b) the total income of an assessee has been under assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance; or
(c) the total income of an assessee and the tax payable by him has been assessed or determined under subsection (1) of section 59 or section 59A or deemed to have been so assessed or determined under subsection (1) of section 59 or section 59A---the Deputy Commissioner may, at any time, subject to the provisions of subsections (2), (3) and (4), issue a notice to the assessee containing all or any of the requirements of a notice under section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may, and all the provisions of this Ordinance shall, so far as may be, apply accordingly.
Section 122 of the Income Tax Ordinance, 2001
122. Amendment of assessments.---(1) Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121, or issued under section 59, 59A, 62, 63 or 65 of the repealed Ordinance, by making such alterations or additions as the Commissioner considers necessary.
(5A) Subjection to subsection (9), the Commissioner may amend, or further amend, an assessment order, if he considers that the assessment order is erroneous insofar it is prejudicial to the interest of Revenue.
(9) No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard.
PART II OF THE FIRST SCHEDULE
Government of Pakistan Department of Income
Office of the
Notice/letter under section 122 of the Income Tax Ordinance, 2001
(See rule 68)
68. Amended assessment notice.---An amended assessment order related issue notice or / letter issued by the Commissioner under section 122 shall be in the manner or pro forma specified in Part II of the First Schedule to these rules.
A bare perusal of the two sections reveals that under section 65 of the repealed Income Tax Ordinance, 1979 the proceedings are initiated by issuance of a notice and the assessing authority may take the cognizance of the case by issuing the said notice. As the statute itself provides for a specific action in a very explicit manner thus the non-issuance of the said notice is fatal and incurable mistake. On the other hand, under section 122 of the Ordinance there is no statutory requirement for issuance of notice to initiate proceedings and instead of notice subsection (9) speaks of providing an opportunity of being heard to the taxpayer.
A careful reading of Rule 68 reveals that 'it gives an option to the Commissioner for issuance of a notice or letter which has to be in the manner or pro forma specified in Part-II of the First Schedule. This means that the Commissioner or the Taxation Officer, in exercise of his delegated powers, can either issue a notice or a letter. If the taxation officer opts to issue a notice then it has to be in the pro forma specified in Part-II of the First Schedule. However, if he opts to issue a letter, then it has to be in the manner of that pro forma. What follows is that when the Taxation Officer deems it sufficient to issue a letter only then necessarily it is to be in the manner specified in the Rules. Now it is to be seen as to how a letter can be in the manner of a pro forma. In our considered opinion, the requirement of the Rule would be satisfied if the intentions, bases and requirements of the intended action, as those in the' notice, are fully disclosed in the letter being issued by the Taxation Officer. The requirements of said Rule 68 stand satisfied in the present case through the issuance of letters. Perusal of the show-cause notice, though in the shape of the letter, fully discloses the intention of the Taxation Officer as also the basis of intended actions besides his requirements. The above discussion makes it clear that issuance of notice under section 122 was not mandatory and law required to provide the taxpayer an opportunity of being heard, therefore, non-issuance of notice was not fatal in the instant case. This being so, the objection raised by the learned counsel in this behalf stand overruled.
Addition on account of excess perquisites:
The issue cropped up in the background of the facts that the assessing officer noted perquisites paid to the executives being in excess of 50% of their remuneration. As per computation given in the assessment order for the tax year, 2004, the addition under section 21(k) of the Ordinance amounting to Rs.3063292 was worked out in the following manner:-
| Remunerations of Executives | | Rs.82,882,057 |
| 50% of the above Perquisites | | Rs.41,441,028 |
| House Rent Allowance | Rs .26,664,279 | |
| Utilities | Rs.8,195,057 | |
| Medical Allowance | Rs.2,285,650 | |
| Reimbursable expenses for Vehicle running | Rs.7,359,334 | |
| Excess perquisites under | | Rs .44,404,320 |
| section 21(k) | | Rs.3,063,292 |
The pattern of working was followed in the subsequent years where for the tax year 2005(II) and for the tax year 2006 the additions were worked out at Rs.2093010 and Rs.6428915 respectively.
During the course of amendment proceedings it had been contended on behalf of the appellant that actual expenses for vehicle running incurred by the executives were reimbursed on actual expense basis, since these had been incurred by them on behalf of the appellant company in performance of their duties. It was further pleaded that such payments stood excluded from the definition of salaries and perquisites under section 12(2)(d) of the Ordinance. The assessing officer did not agree. His point of view, duly endorsed by the learned CIT(A) is that the vehicles had been provided by the appellant to its executives for free use. At the end of the day the additions noted in the pre-paras were made in appellant's taxable income.
According to the learned counsel for the appellant, the impugned additions have been made on the presumptions that the company maintained vehicles had been provided by the appellant to its executives for free use. Factually, he asserts, the reimbursements include POL, maintenance and related expenses incurred by the employees in connection with the business use of vehicles. This fact was admitted by the Revenue, he pertinently mentions with reference to the audit of tax year, 2003, that the part of reimbursement of amounts was spent on business use of vehicles and half of the reimbursable expenses were allowed as business expenses. Section 12(2)(d) of the Ordinance, he highlights, provides that any expenditure incurred by the employee on behalf of the employer in the performance of the employee's duties of employment shall not be chargeable to tax under the head salary. The case-law reported as (1994) 208 ITR 649 (SC). relied by the taxation officer is contested to be not relevant as it deals with the expenditure or allowance claimed by assessee in relation to an asset used by employee for his own purposes or benefits. He argues the reimbursements in the case of appellant are for the expenses incurred for the purpose of business of the company. In support of his contention that reimbursements of expenses are not perquisites, reference is made to the following reported judgments.
1992 PTD 1161 and 2007 PTD (Trib.) 1055.
The learned DR supports the impugned additions for the reasons recorded in the assessment orders as endorsed by the learned first appellate authority.
We have perused the relevant record and considered the rival arguments. Perusal of record shows that for the immediately preceding year i.e. tax year 2003 under the similar facts the assessing officer had curtailed the claim of expense on account of reimbursement of expenses for vehicle running by 50%. The learned DR is unable to distinguish the facts of the case as prevailing for the tax year, 2003 from the four years under consideration. This being so, we deem it appropriate to order that the impugned addition shall be reduced in all the four years by an amount equal to 50% of the payments under the head "reimbursable expenses for vehicle running.
Depreciation on assets transferred from leased assets to own assets:--
The assessing officer noted from perusal of schedule of fixed assets that the appellant had made addition in `plant and machinery' at Rs.74,454,104 by transferring the same from the category of `leased assets' to `own assets' at their original cost price instead of their residual value. The assessing officer observed that the said treatment was not in accordance with law, since the assets stood acquired by the appellant from leasing companies at their residual value of Rs.744540 i.e. 10% of the cost. The appellant company was accordingly called upon to explain its position with reference to the provisions of law contained in section 28(1)(b) as also with section 77(4) of the Ordinance. Intention was shown to disallow the excess claim of depreciation. The appellant explained its position that plant and machinery worth Rs.259,974,243 and related lease liability of Rs.157,447,364 had been transferred from the amalgamating companies w.e.f.1-10-2000 to the appellant pursuant to the Scheme of Merger approved by the honourable Lahore High Court as per following details:--
| Cost of plant and machinery-operating assets | |
| (Note 3 to accounts of 2001) | Rs.243,689,436 |
| Terminal value-lease deposits (Balance sheet) | Rs.16,284,807 |
| | Rs.259,974,243 |
| Lease liability (note 15 to accounts of 2001) | Rs.157,447,364 |
According to the appellant, consideration of Rs.102,526,879 (Rs.259,974,243 Rs. 157,447,364) was settled by issuance of ordinary shares of the appellant company. It was further explained that the residual value of leased assets comprised two elements i.e. terminal value (lease deposit and acquisition cost) paid in shape of shares. Further that the -residual value of Rs.74,454,104 had been correctly transferred from leased assets to own assets, since no lease rentals or depreciation had been claimed on "acquisition cost paid in shape of shares". The assessing officer agreed to the extent that as per audit accounts for the tax year, 2002 plant and machinery worth Rs.243,689,436 had been transferred by the appellant from Messrs Ibrahim Textiles Ltd. and Messrs Ibrahim Energy Ltd. (two amalgamated companies) w.e.f. 1-10-2000 in pursuance of the Scheme of Merger approved by the honourable Lahore High Court. Also that related lease liabilities of Rs.157,447,364 stood transferred from the said amalgamated companies to the appellant. The Taxation Officer, however, did not feel convinced to agree to the proposition of their consideration of Rs.102,526,879 in excess of lease liability settled by issuance of ordinary shares was the acquisition cost of leased assets so as to warrant depreciation. According to the taxation officer, the proposition was not in accordance with tax law. His interpretation of section 2(1A) of the Ordinance was that "amalgamation is the joining of two or more companies to form a single new company."
He noted that in tax year, 2003, the appellant had transferred leased assets worth Rs.6,668,829 to its own assets. Corresponding figure for tax year, 2004 was noted at Rs.74,454,104, thus totaling up to Rs.141,122,933. According to the Taxation Officer residual value of these assets was Rs.14,112,293 on which these assets had to be transferred from leased assets to own assets, claim of excess depreciation in respect of assets transferred upto tax year, 2004 was accordingly calculated at Rs.127,010,640. For tax year, 2004, he worked out inadmissible depreciation at Rs.6,000,194 and added the same to the appellant's income. Operative part of the amended assessment order in this regard reads as under:
Perusal of tax depreciation schedule for the year under consideration and details/documentary evidence furnished by the taxpayer company revealed that no depreciation has been claimed by the taxpayer company on .assets transferred from leased assets to own assets at Rs.74,454,104 during the year as the transfer entry was made at the end of the year. However, the taxpayer has claimed normal depreciation on WDV of leased assets amounting to Rs.66,668,829 brought forward from the tax year 2003. The inadmissible deprecation claimed by the taxpayer company is worked out as under:--
| Leased assets transferred in tax year 2003 as per depreciation schedule | Rs.66,668,829 |
| Less depreciation @ 10 claimed in tax year 2003 | Rs.6,666,882 |
| Balance WDV brought forward to tax year 2004 | Rs.60,001,947 |
| Inadmissible depreciation claimed @ 10% for the year under consideration | Rs.6,000,194 |
| Excess 'WDV brought forward to tax year 2005(I) | Rs.54,001,753 |
| Leased assets transferred in tax year 2004 as per depreciation schedule. | Rs.74,454,104 |
| Residual value on which assets had to be transferred from leased assets to own asset | Rs.7,445,410 |
| | |
| Depreciation claimed | Rs.NIL |
| Excess WDV carried forward to tax year 2005 (I) | Rs.67,008,694 |
| Total excess WDV carried forward to tax year 2005 (I) | |
| (54,001,753 +67,008,694) | Rs.121,011,447 |
In the following year i.e. tax year 2005 (I) too, the appellant transferred assets from the category of leased assets to own assets at Rs.41,630,252. The assessing officer worked out the excess cost of leased assets transferred up to tax year, 2005(I) at Rs.164,477,867 in the following manner:-
| Leased assets transferred in tax year 2003 as per depreciation schedule. | Rs.66,668,829 |
| Leased assets transferred in tax year 2004 as per depreciation schedule | Rs.74,454,104 |
| Leased assets transferred in tax year 2005 (I) as per depreciation schedule. | Rs.41,630,252 |
| Total leased assets transferred upto tax year 2005(I) | Rs.182,753,185 |
| Residual value on which assets had to be transferred from leased assets to own assets. | Rs.18,275,867 |
| Excess cost of leased assets transferred upto tax year, 2005 (I) | Rs.164,477,318 |
The inadmissible depreciation was calculated at Rs.15,847,767/-as under:--
| Excess WDV brought forward to tax year 2005 (I) as calculated in amended order under section 122(5A) for the tax year 2004. | Rs.121,010,447 |
| Leased assets transferred in Tax Year 2005 (I) as discussed above. | Rs.41,630,252 |
| Residual value on which assets had to be transferred from leased assets to own assets. | Rs.4,163,025 |
| Balance excess WDV transferred during the year. | Rs.37,467,227 |
| Total excess WDV transferred from leased assets to own assets. (121,010,447 +37,467,227) | Rs.158,477,674 |
| Inadmissible normal depreciation @ 10% claimed for the year under consideration. | Rs.15,847,767 |
| Balance WDV carried forward to tax year2005(II). | Rs.142,629,907 |
For the remaining two years the excess cost of leased assets transferred to own assets remained the same i.e. Rs. 164,477,867. For the tax year, 2005 (II), the assessing officer curtailed the claim of depreciation by Rs.14,262,990 and Rs.19,255,037 respectively.
Detailed working as given in the assessment order is reproduced below:--
2005(II)
| Excess WDV brought forward to tax year 2005 (II) as calculated in amended order under section 122 (5A) for the tax year 2005 (I) | Rs.142,629,907 |
| Excess normal depreciation @ 10% claimed for the tax year 2005 (II) | Rs.14,262,990 |
| Balance excess WDV carried forward to tax year 2006 | Rs.128,366,917 |
2006
| Excess WDV brought forward to tax year 2005 (II) as calculated in amended order under section 122(5A) for the tax year 2005 (II) | Rs.128, 366,917 |
| Excess normal depreciation @ 15% claimed for the tax year 2006 | Rs.19, 255,037 |
| Balance excess WDV brought forward to tax year 2007. | Rs.109, 111,879 |
The matter was agitated before the learned CIT (A) where written arguments were also presented in support of the relevant grounds of appeal. For convenience of reference, the written arguments pertaining to the tax year 2004 are quoted below:
That the learned Assessing Officer raised certain objections on the opening written down value (WDV) of the fixed assets on which depreciation was claimed during the year and contended that written down value of a depreciable asset at the beginning of the year shall be taken for the purpose of depreciation and no change can be made in opening written down value which is a closed transaction. It was explained to the learned Assessing Officer that the written down value of depreciable assets at the beginning of the year had been correctly taken in the light of amended assessment order dated 30-6-2007 under section 122(1) of the Income Tax Ordinance, 2001 passed on conclusion of the audit proceedings under section 177 of the Income Tax Ordinance, 2001. The learned Assessing Officer accepted the contention of the appellant company that the opening written down value of depreciable assets has been correctly taken for the purpose of claiming depreciation for the tax year, 2004. After accepting the opening written down value in para. 1 of the order the learned assessing officer worked out inadmissible depreciation claimed on written down value brought forward from tax year, 2003.
The opening written down value brought forwarded from tax year, 2003 was a past and closed transaction. Claim of depreciation on this written down value cannot be disallowed unless assessment of tax year, 2003 is amended. Disallowance of depreciation claim relevant to opening written down value was made without confronting the appellant on this issue. The maximum `audi alteram partem" does not any detailed discussion as the Courts have unanimity that no one can be condemned unheard.
The learned Assessing Officer also objected on the addition of Rs.74, 454,104 made in depreciable assets under head plant and machinery by transfer from leased assets to own assets and shown his intention to allow depreciation on the residual value of Rs.7,445,410 i.e. 10% of the cost, to reduce the written down value to the extent of Rs.67,008,694 and disallow depreciation claim of Rs.6,700,869 being the excess claim. In reply it was explained to the learned Assessing Officer that the company acquired plant and machinery of Rs.243,689,436 along with terminal value of leased deposit of Rs.16,284,807 against the leased liability of Rs.157,447,364 at the time of merger of associated companies with the appellant-company w.e.f. October 1, 2000.
Consideration of Rs.102,526,879 in excess of lease liability was settled by issuance of ordinary shares of Ibrahim Fibres Limited. The residual value of leased assets comprise of two elements i.e. terminal value (leased deposit) and acquisition cost paid in shape of shares. The residual value of Rs.74,454,104 is correctly transferred from lease assets to own assets as no rental or depreciation has been claimed on acquisition cost paid in shape of shares.
The learned Assessing Officer after perusal of audited accounts for the tax year, 2002 agreed that the fixed assets worth Rs.243,689,436 were transferred to the appellant-company against the related leased liability of Rs.157,447,364 but treated the own investment by the appellant-company as excess cost transferred to depreciable assets under the misconception that the amalgamation is the joining of two or more companies to form a single new company. Factually as per scheme of merger the merging companies are merged in an existing company which is to continue its business. All assets and liabilities merged company, line by line, and any difference in the value of assets and liabilities is settled by issuance of shares of merged company to the share holders of merging companies by all means is a consideration paid by the merged company to acquire assets in excess of liabilities. The reduction of written down value of Rs.67,008,694 (74,454,104-7,445,410) was highly unjustified.
For rest of the years, arguments remain the same except change of figures.
The learned CIT(A) held that the Taxation Officer had "provided proper basis for disallowance of depreciation at Rs.6,000,194 by reducing the WDV for tax year, 2003". He found the action of the Taxation Officer as well-explained and "based upon plausible basis". Grounds of appeal taken in this regard were rejected for all the years.
Pleadings made at bar for the appellant are more or less same as the arguments presented during the course of assessment proceedings and stressed before the learned CIT(A). The learned counsel further emphasizes that for the tax year, 2003 the appellant had transferred assets amounting to Rs.66,668,829 from the category of based assets to own assets, which action was not objected to, and accepted by Revenue after detailed audit proceedings conducted under section 177 of the Ordinance. He draws our attention to the fact that appellants' claim of tax depreciation inclusive of initial and normal depreciation allowance was one of the grounds for selection of appellant's case for audit as mentioned in amendment order for the tax year, 2003. He invites our attention in this regard to following findings of the taxation officer who conducted audit for the tax year, 2003:--
(1) ----Initial and normal depreciation claimed on the un-operational assets/assets charged to capital work in progress. The proposed disallowance of depreciation was Rs.2,664,919,334.
4 . RATE OF INITIAL DEPRECIATION
As per Part-00 of the Third Schedule to the Income Tax Ordinance, 2001 the rate of initial allowance is 50%. However, initially the said rate was 40%, which was subsequently increased to 50% by Finance Act, 2002. The taxpayer was accordingly communicated the attention to reduce the allowable rate to 40% being the applicable rate at the time of the commencement of the period relevant to tax year, 2003.
In response, the taxpayer contended that the rate of initial depreciation of 50% was introduced through Finance Act, 2002 which took effect from 1-7-2002 and was thus applicable to tax year 2003. In support of his contention, the AR of the taxpayer furnished the following case-laws:-
Supreme Court judgment in Ellahi Cotton Mills Limited v. CIT (1997 PTD 1555)
....Caltex Oil (Pak) Limited v. CIT (2007) PTR 46. H.C. Karachi).
The contention of the learned AR of the taxpayer has been minutely examined in the light of the above referred judgments of the Superior Judiciary. The relevant portion of Karachi High Court judgment is reproduced hereunder;
"It is well-settled that the assessment is to be made in accordance with law in force at the beginning of the assessment year in respect of the income year preceding to the said assessment year".
In the light of the clear judgment of the superior judiciary, the contention of the taxpayer merits acceptance.
He vehemently contends that transfer of assets from the category of leased assets to own assets at Rs.66,668,829 (during the period relevant to tax year, 2003 where it had been properly scrutinized vide amended assessment order dated 30-6-2007 was past and closed transaction for all intents and purposes. According to the learned counsel, if the assessing officer had any reservations about, appellant's claim of cost of acquisition of subject leased assets, he should have first further amended the assessment order for the tax year, 2003. Without having done so, he concludes, the Taxation Officer was not legally justified to go against the history of the case.
According to the learned DR, the claim that the value of leased assets was enhanced by the taxpayer on amalgamation of two companies (amalgamating companies) due to issuance of shares in respect of these assets is not factually correct. He submits that the shares to the shareholders of the amalgamating companies are issued keeping in view over all position of the amalgamating and amalgamated companies and not in respect of any asset individually. Moreover, he adds, the taxpayer is not owner of the leased assets till they are acquired at the time of maturity, therefore, the taxpayer cannot claim depreciation on leased assets legally either. Hence, he contends, the depreciation on leased assets was rightly disallowed. He concludes that the learned AR could not distinguish the case law referred to by learned CIT(A) in favour of the revenue in his order on this score.
We have heard the rival arguments on the issue, perused the record and consulted the documents referred to by the learned representatives. There is no denial of the fact that the appellant issued shares worth Rs.102,526,879 to the share-holders of amalgamated companies which figure had been arrived at by adjusting the amount of lease liability (Rs.157,447,364) from the cost of certain leased assets (Rs.243,689,436) plus the terminal value of the said leased assets (Rs.16,284,807). The only controversy revolves around the tax treatment of the stated cost of acquisition. Rival points of view have been duly incorporated in the pre-paras. At the cost of repetition, we would recall that the assessing officer for all the four years under consideration, refused to acknowledge the said amount of Rs.102,526,879 as cost of acquisition of the said leased assets so as to restrict the relevant claim of depreciation to the residual value of the said assets. It is also evident from the details available in pre-paras that against the original claim of cost of acquisition of Rs.102,526,879 the appellant-company transferred total assets at Rs.1.82,753,185. No plausible explanation has been adduced so as to justify the difference between the stated cost of acquisition and the value of assets transferred. This being so, we would examine the issue of allowability of stated cost of acquisition of leased assets to the extent of Rs. 102,526,879.
It is evident from the facts detailed in pre-paras that the scheme of amalgamation of companies by way of merger of Messrs AA Textile Ltd., Messrs Zanib Textile Ltd., Messrs Ibrahim Energy Ltd. and Messrs Ibrahim Textiles Ltd. (the amalgamated companies) into Messrs Ibrahim Fibres Ltd. (the amalgamating company/the appellant before us) was approved by the honourable Lahore High Court, Lahore vide order dated 15-1-2002 in Co. No.49/2001. The taxation officer has not denied the issuance of ordinary shares of the appellant company for a consideration of Rs. 102,526,879. It is also borne out from record that the first transfer of assets from the category of leased assets to own assets took place during the accounting period ending on 30-9-2002 relevant to the tax year, 2003. Also that for the tax year, 2003 the appellant's case was properly audited and the issue of claim of depreciation was thoroughly scrutinized, which included the claim of depreciation in respect of assets transferred at Rs.66,668,829. In this background of the facts readily agree with the learned counsel for the appellant that to the extent of transfer of assets at Rs.66,668,829, it was a past and closed transaction which had attained finality. The learned counsel has asserted, and we endorse his view, that without recourse to any retrieval action, the taxation officer dealing with the tax year, 2004 was not competent to challenge the veracity or legality of the figures representing written down value of assets brought forward from tax year, 2003. The amendment assessment order for the tax year, 2003 is dated 30-6-2007 which in no way had become hit by limitation so as to debar the taxation officer, conducting proceeding for the tax year, 2004 onward, from taking any retrieval action. The action of the author of the impugned orders and its endorsement by the learned CIT(A) amounts, for all practical purposes, to side-lining express provision of law contained in section 122 of the Ordinance.
Proper course of action for the assessing officer, if he was not comfortable with the treatment accorded to the assets transferred at Rs.66,668,829, was first, or simultaneously, to amend the order for the tax year 2003. This action of the assessing officer cannot be condoned merely by saying that there is no estoppel against law. It is particularly true in respect of interpretation of fiscal statute that there is no estoppel where an action of one assessing officer is statedly held to be in violation of law by a successor in office. But there are limits and parameters of this shelter.
The Ordinance has provided a comprehensive mechanism for an amendment of not only a deemed assessment but also that of an amended assessment. We are unable to condone the disregard of an express provision of law. The order passed by an officer which he was duly competent to pass, deserves due respect from his successors. We painstakingly note that in the present case no degree of respect has been shown in respect of the amended assessment order of the tax year 2003 not to speak of mechanism and procedure provided by law for expression of difference of opinion on whatever account it might have been.
This being so, taxation officer's tinkering with transfer of assets at Rs.66,668,829 in the tax year, 2003 is not approved. It is directed that for all the tax years under consideration written down value of these assets shall be computed accordingly taking their cost of acquisition at Rs.66,668,829/-. This exhausts appellant's claim of cost of acquisition of the leased assets to the tune of Rs.102,526,879 to the extent of Rs.66,668,829, leaving a balance of Rs.35,858,050.
Against the remaining claim of Rs.35,858,050, the appellant transferred assets worth Rs.74,454,104 during the accounting period relevant to the tax year 2004. Having approved the transfer of assets at Rs.66,668,82 during the tax year, 2003, the appellant's claim for tax year 2004 has to be restricted to the balance of Rs.35,858,050. It is ordered accordingly. Rest of the assets transferred during tax year, 2004 shall be taken up at their residual value as per relevant provisions of law and the rules prescribed in this behalf. There thus appears no justification with the appellant to further transfer the assets from the category of leased assets to own assets in tax year, 2005(1). The impugned treatment of the said assets transferred at Rs.41,630,252 thus does not call for any interference. For the tax year, 2006, the impugned disallowance of depreciation shall be worked out afresh in the light of our directions contained in pre-paras.
Exchange loss.
The issue pertains to tax year 2005(I), 2005(II) and 2006. The appellant had claimed exchange loss at Rs.36,275,000 tax year, 2005(I), Rs.8,998,175 tax year 2005(II) and Rs.5,863,318 tax year 2006. The taxation officer showed his intention as to why the expense claimed on account of such exchange loss should not be disallowed being notional and being capital in nature. The appellant explained that it had obtained a foreign currency loan of US $ 50 million (Rs.2,313,200,000) to finance the debt portion of its expansion project of polyster staple fibre. It was further explained that the said exchange loss represented the loss incurred by the appellant due to devaluation of Pakistan currency, since the company was making payments of instalments at exchange rate higher than those prevailing at the time of obtaining of loan. Reliance in. this regard was placed upon the ratio settled in the judgment reported as 1991 PTD 171. The appellant further took exception to the provisions of section 76(5) of the Ordinance on the plea that the proceeds of said foreign currency loan had not been utilized for acquisition of any asset.
The taxation officer was not convinced enough to allow the expense for the following reasons:
The contention of the taxpayer company has been considered. As per contents of reply the taxpayer company has obtained foreign currency loan of Rs.2,313,200.000 for expansion of project of Polyester Staple Fibre. As the taxpayer company has utilized the foreign currency loan on expansion of business, any loss arises on this account expense would only be characterized as capital in nature. It is pertinent to mention that in the case of gains or losses on account of exchange rate fluctuations, Courts have uniformly accepted the principle that the character (revenue or capital) of such gain or loss would depend upon the nature of use of the foreign currency loan. Where foreign currency loan' has been utilized for acquisition of a capital asset, then devaluation loss/gain as the case may be on restatement/ repayment of loan would constitute capital expenditure. In the case of Sutlej Cotton Mills v. CIT (116 ITR 1) (1979), the Supreme Court held that conversion gains or losses in respect of foreign currency held as trading asset or circulating capital is revenue expenditure while conversion gains or losses, in respect of foreign currency, held as capital asset or fixed capital is capital expenditure.
Reliance in this regard was also placed upon the case cited as 2007 PTD (Trio.) 2109 where Tribunal held in favour of admissibility of exchange loss as expense only where such loss related to normal business transactions of the assessee and not at all relating to any capital assets or liabilities. At the end of the day, the claim on account of exchange loss was disallowed in all the three years under consideration.
Before the learned CIT(A), it was further explained that the appellant had earlier obtained a local currency syndicated term finance of Rs.3, 530,700,000 in the period relevant to the assessment year 2001-02. It was reiterated that provisions of section 76(5) of the Ordinance are applicable to a loan used for acquisition of asset. Also that since the proceedings of subject foreign currency loan had not been used for acquisition of any asset, therefore, the exchange difference arising on repayment of subject foreign currency loan was not hit by mischief of said section 76(5). Reliance in this regard was placed on the case reported as 1989 PTD 602. An extract from the case cited as 1991 PTD 171 was quoted with favour:--
It is, therefore, established that the respondent had obtained a loan to augment working capital and such arrangement was duly sanctioned and guaranteed by the State Bank of Pakistan. In these circumstances the respondent was entitled to claim the foreign exchange loss due to devaluation. The learned counsel for the parties have referred to General Tyre and Rubber Co. of Pakistan Ltd. v. The Commissioner of Income Tax, Central Zone, Karachi 1989 PTD 582 where after considering various authorities it was observed as follows.
"Where an assessee under any arrangement, business dealing or contract is obliged to pay any party in foreign currency then it incurs a liability in foreign currency. If the devaluation of a currency adversely affects the liability of the assessee it has to procure same amount of foreign currency by spending more local currency and then it suffers a loss."
We respectfully following the aforesaid judgment answer the question in the affirmative."
The assessing officer's finding that the appellant had obtained the said foreign currency loan for expansion of its polyster staple fibre was duly replied in following terms:
The learned Assessing Officer by twisting the contents of the reply stated in the order that the foreign currency loan was obtained for expansion project of polyester staple fibre and the appellant has utilized the foreign currency loan on expansion of business. The contention of the appellant was wrongly interpreted and the expense claimed was incorrectly characterized as capital in nature. The explanations furnished by the appellant are crystal clear and there is no ambiguity that the proceeds of foreign currency loan were not utilized to acquire any capital asset, therefore any increase in the liability due to exchange rate cannot be added to any capital asset and the transaction is out side the ambit of section 76(5) of the Income Tax Ordinance, 2001. The reported judgment quoted by the learned assessing office also supports the treatment that the exchange loss in respect of normal business transaction is admissible and the exchange losses relevant to liabilities related to creation of assets are of capital in nature.
The learned CIT(A) endorsed the view point of the assessing officer for the reasons recorded in the impugned orders.
Arguments of the learned counsel for the appellant are in terms of replies already submitted to the two authorities below. With the help of a chart, he further explains that as per accounts whenever there was appreciation in value of Pakistan's currency the gain had been duly recognized. Further, that during the period relevant to the tax year, 2004 the appellant made couple of payments at the dollar: Pak rupees parity of 57.33 against the original rate of Rs.58.08 so as to recognize gain of Rs.2,512,500.
We have considered the rival arguments. For convenience of ready reference, we quote the provisions of section 76(5) which read as under:
Section 76
(5) Where an asset has been acquired by a person with a loan denominated in a foreign currency and, before full and final repayment of the loan, there is an increase or decrease in the liability of the person under the loan as expressed in Rupees, the amount by which' the liability is increased or reduced shall bt added to or deducted from the cost of the asset, as the case may be.
As is evident from pre-paras, the assessing officer had, initially, two reservations: (a) that the exchange loss was notional, and (b) it was inadmissible since it pertained to acquisition of capital asset. Both these objections stand duly repelled during the course of assessment proceedings as well as before us. Perusal of the relevant documents confirms that, as per terms and conditions of the foreign currency loan, it had to be utilized for repayment of an earlier syndicated loan, thus leaving no doubt as to its misappropriation.
There is, however, another aspect of the issue. Now suppose a person obtains loan No.1 (in this case the local syndicated loan) which is utilized for acquisition of capital asset and interest payable thereon is inadmissible expense under the provisions of the Ordinance. Now he obtains loan No. 2 (in this case the foreign currency loan) which is utilized to repay the loan No.1. The question would arise as to admissibility of financial cost of loan No.2. That is to say we have to see whether a loan is utilized directly or indirectly for the acquisition of a capital asset or to cater for business needs. In the first situation the cost of the loan is to be categorized as capital expenditure whereas in the later situation it is admissible revenue expense.
In the case before us, admittedly the local syndicated loan had earlier been utilized for expansion project of polyster staple fibre. It is, however, not established nor it is borne out from record that the cost of said local currency loan had been held to be inadmissible being capital expense. It is pertinent to mention that for the tax year, 2003 appellant's tax affairs have been thoroughly audited. And also for the tax year, 2004 a number of issues have been raised in proceedings under section 122(5A) of the Ordinance. Nowhere it is challenged and established that the cost of local syndicated loan has been disallowed. Meaning thereby even the financial charges incurred in respect of the earlier syndicated loan stand allowed as revenue expense. This being so, there is not even an iota of doubt in our minds regarding allowability of exchange loss incurred by the appellant in relation to repayment of its foreign currency loan.
There is still another aspect of this issue. For the tax year, 2005 (I), tax year, 2005 (II) and tax year, 2006, the total financial expenses incurred by the appellant stand thoroughly scrutinized. Some of these expenses have also been proportionately disallowed. (We would be dealing with that issue in later part of this order). Even while partially disallowing total financial expenses, the assessing officer has nowhere objected to the admissibility or otherwise of the interest portion/financial charges attributable to repayment of the subject foreign currency loan. It is not understandable as to how in the absence of objections to repayment of foreign currency loan and interest thereupon, the taxation officer could proceed to reject the claim of resultant exchange loss.
Result of the above discussion is obvious. The exchange loss claimed by the appellant for three years under consideration at Rs.36,275,000, Rs.8,998,175 and Rs.5,863,318 respectively is directed to be allowed.
Curtailment of Financial Expenses:--
For tax year, 2005(I), tax year, 2005(II) and tax year 2006 the appellant had claimed financial charges at Rs.124,513,272 Rs.292,424,568 and Rs.685,736,943 respectively. The assessing officer noted, from scrutiny of balance sheets and allied documents that the appellant had long term loans of Rs.4,600,200,000 and long term morabaha finance facility at Rs.2,450,000,000. Also that during the accounting period relevant tax year, 2005(I), the appellant had made long term investment in acquisition of Messrs Allied Bank Ltd. (ABL) to the tune of Rs.6,210,231,815. Further that no other income had been declared having been received. All these facts were confronted to the appellant and intention was shown through issuance of show-cause notice that apparently investment in acquisition of ABL had been made out of borrowed funds, since the appellant had deficiency of funds available for purchase of capital assets as well as for the smooth running of the business operations. The appellant was called upon to explain as to why claim of financial expenses should not be disallowed proportionate to investment in ABL vis-a-vis total liabilities Appellants detailed reply, as incorporated in the assessment order for tax year, 2005(I) was that:--
The assumption that the investment has been made in Allied Bank Ltd. has been made of the borrowed funds and the company is claiming huge financial expenses is misconceived and against the facts.
Factual position is that the borrowed capital was obtained and utilized in the business operations. Investment in ABL is represented by equity and funds generated from non-interest bearing cash flow changes.
The composition of long term loans of Rs.4,600,200,000 as disclosed in Note 16 to the accounts is explained below:
(a) Foreign currency loan of Rs.1,482,000,000 represent the outstanding balance out of total loan of US $ 50 million (Pak. Rs.2,313,200,000) obtained in tax year, 2004 (Income year ended 30-9-2003) to replace syndicated term finance facility previously obtained for the purpose of financing the debt portion of the project undertaken by the company to expand its P.S.F. production capacity.
(b) Local currency demand finance of Rs.175,000,000 represent the outstanding balance out of the total loan of Rs.350,000,000 obtained during the tax years, 2002 and 2003 (Income years ended 30-9-2001 and 2002) to finance the textile project of the company identified as "Zainab Textiles". It is evident beyond any doubt that above loans were not utilized for investment.
(ii) The demand finance and term finance loans were obtained during the year for textile business and syndicated term loan for polyester business. This is also evident from the relevant Notes to the accounts. The net position of long term loans obtained during the year is as follows:--
| | Rupees |
| Demand Finance | 538,000,000 |
| Term loan | 450,000,000 |
| Syndicated Term loan | 2,723,000,000 |
| 3,711,000,000 Less: Re-payment of loan | 1,042,475,000 |
| | 2,668,525,000 |
The purpose of the above loans was to meet the need of fixed capital expenditure, repayment of existing loan term loan and payment of dividend.
The proceeds from the loans were utilized in the following manner:--
| | Rupees |
| Fixed capital expenditure (Tax year 2005) | 1,272,057,249 |
| Payment of dividend (Tax year 2005) | 465,007,100 |
| Fixed capital expenditure (Tax year 2005 - | 351,681,012 |
| 30-6-2005) Repayment of long term loan-Net Tax year 2005 (30-6-2005) | 228,250,000 |
| Payment of dividend | 464,487,789 |
| (Tax year 2005- 30-6-2005) | 2,781,483,258 |
(iii) So far as long term Murabaha facilities are concerned facility of Rs. 1,200,000,000 was obtained for polyester business and medium term facility of Rs.1,250,000,000 was obtained for Textiles and power generation plant. The facilities are obtained for local purchase (certificate of bank is enclosed on Annexure).
(A) The main purpose of the borrowing was to meet the increasing buying needs of the company in view of the rapidly increasing business volume of the company. It is note worthy that the business volume of the company has been increased from Rs.11.474 billion in Tax year 2004 to Rs.16.378 billion in Tax Year 2005 i.e. registering the increase of Rs.1.904 billion (42.7%). The claim of financial charges on Murabaha facilities is only Rs.18,911,712.
In view of the above any curtailment of financial expenses on presumptions would be unjustified and against the facts of the case.
During the course of proceedings, purchase of long term loans were explained as per following details:
| Description | Loan amount | Document attached | Purpose |
| FCY-Loan | 1,482,000,000 | Loan agreement dated 17-2-2003 | Repay syndicated term finance facility |
| Demand finance | 175,000,000 | Credit facility extension letter dated 23-9-2002 | Balance sheet restructuring |
| Demand finance | 538,000,000 | Credit facility extension letter dated 25-9-2004 | BMR in Ibrahim Textile Plant No. 1 |
| Term Loan | 450,000,000 | Banking arrangement letter No.CR/24/2004/32 dated 12-5-2004 | To finance BMR of the spinning unit 2 of the company |
| Syndicated term loan | 2,723,000,000 | Loan agreement date August 3, 2004 | Corporate purposes and for capital expenditure. |
| Murabaha. Term Finance | 2,450,000,000 | Certificate No.FBL/FSD/CAD/013 dated 28-01-2009 | Local Purchase |
Various explanations put forth by the appellant were not found convincing by the assessing officer. In his opinion, the explanations were not supported by the facts emerging from record. He concluded that the cash flow statement indicated utilization of interest based borrowed money for investment in acquisition of ABL. He picked up the following figures of cash inflow and cash outflow from the cash Flow Statements:--
| Net cash generated from operating activities | Rs. 2,109,991,315 |
| Net cash used in investing activities | Rs. 7,449,248,177 |
| Net cash from financing activities. | Rs. 5,140,710,074 |
According to the taxation officer, the cash generated from the operating activities at Rs.2,109,991,315 was much less than the case utilized for investment activities of Rs.7,449,248,177 warranting utilization of interest based borrowed money for investment activities. In his opinion, there was no rebuttal of the conclusion that the appellant had made investment in acquisition of ABL out of long term loans (Rs.3,711,000,000) and long term Murabaha (Rs. 2,450,000,000). According to the assessing officer the appellant-company had not been able to present any evidence in terms of cash book and bank statements showing availability of money other than borrowed money on the dates money was advanced for investment.
During the course of assessment proceedings the appellant had further contended that funds were also available with it in the shape of money in capital, reserves and advance receipts. The assessing officer did not accept this explanation as well holding that these were already tied to fix assets and stocks. For this conclusion, he relied upon the following figures:--
| A. (i) Trade Creditors | Rs. 89,498,986 |
| (ii) Advances from customers | Rs. 33,623,925 |
| (iii) Share capital/revenue reserves. | Rs. 6,095,642,877 |
| | Rs.6,218,765,788 |
| B. (i) Fixed assets | Rs. 8,639,432,076 |
| (ii) Stocks in trade | Rs. 2,559,246,892 |
| (iii) Stores | Rs. 295,784,023 |
| Total | Rs.11,494,462,991 |
As per impugned assessment order, it was not ascertainable at the particular point of time that which expense by the appellant was from borrowed fund and which one from the self-owned resources of the appellant in the absence of separate accounts for business and non-business or other activities.
At the end of the day, he proceeded to pro-rate the financial charges statedly in accordance with the provisions of section 28(1A) and section 67 read with Rule 13 of the Rules 2002 by applying the following formula:-
Curtailment of financial expenses = Investment in ABL x Financial charges
Total liabilities
6,210,231,815 x 124,513,272= Rs.109, 678,630
7,050,200,000
For tax year, 2005(1I) and tax year, 2006 the disallowance was worked out in similar fashion.
For the reason recorded in the assessment orders, the learned CIT(A) upheld the impugned curtailment of financial expenses.
The learned counsel presents his stance in the following written arguments:--
(iii) It is submitted on the very outset that factual position of non-interest bearing resources available to the appellant have totally skipped sight of the learned Taxation Officer. The correct comparative position of non-interest bearing resources available to the company for making investment in shares of ABL as per audited accounts are given below:--
| | | | Position reproduced in the orderRupees | Factual position as per Balance sheet As at 30-9-2004 Rupees | Factual Position as per Balance sheet As at 30-6-2004 Rupees |
| Non-interest bearing re-sources | | | |
| A | i. | Trade Creditors | 89,498,986 | 89,498,986 | 1,274,931,517 |
| | ii. | Bills payable | -- | 1,613,403,714 | -- |
| | iii. | Advance from customers | 33,623,925 | 33,623,925 | -- |
| | iv. | Other payables | -- | 439,372,068 | 129,176,603 |
| | v. | Other non-current Liabilities | | 937,510,744 | 636,727,666 |
| | | Share capital/revenue Reserves | 6,095,642,877 | 6,095,642,877 | 5,950,169,487 |
| | | | 6,218,765,788 | 9,209,052,314 | 7,991,005,273 |
| | vi | Less Investment in shares of ABL | | (6,210,231,815) | -- |
| | | | 6,218,765,788 | 2,998,820,499 | 7,991,005,273 |
| Interest bearing resources | | | |
| | vii | Short term bank borrowings | | 1,653,687,746 | 2,998,959,466 |
| | viii | Morabaha facility against stocks | --- | 2,450 000,000 | |
| | ix | Long term loans | | 5,368,000,000 | 2,410,250,000 |
| | | | | 9,471,687,746 | 5,409,209,466 |
| | | | 6,218,765,788 | 12,470,508,245 | 13,400,214,739 |
| B | i. | Fixed assets | 8,639,432,076 | 8,639,432,076 | 8,739,500,078 |
| | ii | Long term deposit | --- | 2,326,700 | 2,221,700 |
| | iii | Stocks in trade | 2,559,246,892 | 2,559,246,892 | 3,052,946,299 |
| | iv | Stores | 295,784,023 | 295,784,023 | 298,990,796 |
| | v. | Other current assets | --- | 973,718,554 | 1,306,555,866 |
| | | Total | 11,494,462,991 | 12,470,508,245 | 13,400,214,739 |
| | | | | | | | |
(Copy of the financial statement for the year ended September, 30th, 2004 is placed as Annex-S Page-224 of the Paper Book).
It is evident from the above statistics that sufficient non-interest bearing resources were available to the appellant at the time of investment and even after making the investment, the company had employed the supplies of non-interest bearing financial resources to the extent of Rs.2,998,820,499 in the business (see portion marked read in above comparative chart)
(iv) So long as cash inflow or outflow position referred by the taxation officer is concerned, it is submitted at the very outset that the figure mentioned with regard to alleged net cash generated, net cash used in investing activities and net cash from financing activities (under head cash flow) and liabilities and assets (under the head balance-sheet) were confronted to the appellant as is evident from the show-cause notices dated 15th January, 2009 for tax years, 2005(i), 2005(ii) and 2006 (pages-6/9, 13 and 16 and 17 of paper book). Notwithstanding non-confrontation on the subject, it is submitted that the taxation officer misdirected himself by making comparison of cash generated from operating activities during the year ended on 30-9-2004 (Tax year 2005(i)) with the investment. The assessing officer was required to compare the investment with the non-interest bearing resources available to the company for making investment in ABL.
The above non-interest bearing funds includes funds invested by the owners of appellant-company, accumulated operating profit and interest free credits available. From the above chart, it is evident that the non-interest bearing resources of over 9 billion were available, therefore, one can without fear of contradiction can state that the interest free funds were utilized for investment in ABL.
(v) The balance-sheet reproduced in the order is totally incorrect. It is important and interesting to point out here that the totals of assets of liability side and the balance-sheet produced in the order do not agree with each other.
Total of liability side6,218,765,788
Total of assets side11,494,462,991
The taxation officer unnecessarily worked on a presumption that the interest bearing funds were utilized for investment in ABL but at the same he made an intentional effort to ignore the un interested bearing funds and facility.
(vi) It is very important to point out here that the appellant made investment in shares of ABL on August 17, 2004 (detail placed on Annex-G, Page-41 of paper book) but the learned taxation officer curtailed the financial expenses for the whole year (tax year, 2005 (i)) with considering the fact that firstly that cash inflows and outflows of the company keep on changing on daily basis and secondly that how the interest or financial expenses incurring prior to the date of payment could be sacrificed or alter to the disadvantage of the appellant. It was required to be seen within at the time of making investment, the company had obtained any borrowing, which can be co-related to the investment in bank, in this way the taxation officer has failed to co-relate and prove the nexus of borrowed money/funds with the investment and the financial expenses were curtailed on incorrect figures picked up from balance-sheet of the company as on an irrelevant date viz 30th September, 2004.
It is held in the various judgments of the Apex Courts that the borrowing at the time of making investment and relating of borrowing with the investment on the particular time/date is necessary criteria for curtailment of interest expenses. The extracts from the relevant judgments are reproduced as under:
2003 PTD (Trib) 1449 (Page No. 1452)
"3. In addition to the above observations, we would like to comment that it is not question of interest allocable to investment in securities, whether taxable or tax-free. Under the provisions of clause (vii), the assessee is entitled to deduction of interest paid in respect of capital borrowed for the purposes of the business or profession. It is settled proposition that an assessee may borrow funds for employment in its business even if it has invested all his own resources in any other shape. Hence, what is required to be seen is whether at the time of making these investments, the assessee had made any borrowings which can be related to these investments on the particular time/day. If at the time for making the investment, the assessee had sufficient resources of its own to make the investment, then any subsequent or prior borrowings could not be treated as borrowings for such investments. This can be established from examination of the books of accounts pertaining the relevant date and period of time when the investments were made. Since it is mainly a question of fact, we are inclined to set aside the orders of the departmental officials on this issue and remand the matter back to the Assessing Officer for de novo consideration in view of the observations already given above. The assessee should be provided proper opportunity to substantiate its claim that the interest was expended for earning the profits or for its business propose only.
2006 PTD 103 (Page No. 106)
"We are further of the opinion that in order to clinch the issue, it was imperative to examine the position of cash flow on the date of investment. If on the date of investment sufficient capital was available with the respondent other than the borrowed capital and the evidence was produced to the effect reflecting in the entries in the account books that the investment was made from the respondent's own capital and not from the borrowed capital, then the respondent was entitled to the entire allowance under the head interest paid on the borrowed capital."
The learned Assessing Officer has not examined the cash flow and capital position on the date of investment. Evidence in shape of cash book and bank statements was never called to verify the borrowings on the particular time and date which could be related to investments. All prior and subsequent loans were wrongly treated as borrowings for making investment in the shares, which is totally illegal and unjustified.
(vi) Another important aspect to be looked into is the purpose for which the bank loans were obtained. The appellant furnished the following inconvertible evidence showing the purpose for which the long-term loans were obtained.
Opening Balance
| Description | Loan Amount (Rupees) | Documents provided to Assessing Officer | Date of Disbursement | Purpose |
| FCY-Loan | 1,482,000,000 | Loan agreement dated 17-2-2003 (copy placed on Annexure "H" Page 42 of paper book) | 21-2-2003 | Repay the outstanding balance of local currency Syndicated Term Finance Facility of Rs.3.530 billionavailed to finance expansion project of polyester staple fibre plant capacity. |
| Demand Finance | 175,000,000 | Credit facility extension letter dated 23-9-2002. (Copy placed on Annexure-"I", page 73 of paper book | 27-9-2002 28-9-2002 | Balance-sheet Restructuring to finance plant and machinery of IFL (Zainab Textile) |
Loans obtained during the year
| Description | Loan Amount Rs. | Document Provided To Assessing Officer | Date of disbursement | Purpose |
| Demand Finance | 538,000.000 | Credit facility extension letter dated 25-9-2004 (Copy placed on Annexure-"J", Page 78 of paper book) | 29-9-2004 | BMR in Textile plant I to import dust removal system, two blow rooms, nine roving frames and auto doffing under LC. No. FD/31,32,33,77/2004. |
| Term loan | 200,000,000 250,000,000 | Banking arrangement letter No.CR/24/2004 32 dated 12-5-2004 (Copy placed on Annexure-"K", Page 95 of paper Book | 28-5-2004 29-5-2004 | BMR in textile plant 2 to import 18 ring frames and 18 schlafhorst, Complete autoconers under LC. No. FD/I89/2003 and FD/17/2004 |
| Syndicated term loan | 1,773,000,000 950,000,000 | Loan agreement dated August 3, 2004 (Copy placed on Annexure "L", Page 127 of paper book | 10-8-2004 17-8-2004 | Corporate purposes and for fixed capital expenditure, repayment of existing long term loans. |
| Morabaha Term Finance | 2,450,000,000 | Agreements/Certificate No.FBL/FSD/CAD /013/09 dated 28-1- 2009 (Copy placed on Annexure "M", Page 131, 151,169 of paper book | 7-8-2004 | Local purchase (various assts/stocks). |
(Copies of Financial Statements for the years ended June 30, 2005 and 2006 are placed on Annexure "T" and "U", pages 245 and 266 of Paper Book).
It is crystal clear from the documentary evidence that the loans were obtained for business purpose and could not be related to investment.
(vii) The assessing officer incorrectly correlated the investment with borrowed funds without bringing any material evidence on record. Reference of the relevant judgments are as under;
2007 PTD (Trib) 1509.
"We are of the view that the T.O is not justified in not appreciating the explanation given by assessee as he went on and has through formula basis disallowed proportionate mark-up on investments made in shares of Messrs Orient Petroleum of Rs.3,19,23,280. It is argued that these shares were sold during the year (July) and capital gain of Rs.76,720 made and the same was offered for tax and it was explained that no borrowed amount has been used in investment in shares of Orient Petroleum and self funds were used. The T.O has failed to correlate investment with borrowed funds and unless the same is done financial expenses cannot be curtailed as has been held by the honourable Supreme Court of Pakistan in case of (Sh. Muhammad Ismail) reported as 1986 SCMR 968. The decision of honourable High court reported as 1988 PTD 626 and case reported as 1987 PTD 149 has also been referred in this respect."
1986 SCMR 968
"We are, however, of the opinion that the funds available were greater than the borrowings of the Managing Director and there is apparently no bar on a business concern to advance its own funds or utilize them in the particular manner. It is at the same time patent that out of the non-interest bearing finances certain advances were made to the Managing Director and as and when further capital was needed to run the appellant's business the same was recouped by obtaining loans from various banks. This may be an arranged a fair but there can be no possible restriction on a business concern to arrange its affairs in a particular manner as to suit the revenue. There is no evidence on record to show that the advances made to Mian Aziz A. Sheikh were out of the borrowings that were obtained from the various banks. In absence of such evidence the normal presumptions is that the available funds were utilized according to the circumstances of the appellant and when the business required further funds, the same were obtained through borrowings. In absence of any evidence, therefore, that the borrowed capital was utilized elsewhere the actions of the officers below in curtailing .the interest payable thereon cannot be upheld."
1987 PTD 149
"In the absence of finding by the Department to the effect that borrowed capital by the assessee was not utilized for business purposes, claim of assessee for deduction of interest paid on borrowed capital could not be disallowed under S.10(2)(iii).
(viii) The banks/DFIS continue to closely monitor the use of loans for the purpose for which these were obtained as per directions of State Bank of Pakistan Circular BPD Circular letter No.14 of 2006 dated July 24, 2006 (Copy placed on Annexure "N", Page 170 of Paper Book). As per prudential Regulation No.R-6(1A) the banks are not allowed to take exposure on any person against the shares unless the shares are pledged with the bank. (Copy placed on Annexure-"O", Page 171 of Paper Book). The purpose of facilities availed by the company are clearly mentioned on the relevant sanction letters/agreements which were produced during assessment proceedings. No other purpose during assessment proceedings. No other purpose can be assigned to the borrowings without material evidence.
That the learned taxation officer gravely erred by ignoring the time and date of borrowing. All prior or subsequent borrowings were treated as borrowing for investments.
| Particulars | Bank | Date of | September 30, | September, | June 30, 2005 | June 30, 2006 |
| | | Disbursement | 2003 Rs. | 30, 2004 Rs. | Rs. I | Rs. I |
LOANS BROUGHT FORWARD FROM PREVIOUS YEARS
| Long term loan (ICY) | NBP | 21-02-2003 | 2,313,200,000 | 1,482,000,000 | 1,194,000,000 | 602,000,000 |
| Demand finance | UBL | 27,28-9-2002 | 350,000,000 | 175,000,000 | 43,750,000 | |
| Syndicated term finance | | | - | - | - | - |
| Sub Total | 2,663,200,000 | 1,657,000,000 | 1,237,750,000 | 602,000,000 |
LOANS OBTAINED PRIOR TO INVESTMENT
| Term finance-I | SCB | 28,29-5-2004 | - | 450,000,000 | 450,000,000 | 337,500,000 |
| Morabaha term finance-1 | FBL | 7-8-2004 | - | 1,200,000,000 | 1,200,000,000 | 1,200,000,000 |
| Morabaha term finance-II | FBL UBL,U | 7-8-2004 | - | 1,250,000,000 | 1,250,000,000 | - |
| Syndicated term finance | BL, NB P,C ITI | 10-8-2004 | - | 1,773,000,000 | 1,773,000,000 | 1,773,000,000 |
| Sub Total | - | 4,673,000,000 | 4,673,000,000 | 3,310,500,000 |
LOANS OBTAINED ON THE DATE OF INVESTMENT
| Syndicated term finance | UBL, UBL, NBP, CITI | 17-8-2004 | | 950,000,000 | 950,000,000 | 950,000,000 |
| Sub Total | | 950,000,000 | 950,000,000 | 950,000,000 |
LOANS OBTAINED SUBSEQUENT TO INVESTMENT
| Demand finance | UBL | 29-9-2004 | - | 538,000,000 | 538,000,000 | 538,000,000 |
| Term finance II | MCB | 26-6-2006 | - | - | - | 1,250,000,000 |
| Term finance | SPIA | 25-3-2005 | - | - | 200,000,000 | 200,000,000 |
| Sub Total | - | 538,000,000 | 738,000,000 | 1,988,000,000 |
| | | | | |
| | 2,663,200,000 | 7,818,000,000 | 7,598,750,000 | 6,850,500,000 |
| LOANS TAKEN IN TILE ARBITRARY FORMULA USED FOR CURTAILMENT OF EXPENSES | -- | 7,050,200,000 | 6,845,500,000 | 6,911,125,000 |
(ix) It is worth-mentioning that the taxation officer disallowed the claim of exchange loss on the foreign currency loan of Rs.2,313,200,000 and contended that the company has utilized this foreign currency loan on expansion of business by acquisition of capital asset. The exchange loss claim of Rs.36,275,000 was disallowed.
The same foreign currency loan of Rs.2,313,200,000 was treated as related to investment in shares of ABL and mark-up of this loan was curtailed. The contradictory treatment of interest expenses and exchange loss of this loan and of other loans obtained for business purposes establish beyond doubt that the curtailments of financial charges were on flimsy grounds, without establishing the relation of loans with the investments and without any legal basis.
(x) As far as legal position is concerned the Taxation Officer applied provisions of section 28(1)(a) and section 67 read Rule 13 of the Income Tax Rules, 2002 which were never confronted to the company in notice issued under section 122(9).
The provisions of section 67 were blindly applied without taking into consideration the nature and size of the amounts. The learned assessing officer gravely erred to pro rate the financial expenses claimed of the entire year commencing from 1-10-2003 to 30-9-2004 whereas the investment in shares of ABL was made towards the end of the year i.e. on August 17, 2004 out of non-interest bearing resources.
The financial expenses claimed by the assessee-company are allowable against the income from business under section 28(1)(a) as the loans obtained were wholly and exclusively used to derive income liable to tax under the head "income from business". There was no nexus between the loan obtained during the year, 2004 and purchase of shares of ABL. The provisions of section 67 and Rule 13(3) (a) were incorrectly applied as there were no common expenditure.
It is observed by the taxation officer in the body of the orders that it is not ascertainable at the particular point of time that which expense by the company is from borrowed fund or from the self-owned resources of the company. Contradicting his own statement the taxation officer treated the whole amount of investments out of borrowed funds and disallowed the mark-up by treating the investment to the extent of 100% from long term loans.
The Taxation Officer wrongly applied the provisions of Rule 13(3) of the Income Tax Rules 2002. Rule 13(3) provide for proration of common expenses on the basis of a formula provided in the Rule. It is specifically provided in the Rule that before allocating the common expenses the financial expenses "relatable or attributable" to non-business advances or loans be excluded. The relatable means "connected or associated". The word "attributable" means, "belong to, caused by or produced by ". It is crystal clear from the terms used in the Rule that for exclusion of expense the relationship of a particular advance or loan with the non-business activity has to be established. The company furnished documentary evidence to prove that all long term loans were obtained for business purposes and related to its business activities. The taxation officer has failed to bring on record any material evidence to establish the relationship of loans with the investment and apportioned the expenditure on arbitrary basis.
(xi) The learned Commissioner (Appeals) was not justified to confirm the wrong application of provision of section 67 read with Rule 13, on the basis of non-maintenance of separate accounts, and confirm the addition of Rs.109,678,630 made on the basis of incorrect and arbitrary formula adopted in violation of law.
The addition made is liable to be deleted.
(xii) The impugned orders under appeal suffer from inherent contradictory and self-destructive stances, which belie the basis of apportionment and curtailment of financial expenses.
Firstly the apportionment and curtailment is based on the ground that no income other than business has been declared. It is submitted that in the tax year, 2006 dividend income has been declared, therefore, the apportionment could only be made on reasonable basis as per Rule 13(3)(a) of Income Tax Rules. It is interesting to point out here that in the same order administrative expenses inter se two Blocks of Income have been apportioned and allocated in accordance with Rule 13(3)(a) of Income Tax Rules but while curtailing the financial expenses a self invented formula has been applied.
It is further important to point out here that the formula applied by the Taxation Officer does not find support from the statute or the rules framed thereunder
Secondly in the tax years, 2005(I), 2005(II) and 2006 while disallowing the exchange loss on foreign currency loan (which was utilized in repayment of local currency syndicated Local Currency Loan), the Taxation Officer held as under (commonly in all years):
"As the 'taxpayer company has utilized the Foreign Currency Loan on expansion of business, any loss arises on this account expense would only be characterized as capital in nature. It is pertinent to mention that in the case of gains or losses on account of exchange rate fluctuations, courts have uniformly accepted the principle that the character (revenue or capital) of such gain or loss would depend upon the nature of use of the foreign currency loan, where the foreign currency loan has been utilized for acquisition of a capital asset, then devaluation loss/gain as the case may be on restatement/repayment of loan would constitute capital expenditure."
"in view of the legal position discussed above, exchange loss amounting to Rs.36,275,000 is disallowed and added to the income of the taxpayer"
| Amount disallowed | {page-17,A.O.tax year 2005 (i)} {Page-16,A.O. tax year 2005(ii)} {Page-15/16,A.O tax year 2006} |
| Tax year 2005 (i) 36,275,000 | |
| Tax year 2005(ii) 8,998,185 | |
| Tax year 2006 5,863.318/- | |
| | |
It is interesting to point out here that the whole amount of loan, related to foreign currency loan has been taken as having been utilized for making investment in ABL and the whole amount of financial expenses on foreign currency loan was curtailed for disallowance.
Thirdly the Taxation Officer having knowledge that in the preceding years, the financial statements show outstanding borrowed money, Even in tax years, 2003 and 2004 and huge financial expenses were allowed. For instance:
| Tax year | Long Term Facilities at Close of A/c | Claimed and Allowed Financial Expenses |
| 2003 | | |
| 2004 | | |
Despite the fact that the financial expenses continued to be allowed. How, it is possible that finances utilized earlier for different purpose including business activities and for acquisition of capital assets have suddenly changed its nature and some were held to be utilized in acquiring share of ABL and making the said investment.
Fourthly the Taxation Officer admits that necessary documents in respect of Modarbah facilities were made available as is evident from the schedule appearing at Page 10 of the assessment order for tax year 2005 (Reference is also made to documents Annex-M, Pages 131 to 169 of paper Book viz. Modarbah Agreements and Bank Certificates).
Further reference is made to page-149 of Paper Book Agency Agreement thereby the taxpayer has been appointed as Agent of the bank for purchase of polyester and yarn on behalf of bank and then agreeing to purchase from the bank. The Taxation Officer ignoring the evidence has reached to an absurd conclusion and the fund utilized for business under an Islamic Arrangement for providing financing facility and whole amount of Rs.2,450,000,000 has been taken to be used in investment and the amount of mark-up/financial charges were curtailed.
Fifthly that the utilization of long term loans in the past and explanation given in this behalf has totally been ignored.
viz (i) Foreign currency loan utilized in replacement of syndicated term loan (since 2004, Y.E. 30-9-2003)
(ii) Local currency loan represent outstanding since long viz income. year ended on 30-9-2001 and 2002 for financing textile project identified as Zanib Textile.
(iii) Demand Finance Term Loan and Syndicated Term Loan of Rs.3,711,000,000 were obtained and repaid during the year to the extent of Rs. 1,042,475,000 and the utilization of funds stood explained at page 10 of the order.-
(iv) The Taxation Officer has failed to consider the 42.7% increase in business volume (viz business volume in tax year, 2004 was 11.474 billion which enhanced to 16.378 billion viz increase of Rs.4.903 billion).
The learned DR supports the impugned action in terms of the written arguments which are reproduced below for convenience of reference:--
"Disallowance of mark-up paid in respect of loan utilized in the investment in purchase of shares of M/s Allied Bank Limited:-Perusal of the cash flow statement depicts the following position.
| Net cash used in investing activities | Rs.7,449,248,177 |
| Cash generated from operating activities | Rs.2,109,991,315 |
| Net cash used in financing activities | Rs.5,140,710,474 |
Cash used in financing activities includes long term loan of Rs.3,711,000,000 and long term morabaha of Rs.2,450,000,000 respectively (copy of cash flow statement enclosed). It clearly shows that these two loans were obtained for use in purchase of shares. In response to the notice the taxpayer himself stated that the investment in shares is represented by "equity and funds generated from non-interest bearing cash flow changes". It may be noticed that the taxpayer did not produce cash account to prove this point (page No.11 of the assessment order). It is further submitted that interest on borrowed capital not used in the business of the taxpayer is not allowable expenditure under section 20(1) read with section 28(1). In appeal burden is on the taxpayer to show the source of investment in shares (section 136). The taxpayer did not produce cash account for this purpose during the course of hearing before the court. Therefore, the requirement of section 136 has not been fulfilled (i.e. burden of proof) and hence the taxpayer is not entitled to any relief. Therefore, the burden of proof has not been discharged by the taxpayer. For facilitation of the Court cash account for the tax year 2005 (1) is enclosed which clearly shows that the taxpayer did not have the case other than borrowed capital to invest in the shares.
The recourse to section 67 was made to pro rate the expenses as a method of computation of interest of disallowed. Sections 20/ 28 are substantive provisions and section 67 is a procedural section. In other words any minor irregularity in application of procedure should not vitiate the addition on account of interest because substantive provision contained in section 20 read with section 28 are attracted in this case. It has been held by the Superior Courts that mere reference of wrong provisions is of no effect."
The learned DR further presents the following table to establish his point of view that investment in acquisition of ABL was financed out of the interest bearing funds.
| Cash received | Cash Paid |
| Opening Profit | 1,250,212,120 | Profit on debts | 2,428,848 |
| | | Stores and parts and loose tools | 76,122,825 |
| Depreciation Reversal | 832,946,853 | | |
| Cash for Amortization | 69,445 | Stocks in trade | 691,182,470 |
| Gratuity Reversed | 37,742,049 | Trade debtors | 17,937.690 |
| Financial Charges | 229,734,959 | Loans and advances | 240,687,281 |
| Lease on Assets reversed | 18,914,671 | | |
| Prepayments | 583,292 | Financial charges paid | 153,395,110 |
| Other Receivables | 63,626,557 | Payment of tax | 472,442 |
| Trade and other payable | 870,774,306 | Gratuity paid | 12,386,271 |
| | | Fixed capital Expenditure | 1,272,057,249 |
| Proceeds from disposal of property plant and equipment | 30,848,039 | | |
| Profit on deposits | 2,428,848 | Long term deposits | 236,000 |
| | | Repayment of finance lease | 7,767,376 |
| Cash and bank balance at the beginning of the year | 333,884,945 | Payment of dividend | 465,007,100 |
| | 3,671,766,084 | | 2,939,680,662 |
| | | BALANCE | 732,085,422 |
| | 3,671,766,084 | | 3,671,766,084 |
| BALANCE CASH IN HAND | 732,085,422 | Long term Investment | 6,210,231,815 |
| Short term Bank Borrowing | 494,959,950 | Repayment of Loan | 1,042,475,000 |
| Long Term Loans | 3,711,000,000 | | 7,252,706,815 |
| Long Term Murabaha | 2,450,000,000 | Balance Cash | 135,338,557 |
| | 7,338,045,372 | | 7,338,045,372 |
The learned counsel for the appellant, besides his written arguments presents following analysis to strengthen his point that appellants total investment in acquisition of ABL was out of its own financial resources.
We have heard the learned representatives of two parties and given our anxious consideration to their arguments as also the points raised by them. We have also been benefited from point of view expressed by our learned brothers in the reported judgments and those of their lordships expressed in the cited judgments referred to by the learned representatives. And we have no hesitation in holding that the Taxation Officer has unnecessarily saddled the appellant with uncalled for pecuniary burden without factual or legal basis, at some places even taking up contradictory stances. The learned counsel of the appellant has correctly pointed out, with reference to the foreign currency loan of Rs.2,313,200,000 that while curtailing financial expenses the taxation officer attributed its application towards acquisitions of ABL and on the other hand, while dealing with the `exchange loss' he categorically held that the same had been consumed towards expansion project of ployster fibre yarn. It is a matter of common sense that one loan cannot be consumed for two different payments. It is also correct that while investment in acquisition of ABL was made in the months of July, 2004 (payment of earnest money amounting to Rs.350 million) and August, W 2004 (balance payment of Rs.5,853 million) i.e. towards the end of the accounting period which in the instant case was 30-9-2004, the assessing officer proportionately disallowed the financial expenses incurred by the appellant during the full 12 months period. Unfairness of the impugned treatment need not be over-emphasized. In our opinion, the taxation officer has applied a general formula in all the years including the tax year, 2005(I) without looking into the facts as to whether the borrowed money was obtained in previous year or obtained during the year before the date of investment/after the date of investment. The taxation officer without considering the nature and utilization of funds qua allowance of financial expenses even in the immediately preceding years i.e. tax years 2003 and 2004, has curtailed the same without any reasonable cause. The nexus of borrowed funds with the investment in acquisition of ABL does not stand established.
It has been correctly pointed out that the taxation officer has not ascertained the distinguishing circumstances in the three years under consideration. For instance, in all the assessment orders it is stated that "no other income was shown other than business". Perusal of assessment order for the tax year 2006 reveals that the appellant returned dividend income from investment at Rs.354,956,750 which stands assessed as separate block of income. It manifests that the issue was dealt without considering the distinguishing position obtaining for tax year, 2006.
In our considered opinion, the impugned treatment of Murabaha facility of Rs.2450 million is totally against the established norms of treatment of such facility. Here it will not be out of place to reproduce few extract from the Islamic Financial Accounting Standard number 1, dealing with Murabaha, which was promulgated by the Securities and Exchange Commission of Pakistan vide S.R.O. 865(I)/2005 dated August 24, 2005.
ISLAMIC FINANCIAL ACCOUNTING STANDARDS
IFAS 1 MURABAHA
1. Background
1.3 Basically Murabaha is a particular type of sale. Ideal mode of financing according to Shariah would be Mudarabah or Musharakah. However, in the perspective of the current economic set up there are certain practical difficulties in using Mudarabah and Musharakah instruments in every type of financing. Therefore, the contemporary Shariah experts have emphasized on Murabaha basically as a trading mode of transaction but in the contemporary context, the use of Murabaha subject to certain condition on deferred payment basis has been allowed as a permissible mode.
1.5 The second important point is that the Murabaha transaction does not come into existence by merely replacing the word "interest" by the word "profit" or "mark-up". Unless basic conditions as laid down by Shariah are fully observed, a Murabaha is not valid. In fact, it is the observance of these conditions, which can draw a clear line of distinction between the interest-bearing loan and a trading transaction of Murabaha. If any of these conditions is not met, the transaction ceases, to be Murabaha according to Shariah.
1.9 Definitions
Murabaha: Murabaha is a particular kind of sale where seller expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person by adding some profit or mark-up thereon which is known to the buyer.
Thus Murabaha is a cost plus transaction where the seller expressly mentions the cost of a commodity sold and sells it to another person by adding mutually agreed profit thereon which can be either in lump-sum or through an agreed ratio of profit to be charged over the cost.
Inventories: Inventories are assets held for sale under Murabaha transactions in the ordinary course of business.
2. Basic Shariah Principles and Features of Murabaha
Basic principles governing Murabaha can be divided into three categories. Principles regarding sale, deferred payment and other principles.
2.1 Principles regarding sale
2.1.1 "Sale" is defined in Shariah as the exchange of a thing of value by another thing of value with mutual consent".
2.1.5 The gist of the principles mentioned in paras 2.1.2 to 2.1.4 is that a sale under Murabaha arrangement is not valid under Shariah principles unless a thing or commodity:-
-- is in existence
-- is owned by the seller.
-- is in the physical or constructive possession of the seller.
2.1.7 The sale must be prompt and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. If the parties wish to effect a valid sale, they will have to effect it fresh when the future date comes or the contingency actually occurs.
2.1.9 The delivery of the sold commodity to the buyer must be certain and should not on a contingency or chance.
Example:-A sells his car stolen by an anonymous person and the buyer purchases it under the hope that he will manage to recover it. The sale is void.
3.0 Modalities of Murabaha
3.1 the Murabaha should fulfil all the conditions necessary for a valid sale, i.e.:-
*The thing or commodity is in existence.
It is owned by the seller.
*The bank must have a good title to the commodity before it sells it to its client.
*The commodity must come into the possession of the bank, whether physically or constructive, in the sense that the commodity must be at its risk, though for a short period.
3.2. For a Murabaha transaction, the bank itself may purchase the commodity and keep it in its own possession, or purchase the commodity through a third person appointed by the bank as agent, before bank sells it to the customer. However it is also allowed that bank makes the customer its agent to buy the commodity on its behalf. In this case the client first purchases the commodity and takes its possession as such on behalf of the bank. Thereafter, he purchases commodity from the bank for a deferred price. His possession over the commodity in the first instance is in the capacity of an agent of his bank. In this capacity he is only a custodian while the ownership vests in the bank and the risk of the commodity is also borne by the bank as a logical incidence of the ownership. But as soon as the client purchases the commodity from the bank, the ownership, as well as the risk, passes to the client.
3.3. As mentioned earlier, the sale cannot take place unless the commodity comes into the possession of the seller, but the seller can sign an "agreement to sell", after the bank has acquired ownership title to the goods though the commodity is not in its possession.
3.4. Having regard to the Shariah principles of the Murabaha a bank
can use the Murabaha by adopting the following procedure:-
3.4.1 The client and the bank sign an "agreement to sell" whereby the bank promises to sell and the client promises to buy commodity upto a maximum amount of purchase at a profit margin of X percentage or amount over cost.
3.4.2 The bank appoints the client as his agent for purchasing the commodity on its behalf, and an agreement of agency is signed by both the parties.
3.4.3 The client purchases the commodity on behalf of the bank and takes its possession as an agent of the bank.
3.4.4 The client informs the bank that he has purchased the commodity on its behalf and has taken possession thereof, and at the same time, makes an offer to purchase it from the bank at profit margin over cost as agreed to in the "agreement to sell" referred to in 3.4.1.
3.4.5 The bank accepts the offer and the sale is concluded whereby the ownership as well as the risk of the commodity is transferred to the client. An invoice shall be raised by the bank in respect of the commodity sold to the client.
3.4.6 Another very important point to be followed is that the Purchase Order, Material Receiving Report and Delivery Challan, by whatever name called, should be in the name of the bank.
3.4.7 Finally the payment for the commodity purchased may be made directly by the bank to the supplier or through the agent.
3.5. The purchase of the commodity from the client himself on "buy back" agreement is not allowed in Shariah.
3.6. The above mentioned procedure of the Murabaha is a complex transaction where the parties involved have different capacities in different stages.
3.6.1 At the first stage, the bank and the client agree to sell and purchase commodity in future. This is not an actual sale. It is just a promise to effect a sale in future on Murabaha basis. Thus at this stage the relationship between the bank and the client is that of a promisor and a promisee.
3.6.2 At the second stage, the relationship between the parties is that of a principal and an agent.
3.6.3 At the third stage, the relationship between the bank and the supplier is that of a buyer and a seller.
3.6.4 At the fourth and fifth stage, the relationship of seller and buyer comes into operation between the bank and the client and thereby relationship of a debtor and creditor emerges.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
SHARIAH ESSENTIALS ISSUED BY SHARIAH BOARD .
OF
THE STATE BANK OF PAKISTAN
Murabaha (Agreed profit margin sale with cash or deferred payment of price)
(vi) The invoice issued by the supplier will be in the name of the financier as the commodity would be purchased by an agent on behalf of such financier. It is preferable that the payment for such commodities should be made by the financier directly to the supplier.
(xi) A Murabaha contract cannot be rolled over because the goods once sold by the bank become property of the client and, hence, cannot be resold.
(xii) Buy-back arrangement is prohibited. Therefore, commodities already owned by the client cannot become the subject of a Murabaha transaction between him and the same financier.
Murabaha facilities, one of various methods of Islamic banking and financing introduced in the country, like most of other loans are now strictly monitored by the regulatory authorities, the principal being the State Bank of Pakistan. A distinguishing feature of this mode of financing is that no cash is disbursed to the client by the financial institution for its own use. Perusal of documents available on record establishes beyond doubt that the said Murabaha facility was utilized for local purchases. Thus the question of misappropriation of funds or most specifically diversion of the funds towards some other channel does not arise.
Perusal of record further shows that foreign currency loan of US dollar 50 million had been obtained on 17-2-2003 which date pertains to tax year, 2004. The financial charges in respect of that loan had also been claimed there. Perusal of assessment order for the tax year 2004 which is also before us in appeal confirms that the financial expenses claimed by the appellant for that year at Rs.239,058,815 had been allowed in toto. This fact alone is sufficient to establish that the foreign currency loan of US dollar 50 million had been consumed much before the commencement for the tax year under consideration and no objection had been raised by the revenue authorities in respect thereof.
There also appears to be substantial truth in learned counsel objections that figures were picked up to reach certain conclusions with the objective of curtailment of financial expenses. It is true that the taxation officer has only taken into consideration the interest bearing funds while non-interest bearing funds have been ignored. It stands established beyond doubt that non-interest bearing resources over 9 million were available with the appellant in addition to interest bearing resources of over rupees Two billion. The assessing officer's working that appellants' own sources were tide to fix assets and stocks is not borne out from record in view of the details obtaining in the balance sheet.
We now proceed to examine the balance sheet of the appellant for the period ending 30-9-2004 to ascertain the factual position. Details of trade and other payables are appearing in note No.12. Markup/interest on secured loans, payable as on 30-9-2004 amounts to Rs.54,650,339 and provision for taxation, as per balance sheet, amounts to Rs. 139,768,678. Non-current liabilities representing Deferred Taxation and Staff Retirement Gratuity as per balance sheet totals to Rs.937,510,744. Share Capital, Capital Reserves and Revenue Reserves are respectively to the tune of Rs.3,105,069,950 (Note 20), Rs.1,072,017,550 (Note 21) and Rs.1,918,555,377 (Note 22). Thus total of non-interest bearing resources comes to Rs.9,209,052,314. Details of interest bearing resources appear in notes Nos. 13,14,16 and 17. These have a total of Rs.9,471,687,746. In this manner interest bearing and non-interest bearing resources amount to Rs. 18,680,740,060. On the - other hand appellants operating assets/capital work in progress/spare parts and stock in trade as per notes Nos.3-9 and other entries of balance sheet amount to Rs.12,470,508,245. The difference of the total of interest and non-interest bearing resources exceeds appellants fixed assets etc. by an amount of Rs.6,210,231,815 which represents appellants investment in Allied Bank Limited Pakistan as per note No.5. The following table more clearly supports this conclusions.
| | Note | 2004 |
| NON INTEREST BEARING RESOURCES | | |
| A TRADE AND OTHER PAYABLES | | |
| Creditors | 12 | 89,498,986.00 |
| Capital Expenditure Payable | 12 | 12,810,388.00 |
| Advances from customers | 12 | 33,623,925.00 |
| Bills Payable | 12 | 1,613,403,714.00 |
| Accrued Charges | 12 | 74,174,720.00 |
| | Balance | |
| Markup / Interest on Secured Loan | Sheet | 54,650,339.00 |
| Workers Profit Participation Fund | 12 | 65,869,928.00 |
| Sales Tax Payable | 12 | 68,756,489.00 |
| Unclaimed Dividend | 12 | 12,696,772.00 |
| Workers Welfare Fund | | |
| Other | 12 | 10,644,754.00 |
| Dividend | 11 | Balance |
| Taxation | Sheet | 139 768,678.00 |
| TOTAL | | 2,175,898, 693 |
B Non Current Liabilities
| | Balance | |
| Defferred Taxation | Sheet | 770,406,583 |
| | Balance | |
| Staff Retirement Gratuity | Sheet | 161,104,161 |
| TOTAL | | 937,510,744 |
Share Capital, Capital Reserves and
C Revenue Reserves
| Share Capital | 20 | 3,105,069,950 |
| Capital Reserves | 21 | 1,072,017,550 |
| Revenue Reserves | 22 | 1,918,555,377 |
| TOTAL | | 6,095,642,877 |
Total Non Interest Bearing Resources
| D (A+B+C) | | 9,209,052,314 |
| Investment In Allied Bank Pakistan | | |
| E Limited | 5 | 6,210,231,815 |
| Non Interest Bearing Resources after | | |
| F Investment in ABL (D-E) | | 2,998,820,499 |
| G Interest Bearing Resources | | |
| Short Term Bank Borrowings | 13 | 1,653.687,746 |
| Long Term Loans | 14,16 | 5,368,000,000 |
| Lease Liability Subject to Finance lease | | |
| Long Term Morabaha | 17 | 2,450,000,000 |
| | | 9,471,687,746 |
Total Interest and Non Interest Bearing
| H Resources Available for Assets (F+G) | | 12,470,508,245 |
| OPERATING ASSETS/CAPITAL WORK | | |
| I IN PROGRESS/SPARE PARTS/STOCK IN TRADE | | |
| Operating Assets | 3 | 8,010,870,477 |
| Capital Work In Progress | 4 | 628,561,599 |
| Stores Spares & Loose Tools | 6 | 295,784,023 |
| Stock In Trade | 7 | 2,559,2.16,892 |
| Other Current Assets | 8,9,10,11 | 973,718,554 |
| Long Term Deposit | Balance | 2,326,700 |
| | Sheet | |
| | | 12,470,508,245 |
The underlying cause of the impugned additions in all the years under consideration appears to be that the taxation officer restricted his analysis to the cash flow statement for the accounting period ending on 30-9-2004 ignoring the other entries of the financial statements. The comparative chart of cash inflow and cash outflow presented by the learned DR which stands reproduced in earlier part of this order has also the same lacuna. The data presented by the learned counsel, in exercise of his right of rebuttal successfully explains the sources of investment in ABL.
Result of the above discussion is that the apportionment of financial expense and the resultant additions amounting to Rs.109,678,630, Rs.265,287,321 and Rs.625,178,635 for the relevant three years are found un-maintainable.
Interest on Payments to Workers' Profit Participation, Fund:--
The taxpayer claimed deduction on account of payment of interest on contributions to Workers' Profit Participation Fund (WPPF) in all the years under appeal which was disallowed. The position of claim and disallowance is as under:
| Tax year | Claimed (Rs.) | Disallowed (Rs.) |
| 2004 | 1,491,197 | 1,149,197 |
| 2005 (i) | 1,316,510 | 1,316,510 |
| 2005 (ii) | 3,390,497 | 3,390,497 |
| 2006 | 1,166,919 | 1,166,919 |
The Taxation Officer confronted that the said interest appeared to be in the nature of fine or penalty paid in violation of rules and regulations of WPPF Ordinance and intention was shown for disallowing the same. The appellant explained that it was not in the nature of penalty or fine paid in violation of any regulation of Worker Profits Participation Act, 1968 and, therefore, not hit by the provisions of section 21 (g) of the Ordinance. It was submitted that the payment of interest was legal obligation and statutory duty for using funds. It was further explained that the appellant was liable to pay' the interest @ 2.5% in respect of amount utilized by it for its business in terms of clause 2(2), of the Schedule to the WPP Act, 1968.
The Taxation Officer rejected the submission on the ground that the legislature had not given sanction to any expenditure which has been incurred in violation of any law or regulation in terms of section 21(g) of the Ordinance. He relied upon (1973) 90 ITR 373 (PSH), (1978) 113 ITR (Cal) and (1985) 153 ITR 275 (Dehli).
In appeal before the learned CIT(A), the disallowance was confirmed.
Opening his case, the learned' counsel for the appellant submits the claim was disallowed without considering the nature and governing provisions of the Act of 1968. He complains that the taxation officer also ignored that the law itself provides period for payment of said interest viz. 9 months, closing of accounts, approval of account in AGM and disbursement to funds. The taxpayer, he continues, had to make the payment after approval of the same from shareholders and for the intervening period interest has to be paid under the law.
It is asserted that section 21(g) is not applicable to the interest paid on the outstanding balance of the fund which was ultimately distributed among the workers. The expenditure claimed is contended not being in the nature of any fine or penalty and not payable for the violation of any law as the Workers' Profit Participation Act, 1968 allow payment of interest from the date of closing of account of the company till the final allocation and payment of workers share of profit after finalization of audit and approval of accounts by the shareholders. Also that under section 3(b) of the Act it is obligatory on the company to pay the amount allocated to the fund not later than nine months after the close of the year.
The learned counsel highlights the fact that the appellant is a limited company incorporated under the Companies Ordinance, 1984 and engaged in industrial undertaking, therefore, obliged to allocate 5% of its profits for distribution to the workers under the Acts 1968, he point out that the company has closed its ' accounts on 30-9-2004 and its audited profit and loss account was approved by the shareholders on 31-3-2005.
He complains that the learned Assessing Officer made the addition under the misconception that the interest is paid due to delayed payment to fund, whereas the company was legally entitled to utilize the funds for its business operations subject to payment of interest. Also that there is no concept of delayed payment under the Companies Profits (Workers' Participation) Act, 1968. Further that the provisions of section 21(g), as quoted by the Assessing Officer, are also irrelevant as the interest paid by the appellant was for utilization of funds for its business operation as allowed by the law and not in the nature of fine or penalty for the violation of any law. The case law quoted in the order regarding interest charged for delayed payment of tax is contested to be irrelevant as the allocation of profit for distribution to worker is not in the nature of any tax payable to the Government. He concludes that the addition is against the history of the case as the interest on WPPF is allowed to the company since its inception. Reliance in this regard is placed upon the case reported as 1997 PTD (Trib) 301 to establish that payment of interest is allowable expense. Extract is reproduced as under:
"Workers Profit Participation Fund---Interest on---Disallowance---Validity---Sources of finance were identifiable and payments of interest were confirmed by documents---Department had not proved that the payment was not related to the business of the assessee---Disallowance of such interest, held, was not justified."
We have heard the two parties. The relevant provisions of the scheme as per Schedule to the Act are reproduced below:--
"2. Investment of Fund.
(1) The amount allocated or accruing to the Fund shall be available to the company for its business operations. The company may, however, request the Board to utilize the amount in the Fund for investment under sub-paragraph (7) and the Board may decide to so invest the amount.
(2) The company shall pay to the Fund in respect of the amount is the Fund available to it for its business operations as aforesaid interest at the rate of 201/2 per cent above the bank rate or 75 per cent of the rate at which dividend is declared on its ordinary shares, whichever is higher. In case there is more than one class of ordinary shares on which different rates of dividend have been declared, than the weighted average of the different rates of dividend shall be taken for the purpose of determining the rate of interest. The interest to the fund shall accrue on and from the first day of the year next succeeding the year in which the scheme becomes applicable to the company. Even when the company does not wish to utilize the amount available to it under sub-paragraph (1), interest at the rate aforesaid shall be payable by the company for the period between the date of allocation of any amount to the Fund and the date of its investment under sub-paragraph (7)."
In our considered opinion the impugned payment of interest does not fall within the category of "fine or penalty paid or payable... for the violation of any law, rule or regulation" as stipulated under section 21(g) of the Ordinance. Perusal of the relevant provisions of the Companies Profits (Workers Participation) Act, 1968 establishes beyond doubt that the payment of interest is statutory obligation upon the companies liable to said levy. Looking at the things from another angle, it is to be seen that interest payment becomes due with effect from the first day of the financial year when it is practically not possible for a company to determine even its profit not to speak of its liability with regard to WPPF. The case-law relied upon by the learned counsel further supports our point of view. Under the circumstances, the impugned disallowance is held to be un-maintainable. Hence its deletion for all the years under consideration.
TAX CREDIT:
The Taxation Officer, while determining the tax liability, ignored the credit of tax paid under section 113 of the Ordinance, for minimum tax paid for tax years, .2004 and 2005(i), which was already allowed under section 221 of the Ordinance vide on order dated 29th September, 2007.
The learned CIT(A) refrained to adjudicate the ground of appeal holding that since matter was sub-judice before the honourable Lahore High Court, Lahore, therefore, there was no need to adjudicate the ground.
The learned counsel for the appellant vehemently contends that the stance taken by both the authorities below is totally irrelevant and out of context. He draws our attention to the fact that the Taxation Officer earlier allowed the credit of taxes paid under section 113 in respect of tax years 2004 and 2005 by considering the provisions of sub-section (2)(c) of section 113 through a rectification order dated 29th September, 2007. Subsequently, he continues, the Taxation Officer, Enforcement-B, LTU issued a notice under section 122(5A) stating that the credit was not allowed properly under section 113(2)(c) through the order passed under section 221 dated 29th September, 2007 and it should have been allowed in the manner provided in the show cause dated 30th December, 2008.
He informs that the above notice was impugned through Writ Petition No. 574 of 2009 on the ground that the provisions of section 113(2)(c), having been added by Finance Act, 2004, cannot be applied retrospectively, since the same relates to substantive law.
He submits that the issue before the honourable Lahore High Court was totally different, while the claim before the learned CIT(A) was that the tax paid under section 113 in respect of tax years, 2004 and 2005(i) should be allowed set off against normal tax liability for tax years, 2005(ii) and 2006 in terms of section 113(2)(c) but both the authorities without considering the nature of claim before them, tried to side track the issue under the umbrella of the matter being sub judice before the honourable High Court. The decision in writ petition referred above, shall not vitiate the present claim in any manner, he concludes.
The learned DR, however, opposes the grounds taken in this regard as also the pleadings made at the bar for the appellant. He stresses that the matter is subjudice before the honourable Lahore High Court, Lahore, so it should be kept pending.
Having considered the rival points of view, we deem it prudent to remand the issue to the taxation officer with the directions that the out come of appellants' writ petition, pending adjudication before the honourable Lahore High Court, Lahore, should be followed in letter and spirit.
Proration of Administrative expenses:
For the tax year, 2006, the taxpayer received divided income of Rs.354,956,750. The Taxation Officer confronted that the administrative expenses amounting to Rs.4,978,070 were intended to be allocated to dividend income under section 67 of the Ordinance in the following manner:
Dividend Income X Admn Expenses
Total Receipts
Rs.354,956,750 X Rs.246,655,777
Rs.17,587,564,595
It was explained on behalf of the appellant that:-
(i) the administrative expenses claimed by it were exclusively incurred for the purposes of business of manufacture and sale of polyester staple fibre and yarn;
(ii) that there was no common expenditure incurred to earn dividend income;
(iii) that any proration of actual business expenses with the dividend would' be arbitrary, baseless and without justification;
The contention raised was not found, tenable by the Taxation Officer, since without engaging certain staff, incurring legal expenses and printing stationery dividend income cannot be earned. The Taxation Officer relied upon the case reported as 2009 PTD (Trib.) 869 and 2005 PTD (Trib.) 2161. Where it had been held that there cannot be any concept of earning income without incurring of expenses.
The learned CIT(A) rejected the ground of appeal taken in this behalf holding that:--
"The detail of impugned addition recorded in para 5 on page 11 of the order under appeal has been perused. The Taxation Officer after examination of the Note No.24 to the Final Accounts has disallowed an amount of Rs.2,069,500 having been paid to unapproved institutions in terms of section 61 of the Tax Ordinance, 2001. The treatment given by the taxation officer being on facts and as per statutory provisions, is valid and under the law, hence confirmed and upheld. The ground taken by the appellant being without merit is rejected".
The learned counsel pleads that the assessing officer was not justified to allocate huge amount of Rs.4,978,070 out of administrative expenses to dividend income. Also that the allocation is in violation of section 67 of the Ordinance which provides that the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates. He points out that there was only one transaction of receipt and deposit of dividend warrant during the year for which the expenses of Rs.4,978,070 could not be incurred by any stretch of imagination. The administrative expenses claimed were, he submits, exclusively incurred for the purpose of business of manufacture and sale of polyester fibre yarn. He draws our attention to the fact that the investment was made in tax year, 2005(i) but no adverse inference was drawn under the head admin expenses in the tax years, 2005(I) and 2005 (II). The unjustified and unreasonable apportionment to dividend income may be deleted, he pleads.
Rival arguments on the issue stand considered. Section 67 of the Ordinance specifically requires that the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of activity to which the amount relate.
The catch provided in the law is determination of nature and size of activity involved for earning an income and incurrence of expense in relation to size and nature of the activity. Earning of dividend needs not any hectic activity. Therefore, the formula provided in Rule 13(3)(a) cannot be applied blindly. Rule 13(4) specifically draws attention of the concerned authority to consider the nature and source of each class of income.
Sub-Rule (4) of Rule 13 of the Rules specifically lays down:
"(4) where expenditures are to be allowed among deferred classes of income under sub-rule (3), consideration shall be given to the nature and source of each class of income, on reasonable basis to earn each class of income (particularly in allocating selling expenses)"
In the stated background the question arises that "whether while earning dividend income the same quantum of administrative activity is required as is required for administrating business income? The answer is a big No, for the simple reason that both the activities are not at par. While earning dividend income, a very little activity is required as compared to earning of business income. Therefore, both cannot be taken or considered on equal footing. The main activity is the investment in shares. In the present case the said activity took place on 17th August, 2004 when the shares of ABL were purchased. Thereafter, this activity has not been undertaken.
Dividend is profit distribution and is an activity of the other party. Having announced dividend the dividend warrants are dispatched to the share holders (irrespective of status), which is deposited into bank and the amount is realized by bank itself. Even the tax is deducted before issuance of warrant. Practically a very little expenditure is involved. The taxation officer without consideration of the nature and source of income has unilaterally reckoned the activity involved for earning income and unilaterally applied the formula given in sub-rule 3(a) of rule 13, which is contrary to the dictates of law.
Apportionment of administrative expenses is found not on reasonable basis and cannot be sustained in the eyes of law. Under the facts and in the circumstances of the case, as also in the interest of justice, we are not inclined to uphold the impugned addition in toto. There is, however, no denial of the fact that no income can be earned without expense. As we have noted earlier the dividend income was received at fag-end of the year. In our opinion, it would be prudent if the impugned addition is maintained to the extent of Rs.500,000. It is ordered accordingly.
The issues involved in the rest of the grounds of appeals not mentioned above, having not been discussed and debated stand rejected.
The four appeals succeed to the extent and in the manner indicated above.
C.M.A./58/Tax(Trib.)Order accordingly.