COMMISSIONER INLAND REVENUE ZONE-II, RTO, HYDERABAD VS JAMSHORO POWER COMPANY LTD., 2017 PTD-KARACHI-HIGH-COURT-SINDH 237 (2016)

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss.113, 74(1) & 2(68)----Minimum tax on income---Determination---Question was whether the Appellate Tribunal was justified in confirming the decision of Commissioner of Inland Revenue (Appeals) for deletion of minimum tax under S. 113 of Income Tax Ordinance, 2001, as the same had been omitted through amendment brought about through Finance Act, 2008---Appellate Tribunal had answered said question in negative---Validity---Section 113 of Income Tax Ordinance, 2001 provided for the payment of certain 'minimum' income tax by the various categories of taxpayers as specified therein; said provision had been omitted by Finance Act, 2008, but the same was reintroduced by Finance Act, 2009---Income Tax Ordinance, 2001, generally speaking, applied in respect of the relevant income period, as the same stood on the next succeeding first of July---Under Income Tax Ordinance, 1979 [since repealed], the relevant tax period was known as the 'income year' and the income earned during that period was brought to tax in the next succeeding 'assessment year'---Income year, in general, was the same as the financial year, that ran from July 1st in one calendar year to June 30th in the next---Assessment year was reckoned from the next day that was succeeding July 1st, which meant that Income Tax Ordinance, 1979 [since repealed] applied as the same stood on the first of July, that was on the first day of the assessment year---Under Income Tax Ordinance, 2001, the equivalent concept was that of a 'tax year' as defined in S. 2(68) read with S. 74(1) of the Ordinance---Income Tax Ordinance, 2001, thus, had to be applied to the appellant/taxpayer in respect of the tax year 2008, as the same stood on first of July, 2008; thus, the tax in terms of S. 113 of the Ordinance could not have been levied on the taxpayer, as the provision had been omitted---Reference was dismissed by High Court.

(b) Income Tax Ordinance (XLIX of 2001)---

----Ss. 39, 18(1)(d) & 11(1)(a) to (e)----Income from business/Income from other sources---Determination---Question before the High Court was that whether the Appellate Tribunal was justified to hold that the amount reimbursed by the purchaser of electric power to the taxpayer, being the income tax paid by the latter, was 'business income' under S. 18(1)(d) of Income Tax Ordinance, 2001 and not a receipt to be included under the head 'Income from other sources' under S. 39 of the Ordinance---In terms of the Power Purchase Agreement, the income tax paid by the appellant/taxpayer on the income earned by it was to be reimbursed to it by the purchaser of electric power, and a certain sum had been reimbursed to the taxpayer on said account---In terms of Power Purchase Agreement, a number of outlays and expenditures that would fall on, and to be the account of, the seller of electric power/respondent were 'passed through' to the purchaser; said 'pass through' was by way of a reimbursement of the former by the latter, which was the issue in the present case---Actual 'pass through' items (and the manner thereof) depended upon the exact term of the Power Purchase Agreement, but that was not uncommon for the income tax payable by the seller to be 'passed through'---One, while determining the 'head' of income under which a particular receipt fell, started first by looking at the specific heads under S. 11 (1) (a) to (d) of Income Tax Ordinance, 2001, and in case, the receipt did not come under any of those heads, then the same was allocated to the 'residual' head, 'Income from other sources' under S. 11 (1) (e) of the Ordinance; therefore, it was incorrect to reverse said order (for determination of particular head) and to start first with the latter---Section 18 (1) (d) of the Ordinance required that the 'fair market value' of a 'benefit' or 'prerequisite', derived in the circumstances (i.e. on account of past, present or future business relationship), was to be regarded as a "business receipt", and that was so regardless of whether the same was convertible into money or not; S. 11 (1) (d) of the Ordinance applied only in such a situation---Reimbursement certainly conferred a 'benefit' on the appellant; however, no sensible answer to the question as to what was the 'fair market value' of the reimbursed income tax could be given---Income tax was liability towards the State, paid in money by the one (the appellant/taxpayer) on whom the same laid and reimbursed by the third party (the purchase of electric power)---Situation as contemplated by S. 18 (1) (d) of the Ordinance was materially different from the present case, therefore, said provision was not applicable---Reimbursement in question, regardless of the fact that S. 18 (1) (d) of the Ordinance did not apply, was a receipt, which was to be allocated under the head 'Income from Business'---Order of Appellate Tribunal was upheld---Reference was dismissed.

Syed Irshad ur Rehman for Applicant.

S. Riazuddin for Respondent.

Date of hearing: 9th November, 2015.

ORDER

MUNIB AKHTAR, J.---The applicant, which is the Department, is aggrieved by the order of the learned Appellate Tribunal dated 15.06.2012, and has raised the following two questions of law for consideration by this Court:--

1.Whether the learned Appellate Tribunal was justified in confirming the decision of CIR (Appeals) for deletion of minimum tax under section 113 of the Income Tax Ordinance, 2001, because the amendment omitting section 113 was brought about through Finance Act, 2008?

2.Whether the learned Appellate Tribunal was justified to hold that the amount reimbursed by the purchaser of electric power to the taxpayer, being the income tax paid by the latter, was business income under section 18(1)(d) of the Income Tax Ordinance, 2001 and not a receipt to be included under the head "Income from Other Sources" under section 39?

We may note that for editorial purposes, we have modified the questions as framed in the Reference. The matter relates to the tax year 2008.

2.The respondent taxpayer is a power generation company, which sells electric power to NTDC (and/or its successor or assign) for transmission in the national grid. The power is sold in terms of a power purchase agreement. As is clear from the questions of law, two issues require consideration. The first is whether the respondent was liable to pay minimum tax in terms of section 113 of the Income Tax Ordinance, 2001 ("2001 Ordinance") in relation to the tax year 2008. The learned Tribunal answered this question in the negative. The second is whether a certain amount, reimbursed to the taxpayer by the power purchaser in circumstances stated below, is to count as income receipt under the head "Income from Business" (as contended by the taxpayer) or "Income from Other Sources", as claimed by the Department. The taxpayer submitted that the answer sought by it obtained by reason of section 18(1)(d). The Department's case is that that provision had no application to the facts and circumstances of the present case. Again, the learned Tribunal found for the respondent and against the Department.

3.As to the first question, in our view it ought to be answered in favour of the respondent and against the Department. Section 113 provided for the payment of a certain "minimum" income tax by the various categories of taxpayers as specified therein. Now, this section was omitted by the Finance Act, 2008 and reintroduced (in a somewhat modified form) by the Finance Act, 2009. As is well known, the 2001 Ordinance (like the predecessor legislation) applies, generally speaking, in respect of the relevant income period as it stands on the next succeeding first of July. Thus, to look first at the Income Tax Ordinance, 1979 ("1979 Ordinance"), the relevant tax period was known as the "income year" and the income earned during this period was brought to tax in the next succeeding "assessment year". In general, an income year was the same as the financial year, i.e., ran from July 1st in one calendar year to June 30th in the next. The assessment year was reckoned from the next day, i.e., the succeeding July 1st. That meant that, generally speaking, the 1979 Ordinance applied as it stood on the first of July, i.e., on the first day of the assessment year. Under the 2001 Ordinance, the equivalent concept is that of a "tax year", which is defined in section 2(68) read with section 74(1). As presently relevant, it amounts essentially to the same thing as in the 1979 Ordinance. Thus, the 2001 Ordinance had to be applied to the respondent taxpayer in respect of the tax year 2008 as it stood on 01.07.2008. But it is not in dispute that on that day section 113 had been omitted. Thus, the tax in terms of that section could not be levied on the respondent. In our view, the conclusion arrived at by the learned Tribunal is correct and requires no interference by this Court.

4.We turn to the second question. It appears that in terms of the power purchase agreement, the income tax paid by the respondent on income earned by it was to be reimbursed to it by the purchaser of electric power, i.e., NTDC (or its successor or assignee; it is not material for present purposes which was the relevant entity). During the tax year 2008 a sum of Rs.109,765,634/- was reimbursed to the respondent on this account. It is common ground that this was a receipt that could be brought to tax. However, the respondent contends that it is to be counted as business income under the head "Income from Business", and that this is so by reason of section 18(1)(d). The Department on the other hand contends that it is a receipt that properly falls under the head "Income from Other Sources". The difference in tax liability appears to arise from the fact that if the respondent is correct, it is, inter alia, able to set off certain losses brought forward from previous years against this amount. On the other hand, if the Department is correct, then such set off is not possible.

5.As is well known, in terms of power purchase agreements a number of outlays and expenditures that would otherwise would fall on, and be to the account of, the seller of electric power (here the respondent) are "passed through" to the purchaser. In many instances, this "pass through" is by way of a reimbursement of the former by the latter, and that appears to be the situation here. The actual "pass through" items (and the manner thereof) depend upon the exact terms of the power purchase agreement, but it is not uncommon for the income tax payable by the seller to be "passed through". It is in such circumstances that the aforementioned sum was reimbursed to the respondent by the purchaser of electric power.

6.Section 18(1)(d) provides as follows:--

"18. Income from business.---(1) The following incomes of a person for a tax year, other than income exempt from tax under this Ordinance, shall be chargeable to tax under the head "Income from Business" -

(d) the fair market value of any benefit or perquisite, whether convertible into money or not, derived by a person in the course of, or by virtue of, a past, present, or prospective business relationship; ..."

7.The learned Tribunal held that "by no stretch of imagination" could the reimbursement be regarded as "Income from Other Sources". It upheld the finding recorded by the learned CIT (Appeals) that the reimbursement constituted a benefit in terms of the foregoing provision and had therefore rightly been claimed under the head "Income from Business". Before proceeding further, we would like to make one comment. It is well settled that when determining the "head" of income under which a particular receipt falls, one starts first by looking at the "specific" heads (i.e., clauses (a) to (d) of section 11(1)). It is only if the receipt does not come under any of these heads that it is allocated to the "residual" head, "Income from Other Sources" (clause (e)). It is incorrect to reverse this order and start first with the latter and, if it is found inapplicable, to then proceed to the former and determine the specific clause.

8.Having considered the matter, in our view section 18(1)(d) does not apply to the facts and circumstances of the taxpayer's case. This provision requires that the "fair market value" of a "benefit" or "perquisite", derived in the circumstances as stated (i.e., on account of a past, present or future business relationship), is to be regarded as a business receipt, and this is so regardless of whether it is convertible into money or not. It is only in such situations that clause (d) applies. In what meaningful sense can it be said to apply to a reimbursement of income tax? The reimbursement certainly conferred a "benefit" on the respondent. However, what is the "fair market value" of the reimbursed income tax? To this question no sensible answer can be given. The income tax was a liability towards the State, paid in money by the one on whom it lay (the respondent) and reimbursed by the third party (the purchaser of electric power). In our view, the situations contemplated by section 18(1)(d) are materially different from the one at hand. It does not apply.

9.That does not however, end the matter. In our view, the true question is whether the reimbursement can or ought to be regarded as an amount received during or on account or in the course of the taxpayer's business? If so, then it is properly regarded as a receipt that falls under the head "Income from Business". In our view, in the facts and circumstances of the case, the question just posed ought to be answered in the affirmative. The respondent's business is the generation and sale of electric power. It is entirely typical of this business that the electric power is sold to one buyer under a long term contract, commonly referred to as a power purchase agreement. It is also typical of such agreements for the seller of electric power to be reimbursed for various "pass through" items. If at all any such reimbursement constitutes a revenue receipt, it may be regarded as a business receipt. We may clarify that we are not here concerned with the question, in general, whether the reimbursement of "pass through" items (and/or the manner thereof) constitutes revenue receipts that are liable to tax. Any such questions are expressly left open. The issue before us is of a limited nature. This is so because in the facts and circumstances of the present case, it is common ground that the reimbursement in question is a receipt that can be brought to tax. The only question is the head under which it is to be allocated. In our view, and regardless of the fact that section 18(1)(d) does not apply, it ought properly to be regarded, in the present facts and circumstances, as a receipt that is to be allocated to "Income from Business".

10.Accordingly, we reformulate the second question in the following terms, and in light of the above discussion answer it in favour of the taxpayer and against the Department:--

Whether in the facts and circumstances of the present case the amount reimbursed by the purchaser of electric power to the taxpayer, being the income tax paid by the latter, was a receipt allocable under the head "Income from Business", or a receipt that ought to have been included under the head "Income from Other Sources"?

11.This Reference therefore fails and is hereby dismissed.

SL/C-6/Sindh Reference dismissed.