2010 P T D (Trib) 37
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Mrs. Zareen Saleem Ansari, Accountant Member
I.T.As. Nos. 620/KB and 640/KB of 2008, decided on 02/05/2009.
(a)Income Tax---
----Disallowance out of "other expenses"---Assessee contended that complete details along with particulars had been filed and Bill and Vouchers were also examined---In PNR and other notices, the Taxation Officer had not pointed out any specific unverifiable claim or any defect except for estimated figure on assumed working---Validity---Contention of the assessee was correct as the Taxation Officer was not justified to disallow the expenditure based on stock phrases which was obvious from the order passed by the Taxation Officer---No disallowance could be based upon stock phrases like partial unverifiability and alleged presence of element of personal use---If Taxation Officer had failed to take into consideration that the assessee being a juristic or legal person its personal use of facilities like telephone, vehicle etc. need all the more strict test to bring home that any employee/director of company had in fact used or availed same which had not directly or indirectly connected with business of company, the disallowance could not be made---Disallowance out of other expenses were deleted by the Appellate Tribunal.
2002 PTD 1496 rel.
(b) Income Tax Ordinance (XLIX of 2001)---
----S.21---Disallowance out of "advertisement expenses"---Taxation Officer had only disallowed the claim regarding which no evidence had been furnished by the assessee---Taxation Officer was fully justified in disallowing the claim which was accordingly maintained by the Appellate Tribunal.
(c) Income Tax Ordinance (XLIX of 2001)---
----S.21---Disallowance out of "travelling expenses"---Taxation Officer had admitted that complete details of travelling expenses were filed---Claim was disallowed without pointing out any specific instances and by using stock phrases---Manner of disallowance was not sustainable as the law required that the specific unverifiable claim should be pointed out---Disallowance made in that respect was deleted by the Appellate Tribunal.
(d) Income Tax Ordinance (XLIX of 2001)---
----Ss.21(c) & 233--.-Deductions not allowed---Disallowance out of "collection charges "---Advice of the Bank showed that they had charged discount on the credit facilities provided against payments made on' account of credit cards---All the scheduled banks enjoy exemption from the provisions of withholding of taxes on their receipts and tax was not deductible from them---Even otherwise, the banks had declared their entire receipts as taxable and had offered the same for taxation---Provision of S.21(c) of the Income Tax Ordinance, 2001 had not been violated---Disallowance made by the Taxation Officer was deleted by the Appellate Tribunal.
1996 PTD (Trib.) 411 rel.
(e) Workers' Welfare Fund Ordinance (XXXVI of 1971)---
----S. 3---Income Tax Ordinance (XLIX of 2001), Preamble---Tax Year 2004---Levy of workers' welfare fund---Assessee contended that in the tax year, 2004 workers' welfare funds could not be levied as in S.3, Workers' Welfare Fund Ordinance, 1971 there was no reference to such levy under the Income Tax Ordinance, 2001---Validity---Levy of workers' welfare fund was charged under the Workers' Welfare Funds Ordinance, 1971 wherein the levy was restricted to charge under the Income Tax Ordinance, 1979 and not under the Income Tax Ordinance, 2001---In the year under review the amendment in the relevant law was not made and Taxation Officer could not charge workers' welfare fund---Levy of workers' welfare fund was deleted by the Appellate Tribunal.
2002 PTD 14 and 2007 PTD (Trib.) 1860 rel.
(f) Income Tax Ordinance (XLIX of 2001)---
----Ss.21, 149 & 165---Deductions not allowed---Disallowance of salaries paid to contractor---First Appellate Authority deleted the same for the reason that income tax on payments made to contractor against labour provided by him had been deducted which was duly disclosed in the statement under S.165 of the Income Tax Ordinance, 2001 and did not relate to deduction of tax disclosed in the statement under S.149 of the Income Tax Ordinance, 2001---Contract labourers were not the employees of the assessee-company---Tax deducted on payments made to contractor was correctly disclosed in the statement filed under S.165 of the Income Tax Ordinance, 2001---Directions of the First Appellate Authority were confirmed by the Appellate Tribunal and appeal filed by the Department on the issue was dismissed.
I.T.A. No.662/KB of 2004 rel.
(g) Income Tax Ordinance (XLIX of 2001)---
----S. 21---Deductions not allowed---Disallowance of "financial charges" on the ground that claim was in excess of fixed mark-up rate of 10%---Validity---Financial charges had been paid directly to the bank at different rates---Admittedly, assessee had filed breakup of financial charges with rate of interest and was supported by bank statement which was neither appreciated nor properly examined by the Taxation Officer---First Appellate Authority after examining the record, had rightly disagreed with the Taxation Officer with a specific finding that neither the claim was unverifiable nor there was finding that the loan obtained was used for non-business purpose---Loan had increased during the period---First Appellate Authority had given a clear finding that the claim of financial charges was supported by bank statement and was fully vouched and verifiable---First Appellate Authority had correctly deleted the disallowance of financial charges and his order was confirmed by the Appellate Tribunal and appeal filed by the department was dismissed.
Iqbal Salman Pasha and Nadeem Ahmed Dawoodi for Appellant (in I.T.A. No.620/KB of 2008).
Rehmatullah Khan Wazir for Respondent (in I.T.A. No.620/KB of 2008).
Rehmatullah Khan Wazir for Appellant (in I.T.A. No.640/KB of 2008).
Iqbal Salman Pasha and Nadeem Ahmed Dawoodi for Respondent (in I.T.A. No.640/KB of 2008).
ORDER
The above titled cross-appeals have been filed against impugned order dated 30-6-2008 passed by the learned CIT(Appeals), Zone-I, Karachi.
The Taxpayer has objected the impugned order on the following grounds:--
(1) That the learned Commissioner of Income Tax (Appeals) has erred in confirming the following disallowances without pointing out any specific unverifiable claim from the details and evidences admittedly produced and examined by the Taxation Officer.
| (i) | Other expenses | Rs.4,390,402 |
| (ii) | Motor Vehicles expenses | 1,608,256 |
| (iii) | Advertisement expenses | 750,368 |
| (iv) | Travelling expenses | 1,520,654 |
| (v) | Collection charges | 8,905,988 |
| (vi) | Depreciation on old/replaced Air-conditioners | 225,000 |
| (vii) | Depreciation on Motor Vehicles and Boat | 184,588 |
The quantum of expenses disallowed and confirmed in appeal besides being unjustified are not only excessive and exorbitant, but also without any basis and in clear violation to provision of law, without pointing out and confronting with any specific defect or unverifiable claim. Hence the disallowances are not sustainable in law and are liable to be deleted.
(3) That the learned Commissioner of Income Tax (Appeals) has not only erred but has also misdirected himself in law and on facts by confirming the levy of W.W.F. amounting to Rs.492,132 to the case of the appellant.
The quantum of W.W.F. confirmed in appeal besides being unjustified is excessive and exorbitant."
While the Department in the cross appeal has agitated the impugned order on the following grounds:--
"(2) That the learned CIT(Appeals) was not justified to delete addition of Rs.2,204,549 under the head disallowance of China Glass Ware, Linen and Uniform.
(3) That the learned CIT(Appeals) was not justified to restrict addition out of telephone expenses to 15% relying on the history of case.
(4) That the learned CIT(Appeals) was not justified to delete addition of Rs.824,500 on account of Salaries paid to contractor.
(5) That the learned CIT(Appeals) was not justified to delete Financial Charges amounting to Rs.22,126,039."
Brief fact of the case are that the Taxpayer in this' case is a Private Limited Company and derived income from hotel business at Karachi and Lahore. The company is also managing a hotel in Dubai and in Toronto on the basis of management agreement. Return filed by the taxpayer for the year under review was selected for audit within the Power vested with the Commissioner of Income Tax under section 177(4) of Income Tax Ordinance, 2001. On the basis of PNR issued by the Taxation Officer, the Taxpayer had produced books of accounts, various details, documents and evidences which were required in compliance to audit proceedings along with explanation letters etc. The contentions of the Taxpayer were partly accepted and various disallowances were made out of expenses. Objections before this forum have been raised against the above referred additions made out of other expenses, motor vehicles expenses, advertisement, travelling,, collection charges, depreciation on old/replaced Air-conditioners, depreciation on motor vehicles, depreciation on boat and also Workers Welfare Funds which was separately charged which has been confirmed by, the Commissioner of Income Tax (Appeals) in the impugned order.
We have heard Messrs Iqbal Salman Pasha and Nadeem Dawoodi, Advocates who have represented the Taxpayer and the learned Departmental Representative Mr. Rehmatullah Khan Wazir. Both of them have vehemently argued in support of their respective appeals.
In respect of disallowances out of "other expenses", the main contention of the Taxpayer is that complete details along with particulars have been filed and Bills & Vouchers were also examined. In the PNR and other notices, the Taxation Officer has not pointed out any specific unverifiable claim or any defect except for estimated figure on assumed working. Although in their reply filed during the hearing it was clarified that entire expenditure is fully vouched and verifiable and there is no justification for proposed disallowance. The contention was rejected by both the officers. He had vehemently argued that under the Ordinance, 2001 the Taxation Officer cannot disallow the expenditure without pointing out specific instances and in support he had placed reliance on the decision of the Honourable Lahore High Court reported as 2002 PTD 1496 with a submission to delete the expenditure. On the other hand, the learned D.R. has referred to notices issued under PNR and 122(9) by the Taxation Officer proposing to disallow the claim as the same is unverifiable, hence, according to him the CIT(Appeals) had correctly confirmed the disallowance. Exercising the right of rebuttal the learned counsel for the Taxpayer has referred to the notices wherein specific instances have not been mentioned and according to him the disallowance cannot be maintained.
After hearing both the sides, we are of the view that the contention of the Taxpayer is correct as the Taxation Officer is not justified to disallow the expenditure based on stock phrases which is obvious from the order passed by the Taxation Officer. We have found that the Honourable High Court in the above referred decision reported as 2002 PTD 1496 has held that no disallowance could be based upon stock phrases like partial unverifiability and alleged presence of element or personal use and if the Taxation Officer has failed to take into consideration that the Taxpayer being juristic or legal person its personal use of facilities like telephone, vehicle etc. need all the more strict test to bring home that any employee/Director of company had infact used or availed same which has not directly or indirectly connected with business of company, the disallowance cannot be made. Respectfully following the observations of Honourable Judges in the above referred reported decision, the disallowance out of other expenses are deleted.
The next issue contested is in respect of disallowance out of motor vehicle expenses. The arguments advanced by both the sides are the same as discussed above with an alternative plea by the learned A.R. that in view of increase in rate of petrol and other cost, the disallowance is highly excessive. We however feel that as the Taxation Officer has not pointed out any unverifiable claim, therefore following the above referred decision of the Honourable High Court the disallowance made by the Taxation Officer is deleted.
Regarding disallowance made out of advertisement expenses, we have considered the arguments of both the sides and are of the view that the Taxation Officer was fully justified in disallowing the claim which is accordingly maintained as the Taxation Officer has only disallowed the claim regarding which no evidence has been furnished by the Taxpayer. We therefore find no warrant for interference in the impugned order in this respect.
The next objection is regarding disallowance out of travelling expenses. The arguments advanced by both the sides are the same as in the case of other expenses. However, from the perusal of order it is observed that the Taxation Officer has admitted that complete details of travelling expenses were filed, whereas he had disallowed the claim without pointing out any specific instances and by using stock phrases. After hearing the arguments of both the sides we are of the considered view that the manner of disallowance is not sustainable as now the law requires that the specific unverifiable claim should be pointed out. Accordingly, we cannot uphold the treatment and the disallowance made in this respect is deleted.
Next objection argued by the learned A.R. relates to disallowance of collection charges. According to the learned A.R., the entire amount has been deducted by various banks against payment made on Viza and other credit cards used by customers. After deducting their charges the balance amount is remitted to the Taxpayer which have been separately debited. During the assessment proceeding, the Tax Payer had produced complete details of collection charges deducted by various banks and as per the statement issued by banks, the deduction had been termed as discount by the bank: Since the banks have retained this amount, Taxpayer was not required to deduct tax and neither the provision of section 153 nor section 21(c) are applicable as the deduction does not amounts to commission. According to the learned counsel of the Taxpayer the Taxation Officer has misdirected himself by treating the same as commission for the purpose of invoking the section 21(c). He has contended that similar deductions were also made by the banks in the preceding years, but no such disallowance was made. He has further argued that factually and in reality the amount deducted by the bank represents discount charged by them on finance facilities provided against payment made against credit cards which is also obvious from the bank advices. Although tax is not deductible on discount, but even then as an alternative argument, he has asserted that as all the banks are registered on National Tax Numbers and are income tax assesses and as they have paid income tax on the amount representing discount recovered from the customers, the provision of section 21(c) is not applicable. Elaborating his arguments he has asserted that even otherwise the provisions of section 21(c) cannot be invoked as the banks have already paid tax on the amount of discount, hence, the second condition of this subsection having been fulfilled, the claim disallowed is not sustainable in law. He has in this respect referred to a Full Bench decision of this Tribunal reported as 1996 PTD (Trib.) 441.
On the other hand, the learned D.R. is supporting the impugned orders of the officers below. According to him the amount collected by the bank does not represent discount which is allowed against sale and according to him it represents commission paid by the Taxpayer, hence, they were required to deduct tax under section 233 which admittedly have not been deducted and for this reason the Taxation Officer had correctly disallowed the claim.
We have considered the arguments of both the sides and have also perused the bank advice issued by Standard Charted Bank which shows that they have charged discount on the credit facilities provided against payments made on account of credit cards. We are of the view that as all the Scheduled Banks enjoy exemption from the provisions of withholding of taxes on their receipts, hence, tax is not deductible from them. Even otherwise the Scheduled Banks have declared their entire receipts as taxable and have offered the same for taxation, hence, the ratio decidendi of Full Bench decision referred by the learned counsel of the Taxpayer is squarely applicable. Thus, as the provision of section 21(c) has not been violated, the disallowance made by the Taxation Officer is deleted.
Regarding the disallowances made out of claim of depreciation on old Air-conditioners, motor vehicles and boat learned counsel for the Taxpayer is not pressing 'the ground of appeal in this regard as such the appeal filed on these both the grounds is dismissed.
The last issue contested by the A.R. is regarding levy of workers welfare funds at Rs.492,132. The learned Authorized Representative has placed before this Bench the order passed under sections 124/221 for the Tax Year, 2004 wherein the Assessing Officer has determined net loss at Rs.46,655,505, hence, in view of the decision of the Honourable Sindh High Court reported as 2002 PTD 14 (KHC) in the case of CIT v. Kamran Model Factory, workers welfare funds cannot be levied as in that case the Honourable High Court has held that as assessee would be entitled to the benefit of set off the losses, which have been determined/settled in accordance with provisions of sections 34 and 35 of the Income Tax Ordinance (Repealed). As an alternative argument he has also referred to the decision reported as 2007 PTD (Trib.) 1860. His contention is, that in the Tax Year, 2004 workers welfare funds cannot be levied as in the said provision of 1971 there was no reference to such levy under the Income Tax Ordinance, 2001. He has pleaded for cancelling the order under the Workers' Welfare Funds Ordinance, 1971. On the other hand learned D.R. has argued that the levy is fully justified and the treatment of both the officers below in this regard is correct.
After considering the submission from both the sides, we are of the view that the contention raised by the learned counsel for the Taxpayer has enough force for the reason that the levy of workers welfare funds is charged under the Workers' Fund Ordinance, 1971 wherein the levy was restricted to charge under the Income Tax Ordinance, 1979 and not under the Income Tax Ordinance, 2001. We are of the view that in the year under review the amendment in the relevant law was not made and therefore, the Taxation Officer cannot charge WWF. Had the position been otherwise there was no need to insert the amendment vide Finance Act, 2006, thus, both the contentions of the learned A.R. are not only forceful but also in accordance to law, hence, the levy of workers welfare fund is accordingly deleted.
Now we came to the cross appeal filed by the Department. In this respect the learned Departmental Representative Mr. Rehmatullah Khan Wazir has argued that the learned CIT(Appeals) was not justified in deleting the disallowance out of China Glassware, Linen and Uniform for the reason that as per PNR and notice under section 122(9), the Taxation Officer had pointed out unverifiable claim to this extent which was also on the basis of past 'history. He has contended that since the Tax payer could not justify the claim through evidence the directions of the learned CIT(Appeals) should be recalled.
Whereas on the other hand learned counsel of the Taxpayer, Mr. Salman Pasha, has strongly objected not only against the treatment accorded by the Taxation Officer but also on the line of argument of learned D.R. and has emphasized that the learned CIT(Appeals) had correctly deleted the addition which was not only against the directions of this Tribunal as contained in I.T.A. No.662/KB of 2004 (Asst. Year 2002-2003) dated 30-8-2006, but has also emphasized that as the disallowance was made purely by using stock phrases without even examining the details and evidence produced by the Taxpayer and for this reason the Taxation Officer could not detect any unverifiable transaction. Relying on the decision of Honourable Lahore High Court reported as 2002 PTD 1496 which has already been discussed in the above paras of this order, he has argued that the learned CIT(Appeals) had correctly deleted the disallowance made purely with an arbitrary approach which was not sustainable in law.
Arguments advanced by both the sides have been considered and we have also perused the order of the Taxation Officer as well as the impugned order of learned Commissioner of Income Tax (Appeals) and have also perused the order passed by this Tribunal for the assessment year, 2002-2003 wherein reference was also made to the orders passed in preceding years deleting similar disallowances made without any proper basis. Since the facts of the case are identical and even this year the Taxation Officer. could not point out any specific unverifiable expenditure, hence, we are of the view that the order passed by the learned Commissioner of Income Tax (Appeals) does not require any modification and the appeal filed by the Department is dismissed by confirming the order of learned Commissioner of Income Tax (Appeals) in this respect.
The order passed by the Commissioner of Income Tax whereby disallowance made out of telephone was restricted to 15% is confirmed as it is in accordance to the consistent view of this Tribunal.
The Taxation Officer had disallowed salaries paid to contractor but the same was deleted by the learned CIT(Appeals) for the reason that income tax on payments made to the contractor against labour provided by him have been deducted which was duly disclosed in the statement under section 165 and does not relate to deduction of tax disclosed in the statement under section 149. We have heard the arguments of both the sides and we are inclined to agree with the directions of learned Commissioner of Income Tax (Appeals). The reason being that the contract labours were not the employees of the Taxpayer company, hence, the taxes deducted on payments made to the contractor was correctly disclosed in the statement filed under section 165 of Income Tax Ordinance, 2001. Accordingly the directions of the Commissioner of Income Tax (Appeals) are confirmed and the appeal is rejected on this issue also. We have also examined similar directions issued by various Benches of this Tribunal on this issue in the preceding years and our finding is also supported by similar directions given in Taxpayer's own case in ITA No.662/KB of 2004, assessment year, 2002-2003 in the order dated 30-8-2006. The appeal filed by the department on this issue is also dismissed.
The last objection of the department is in respect of deletion of financial charges. The learned D.R. has referred to the' finding of Taxation Officer on page 5 of the amended order and Note No.14 of audited accounts to justify that the Taxation Officer had correctly restricted the financial charges payable on subordinate loan obtained from Beach Luxury Hotel (Pvt.) Limited, Karachi. He has also provided copy of audited accounts to justify that the Taxation Officer had correctly disallowed financial charges amounting to Rs.22,126,039 as the claim was in excess of fixed mark-up rate of 10%. According to him the learned Commissioner of Income Tax (Appeals) without appreciating the facts of the case was not justified in deleting the disallowance.
The learned counsel for the Taxpayer is supporting the impugned order of the learned CIT(A) in this regard and vehemently rebutted the arguments advanced by the learned D.R. and as well as the Taxation Officer. According to him the view taken by the Taxation Officer is not correct for the reason that the Taxpayer had obtained loan from Union Bank Limited and other Banks directly and as well as through Beach Luxury Hotel (Pvt.) Limited as the loans obtained were in excess of limits specified by the Banks. The entire mark-up were paid directly to Union Bank Limited and not through Beach Luxury Hotel, although the payment of financial charges of Rs.55,126,039 also included the payment of financial charges on loan obtained through Beach Luxury Hotel, but the auditors instead of showing all the loans and financial charges separately had clubbed the entire amount under one head. To clarify this issue, the Taxpayer in the schedule of financial charges had declared breakup of Rs.55,126,039 which clearly shows that mark up at different rate have been paid and not at the fixed rate of 10%. He has further argued that from the confirmation certificate available on record it is obvious that different loans have been obtained at different rate of mark up as such the working adopted by the Taxation Officer is totally incorrect. Moreover, the Taxation Officer has also ignored the copies of bank statements produced before him from which it was clearly Proved that the total financial charges paid to Union Bank on loan obtained through Beach Luxury aggregates to Rs.55,126,039.
Accordingly, the working tabulated by the Taxation Officer is not only imaginary but also based on incorrect assumptions and the learned CIT(Appeals) had correctly deleted the disallowance of Rs.22,126,039. He had further stated that the Taxation Officer had verified that the entire amount of direct and indirect loans have been used for the purpose of business and have not been siphoned off for non-trading purpose, from the details it is also obvious that the claim of financial charges and the rate of mark up levied by the Bank is supported by documentary evidence which have not been appreciated by the Taxation Officer on the basis of incorrect assumptions, according to him the learned CIT(Appeals) had correctly deleted the disallowances of financial charges.
The arguments advanced by both the sides have been considered and we are of the view that the Taxation Officer had totally misdirected himself for the reason that the loan was not obtained from Beach Luxury Hotel (Pvt.) Limited but from Union Bank Limited through the said company and financial charges have been paid directly to the bank at different rates. Although, the Taxpayer had admittedly filed the breakup of financial charges of Rs.55,126,039 with rate of interest and was also supported by bank statement which was neither appreciated nor properly examined by the Taxation Officer. We also find that the learned CIT(Appeals) after examining the record, had rightly disagreed with the Taxation Officer with a specific finding that neither the claim is unverifiable nor there is finding that the loan obtained was used for non-business purpose. Moreover, the loan during the year had increased. We are inclined to agree with the finding of he learned Commissioner of Income Tax (Appeals) for the reason that he has given a clear finding that the claim of financial charges is supported by bank statement and is fully vouched and verifiable. The learned CIT(Appeals) had correctly deleted the disallowance of financial charges and his order in this respect is also confirmed and the appeal filed by the department is dismissed.
Both the cross appeals are disposed of in the manner indicated above.
C.M.A.119/Tax(Trib.)Order accordingly.