2010 P T D (Trib.) 725
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Khalid Siddiqui, Accountant Member
I. T A. No.375/KB of 2009, decided on 01/09/2009.
(a) Income Tax Ordinance (XLIX of 2001)---
----Ss.69, 34(2) & 122(1)(5)---Receipt of Income---Advances from members of Exchange against allotment of office space---Taxation of---Assessee contended that such type of advance was not taxable as the same was a liability; till such time and said amount was paid back to member; that such advances were to be adjusted as consideration for allotting offices to the members; that Assessing Officer had erroneously treated such advances to be non-refundable; that such amounts were nothing but liabilities till such time the offices were allotted to the respective members; and that amounts received were mere receipts and not income of the assessee as the basic characters of an income were lacking---Validity---Assessee had admittedly acquired the place for subsequent transfer to its members subject to payment of the stipulated amounts---Though the assessee had termed the amounts to be advances but the fact remained that these amounts were nothing but the consideration received for allotment of space---Said advances were only refundable in exceptional circumstances if the allotment of the premises was cancelled---Such transaction appeared to be a transaction of sale---As the amounts had been received the year under consideration and as the assessee maintained the accounts on accrual basis these amounts had accrued to the Exchange the year under consideration and the same were liable to be taxed in the year under consideration---For all practical purposes the amounts received had vested with the assessee and the assessee alone was its own to utilize it in the manner and mode it deemed fit and proper---In case the amounts were refunded to the members the assessee will be at liberty to claim the amount paid to be its business expenditure---Present case appeared to be a case of offer and acceptance---Offer was made to the members and they were not legally obliged to give their reply in an affirmative to the offer but once they had accepted the offer to purchase the required space the amount given by them to the assessee would be an amount paid for consideration of the required space---Appeal was dismissed by the Appellate tribunal in limine.
(2008) 98 Tax 262 ref.
(b) Income Tax Ordinance (XLIX of 2001)---
----S.69--Receipt of income---Advances from members of Exchange against allotment of office space---Non-deduction of cost of acquisition of building from the advances treated as consideration for sale of office space---Assessee contended that when Taxation Officer on one hand had considered the arrangement to be sale of property then the corresponding cost should be deducted from such consideration to compute the net gain---Validity---Amount invested could not be deducted from the amounts received from the members due to the fact that the amount invested was a capital investment made by the assessee whereas the amount received from the members were nothing but the business income of the assessee---Amount could not be deducted as claimed by the assessee---Appeal was dismissed on the issue as well.
(c) Income Tax Ordinance (XLIX of 2001)---
----S.69---Receipt of income---Gain on sale of fixed assets---Taxation of without allowing depreciation on such fixed assets---Validity---Matter was remanded back by the Tribunal with the instructions to examine the issue afresh and if it was found that no depreciation had been allowed to the assessee on the assets sold out by them, then the gain on sale of fixed assets should not be taxed.
Salahuddin Ahmed and Amin Malik, F.C.A. for Appellant.
Rajabuddin, D.R. for Respondent.
ORDER
This appeal relating to above mentioned tax year has been filed by the assessee against the order passed by the learned CIT(A) dated 27-5-2009. The grounds of appeal taken by the assessee in the above mentioned year are as under:-
Appeal under section 122(1)(5)
(1) The order of the Commissioner of Income Tax (Appeals) is bad in law and on facts.
(2) The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer in treating advances received from members adjustable against the consideration for allotment of office space to them as income of the appellant.
(3) The Commissioner of Income Tax (Appeals) has erred in upholding the action of the Taxation Officer in treating the advances as income when these advances are to be refunded to the members in the event the property acquired is sold instead of allotting office space to the members or the consideration for acquisition of building is `refunded by the Privatization Commission.
(4) The Commissioner of Income Tax (Appeals) has erred in maintaining the observation of the Taxation Officer that the advances received become vested in the appellant as its income in the year of receipt in terms of section 69 read with section 34(2) of the Ordinance.
(5) The Commissioner of Income Tax (Appeals) has erred in misdirecting himself by considering advances received from members specifically for allotment of office space in the property as charges received from members and thereby confirming the action of treating the advances as income.
(6) The Commissioner of Income Tax (Appeals) has erred in upholding that the benefit of income has been passed on to the appellant for all intent and purpose of the law when the appellant has realized the amount from the members and the property acquired is also recorded in the accounts.
(7) The Commissioner of Income Tax (Appeals) has erred in upholding the action of the Taxation Officer in relying on the decision reported as (2008) 98 Tax 262 (H.C. Ind.) when the facts of the appellant's case are totally distinguishable.
(8) Without prejudice to above grounds of appeal and not conceding to the stance of the department, the Commissioner of Income Tax (Appeals) has erred in confirming the action of Taxation Officer in not deducting the cost of acquisition of the building from the advances treated as consideration for sale of office space to the members.
(9) The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer in holding that the appellant has not commenced its business during the year under appeal.
(10) The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation officer in disallowing tax depreciation amounting to Rs.5,360,944.
(11) The Commissioner of Income Tax (Appeals) has erred in maintaining the treatment of the Taxation Officer in disallowing tax amortization on intangibles amount of Rs.90,646.
(12) The Commissioner of Income Tax (Appeals) has erred in upholding the action of the Taxation Officer in disallowing improvements/modifications in leasehold premises amounting to Rs.2,516,375.
(13) The Commissioner of Income Tax (Appeals) has erred in maintaining the treatment of the Taxation Officer in taxing gain on disposal of fixed assets amounting to Rs.675,976 when no depreciation has been allowed on the fixed assets since their acquisition by the appellant.
(14) Your appellant craves leave to add, amend or alter the above grounds of appeal.
2. On the date of hearing Mr. Syed Salahuddin Bar at law alongwith Mr. Amin Malik (A.R.) attended on behalf of the assessee while the department was represented by Mr. Rajabuddin.
3. Briefly stated the assessee is a limited company whose job is to conduct, regulate and control the commodity market in Pakistan. The company filed its return by declaring an income of Rs.1,965,433. Thereafter, the case was selected for audit and due intimation in this regard was given to the assessee. After completing the audit, legal formality notice under section 122(9) was issued to the assessee which was duly responded by the assessee. Dissatisfied with the explanation filed by the assessee the assessment under section 122(1)(5) of Income Tax Ordinance, 2001 was framed on 28-2-2009 by finalizing the assessment at an income of Rs.551,933,398. Appeal against the order passed by the Assessing Officer (A.O) was filed before the learned CIT(A) who vide his order dated 2'7-5-2009 confirmed the treatment meted out by the A.O.
4. The learned A.R while making submission in respect of grounds Nos.1 to 7 submitted that the A.O was not justified in treating the advances from members for acquisition of lease hold property amounting to Rs.542,000,000 as income of the assessee in terms of section 69 read with section 34(2) of the Income Tax Ordinance, 2001 (the Ordinance). While elaborating his point the learned AR submitted that:--
*The applicant is a company established principally, to conduct, regulate and control the commodity market in Pakistan. The shareholders of the appellant are the Karachi Stock Exchange, Lahore Stock Exchange, Islamabad Stock Exchange, Pak Kuwait Investment Company (Private) Limited and Zari Tarqiati Bank Limited.
*In 2003, the Privatization Commission invited bids for the sale of the land and incomplete building structure commonly known as "Hyatt Regency Hotel Building" situated at M.T. Khan Road opposite PIDC Building, Karachi. A great number of members/brokers (who trade on the Commodity Exchange and are not the shareholders) evinced interest in purchasing the said property for setting up their offices in the above property as well space for use by the Commodity Exchange.
*The applicant decided to bid for the acquisition of the property through a pre-qualified bidder Messrs Aqeel Kareem Dhedhi Securities (Private) Limited (AKDS) who was also one of the member of the Commodity Exchange. The direct bidding was not possible as the time for filing Expression of Interest (EOI) to the Privatization Commission had already lapsed.
*Messrs Aqeel Kareem Dhedhi Securities (Private) Limited (AKDS) was declared as successful bidder and as such the leasehold property namely Hyatt Regency Hotel on "as is where is basis" has been acquired from the Privatization Commission (PC). The property acquired represent at an incomplete structure on the land owned by Pakistan Railways.
*The Cabinet Committee on Privatization approved the bid for sale of aforesaid building vide its decision Case No.CCOP-32/7/2003 dated December 26, 2003. It was decided by the Committee that in the event the successful bidder, Messrs Aqeel Kareem Dhedhi Securities (Private) Limited sought transfer of the lease to a third party for setting up Commodity Exchange at the project, the Ministry of Railway may seek necessary approval of the Pakistan Railway Board therefor.
*The applicant financed the purchase of the property by collecting advances from the members offering them allotment of office space of 1000 square feet in the said property after completing and refurbishing thereof. Copies of letters dated September 15, 2003, November 24, 2003 and January 12, 2004 issued to members in this respect are enclosed as Annex A-1, A-2 and A-3. Some 253 out of 257 members initially accepted the offer and eventually a total sum of Rs.542,000,000 was collected by way of advances.
*That entire bid amount in this regard, namely Rs.530,000,000 together with transactional costs of Rs.13,839,778 amounting to a total of Rs.543,839,778 was paid by the appellant.
*As per note No.11.1 to the audited accounts, the advances received from the members are to be treated a subordinated loan to the company and adjusted against the consideration for allotment of space to them. However, in case of refund of consideration for acquisition of the building by the Privatization Commission or in case the property acquired is sold by the company for any reason the advances received from the members would be refunded to them.
*Pakistan Railways transferred the leasehold title and physical possession to AKDS.
*However, Pakistan Railway has so far not transferred the title of Hyatt Regency Hotel from AKDS to the company. The transfer of title to the property or a no objection certificate from Pakistan Railways is essential for the applicant to .construct and refurbish the said property for subsequent allotment of the office space to the members for their use.
*The office space has not been transferred/allotted to the members nor is the possession of such space given to the members who had paid advances for acquisition of offices in the property. The appellant had shown these advances as a liability in its financial statements and the amount paid to the Privatization Commission as an amount paid in respect of leasehold property acquired for subsequent allotment to members.
4A. The learned A.R further submitted that the said amount received by the company is an advance and as per the provisions of the Ordinance this type of advance is not taxable. They further explained that this advance in fact is a liability till such time the said amount is paid back to the member from whom this advance has been taken. These advances are to be adjusted as consideration for allotting offices to the members. They vehemently contended that the A.O was not justified in treating the said amounts to be taxable under the provisions of section 69 read with section 34(2) of the Ordinance. They also read out the relevant provisions of the Ordinance. It was further submitted that the A.O has erroneously treated the said advances to be non-refundable, the said amounts are nothing, but liabilities till such time the offices are allotted to the respective members. The learned A.R further submitted that the amounts received are mere receipts and not income of the company as the basic characters of an income are lacking.
5. The learned D.R on the other hand has supported the orders passed by the two authorities below and stated as under:---
*The advances are non-refundable and becomes vested with the assessee as his income in terms of section 69 read with 34(2) of the Ordinance.
*This is a case of a sale of property by way of allotting offices to the members hence the amount received as the income of the applicant.
*On construction and refurbishing of the property further advances could be received by the applicant which would be set off against cost of the construction and the net amount would be income of the appellant.
*The Income Tax Law is not concerned as to time and mechanism through which the property is going to be transferred in the name of the taxpayer the fact remains that the company has realized the amount and recorded the same in its book as benefit accruing to the assessee.
6. In the appeal before the learned Commissioner of Income Tax the treatment meted out by the T.O has been affirmed on the following reasons:
*The contention of the assessee that the amount received from the members is refundable to members is out of context as the amount received is to be kept by appellant itself.
* Since the assessee was established as a regulator cum facilitator of trading in commodity market and have business relationship with its members any charges including membership fee is income of the appellant. Therefore, the action of the Taxation Officer in treating the entitlement to income become vested with the appellant in terms of section 69 read with section 34(2) of the Income Tax Ordinance, 2001 and income of the appellant chargeable to tax for the tax year under consideration is correct.
7. While making the submission in respect of alternative ground taken by the A.R vide Ground No.8 they submitted that the T.O was not justified in not deducting the cost of the acquisition of building from the advances treated as consideration for sale of office space to the members. It was vehemently contended that when the TO on one hand has considered the arrangement to be sale of the property then the corresponding cost should be deducted from such consideration to compute the net gain.
8. The learned D.R on the other hand has supported the orders of the two officers below and submitted that the company has acquired the said property after successful bidding and has attained the possession of the same, though the title has not been transferred in their name yet but the thing remains that the amount invested by the appellant is their capital investment hence the same could not be deducted from the amounts received from the members.
9. While arguing appeal in respect of Ground 9 to 12 the learned A.R submitted that the T.O was not justified in observing that the business of the appellant has not commenced yet and not allowing certain allowances and expenditure which were incurred wholly and exclusively for the purposes. However, on ground 13 the learned A.R submitted that the department was not justified in taxing the gain on sale of fixed assets when admittedly no depreciation on fixed assts has been allowed.
10. The D.R on the other hand has supported the orders passed by the two officers below.
11. We have considered the arguments, the law laid down in this regard and the case laws relied upon by both the learned counsel on the above issues and are inclined to agree with the line of arguments adopted by the department as far as grounds Nos.1 to 8 are concerned. The company has admittedly acquired the place for subsequent transfer to its members subject to payment of the stipulated amounts. Though the company has termed the amounts to be advances but the fact remains that these amounts are nothing but the consideration received for allotment of space. These advances are only refundable in exceptional circumstances if the allotment of the premises is cancelled by the Privatization Commission. To us the present transaction appears to be a transaction of sale, our this view is fortified from the letter filed by the assessee dated January 12, 2004 which clearly states that the space will first be allotted/offered to the members and thereafter, the balance space will be sold to the highest bidder. Meaning thereby that the property acquired will be first offered to its members and thereafter it will be sold to other parties. Hence the department was quite justified in treating the amounts to be a receipt of either sale consideration of the said property or the amounts received from the members to acquire a place for their business.
12. We again find merit in the arguments of the department that as the amounts have been received during the year under consideration and as the company maintain the accounts on accrual basis these amounts have accrued to the company in the year under consideration and the same are liable to be taxed in the tax year 2004. For all practical purposes the amounts received have become vested with the assessee and the assessee alone is its owner to utilize it in the manner and mode it deems fit and proper. However, in case the amounts are refunded to the members the assessee will be at liberty to claim the amount paid to be its business expenditure.
13. We do not agree with the contention of the A.R that there is no provision of law which seeks to tax advances but the present case to us appears to be a case of offer and acceptance. An offer was made to the members and they were not legally obliged to give their reply in an affirmative to this offer but once they have accepted the offer to purchase the required space the amount given by them to the assessee will in our opinion be an amount paid for the consideration of the required space. Hence, keeping in view our above observations we do not find any merit in the appeal filed by the assessee as far as grounds Nos.1 to 8 are concerned and dismiss the appeal in limine.
14. So far as ground No.9 is concerned here again we do not find ourselves to be an agreement with the arguments adopted by the learned A.R, the amount invested could not be deducted from the amounts received from the members due to the fact that the amount invested is a capital investment made by the assessee whereas the amount received from the members are nothing but the business income of the assessee. Hence this amount could not be deducted as claimed by the assessee and the department was justified in rejecting this contention of the assessee. We, therefore, dismiss the appeal of the assessee on this issue as well.
15. Now coming to the grounds 9 to 12 it would not be out of place to mention that in the appeal of the same assessee pertaining to Tax year 2003 filed before this tribunal vide ITA 242/KB/2009 decided by us on July 16, 2009, same issue has already been allowed by us vide para. 11 of the said order hence the appeal of the assessee on the above grounds is hereby allowed in line with the observations made by us previously in our above referred order.
16. We now take up the appeal on Ground No. 13 regarding tax gain on sale of fixed assets when no depreciation has been allowed by the department. In our opinion, this issue requires reconsideration hence the matter is remanded back to the T.O with the instructions to examine the issue afresh and if it is found that no depreciation has been allowed to the assessee on the assets sold out by them, then the gain on sale of fixed assets should not be taxed.
17. The above appeal filed by the assessee is hereby disposed of to the extent and in the manner as indicated above.
C.M.A/145/Tax(Trib.)Order accordingly.