COMMISSIONER OF INCOME TAX, ZONE, ISLAMABAD VS CAP GAS (PVT.) LTD., RAWALPINDI, 2010 PTD-ISLAMABAD 763 (2009)

Income Tax Ordinance (XXXI of 1979)---

----S.12---Assessment under cost of sales account of by Gas Supply Company---Expenditures incurred on maintenance of its roads and loss on sale of cylinders---Deduction of such expenditures and loss from income of company---Scope---Roads were damaged due to heavy vehicles carrying gas cylinders---Such expenditures being necessary were not capital in nature---Company would be entitled to deduct such expenditures and actual loss on sale of cylinders.

Ms. Shaheena Akbar.

Hafiz Muhammad Idrees for Respondent.

JUDGMENT

MUHAMMAD MUNIR PERACHA, J.---This judgment shall dispose of Income Tax Reference No.7 of 2004 and Income Tax Reference No.24 of 2004.

2. In order, dated 22-9-2004, it was observed that questions of law frame in para. 7 of the statement of the case are admitted to a regular hearing. In para.7 of the Reference, filed by the Commissioner of 'Income Tax, the following questions of law have been framed:

"Whether on the facts and in the circumstances of the case the ITAT was justified in restricting those add-backs out of expenses which were purely of capital nature?

Whether on the facts and in the circumstances of the case the ITAT was justified in upholding the decision of CIT(A) to set aside the issue of loss on sale of insured fixed assets when the assessee-company did not choose to tender its claim to the insurance company for the total amount of loss in which case the assessee-company would have been fully compensated?"

3. Income Tax. Reference No.7 of 2004 is with respect to assessment year 1999-2000, whereas, Income Tax Reference No. 24 of 2004 is with respect to assessment year 1998-1999.

4. In the assessment year 1998-99, under cost of sales account, the assessee claimed Rs.13,01,212 as repair and maintenance. However, the Deputy Commissioner of Income Tax was of the opinion that the following expenses in it are capital in nature and cannot be claimed 'as deduction from income.

The assessee was given notice to explain. After considerable explanation of the assessee, Rs.693189 was disallowed.

The assessee also claimed in this assessment year the loss on sale fixed asset at Rs.74,194. It was claimed by the assessee that it received Rs.65,496 against 229 cylinders. Paragraph 2 on page 9 of the assessment year deals with loss on sales of fixed asset. Paragraph 2 is reproduced:--

"The working of loss of sales fixed asset provided by the assessee is as under:

It is notable that the amount received against the cylinder was actually the insurance claim against the said asset. During the course of discussion the AR of the assessee explained that the claim received from insurance company was deducted from the total loss. It was noted insurance company paid the claim of 34 cylinders whereas the total number 229 cylinders was discarded: The AR of the assessee was asked that why the claim against the remaining cylinders was not deducted and in response thereto he clarified that the claim of the remaining cylinders could not be tendered before the insurance company. This explanation is totally unsatisfactory as the assessee-company is maintaining its account on accrual basis. The accrued amount on the basis of claim to be filed with insurance company should have to be accounted for while determining loss/profit and sales of fixed asset. Without adjusting the claim from insurance company the actual loss/profit could not be worked out. In this way the loss claimed for Rs.74194 is not the actual loss, thence the same is disallowed."

5. The assessee challenged the assessment order through an appeal. The Commissioner of Income Tax (Appeals) vide order, dated 13-6-2006, restricted the addition on account of repair and maintenance to 15% of the claim. So far as the loss on sale of cylinders is concerned, the Commissioner (Appeals) directed the Assessing Officer to allow the same to the extent of actual. The department challenged the appellate order- through an appeal before the Income Tax Appellate Tribunal. The order of the Commissioner (Appeals) with regard to loss on sale of cylinders was upheld by the Tribunal. Similarly, the order of the Commissioner (Appeals) regarding expenditure on account of maintenance of roads was upheld and it was held:-

"As far as repairs and maintenance is concerned, the learned AR stated that the expenses on account of maintenance of roads were necessary because they got damaged due to heavy transport vehicles which carry gas cylinders etc. He also stated that the expenditure necessary to prevent waste of an asset like the roads and culverts is treated under the accounting principles, as current expenditure and not capital expenditure. We find force in the assessee's contention and do not find any reason to interfere with the order of CIT(A) restricting the disallowance to 15%."

6. The department filed a reference application before the Income Tax Appellate Tribunal, which application was rejected by the Tribunal.

7. In the assessee- year 1999-2000, the assessee claimed Rs.62,160 as loss on sale of cylinders, which was disallowed by the Assessing Officer. The expenses claimed by the assessee against roads repair and maintenance were also disallowed by the Assessing Officer. In appeal, the loss on sale of cylinders claimed by the assessee was allowed by the Commissioner of Income Tax (Appeals) and the Assessing Officer was directed to allow the same to the extent of actual. The disallowance of the expenditure on repair and maintenance was restricted to 15% of the claim. The Department challenged the order of the Commissioner of Income Tax (Appeals) though the appeal, before the Income Tax Appellate Tribunal. The Income Tax Tribunal dismissed the appeal filed by the Department vide judgment, dated 24-2-2003. The department filed a reference application before the Tribunal which too was disallowed.

8. We have heard the learned counsel for the petitioner and the learned counsel appearing for the respondent and have gone through the record of the case.

9. Relying on "Commissioner of Income Tax v. BPL System and Project Ltd. "1999 PTD 2496", the learned counsel for the petitioner submits that the expenditure on maintenance and repair are capital expenditure.

On the other hand learned counsel for the respondent referred the following judgments:

"Commissioner of Income Tax v. Banswara Textiles Mills Ltd., 2000 PTD 2087"

"Lungla (Sylhet) Tea Co. Ltd., Sylhet v. Commissioner of Income Tax, Dacca Circle Dacca, 1970 SCMR 872.

"Commissioner of Income Tax, Rawalpindi v. Zamindara Flour Mills Lyallpur 1970 SCMR 530.

"Shah Nawaz Khan and Co., Multan v. The Commissioner of Income Tax, North Zone 1969 SCMR 123"

"Commissioner of Income Tax Lahore v. Immion International, Lahore 2001 PTD 900"

"The Commissioner of Sales Tax, Lahore v. Messrs Suleman and Co., 1980 PTD 188"

"Commissioner of Income Tax Lahore Zone, Lahore v. Sh. Muhammad Ismail and Co., Ltd. Lyallpur, 1986 SCMR 968"

"Commissioner of Income Tax, Karachi v. Eastern Automobiles Ltd. Karachi."

to contended that whether the expenditure is capital expenditure and the quantum of the expenditure is a question of fact and can not be gone into in a reference under section 133 of the Income Tax Ordinance, 2001.

10. It has been held by the Tribunal in its order, dated 27-4-2002 that the expenses on account of maintenance of roads were necessary because they got damaged due to heavy transport vehicle which carry gas cylinders. In view of this finding, it cannot be said that the expenditure on account of maintenance of road is capital expenditure. So far as the loss on sale of cylinders is concerned, the same has been ordered to be allowed to the extent of actual loss. We, therefore, answer both the questions framed in the positive. Both the references are disposed of.

S.A.K./C-2/IslQuestions answered in positive.