COMMISSIONER INLAND REVENUE, ZONE-II VS LUCKY COTTON MILLS (PVT.) LTD., 2017 PTD-KARACHI-HIGH-COURT-SINDH 864 (2016)

Income Tax Ordinance (XLIX of 2001)---

---Ss.18(1)(d) & 133(1)---Reference---Business relation---Determination--Income from business---No business relationship existed between taxpayer company and its Directors who were Directors of the company which had advanced interest free loan to the company---Taxation officer could not establish any business relationship between taxpayer company and its Directors, nor any finding to such effect had been recorded by Taxation Officer---Treating amount of loan advanced as "income from business" in terms of S. 18 (1)(d) of Income Tax Ordinance, 2001, was contrary to facts and law and such addition was rightly deleted by Commissioner (Appeals)---Appellate Tribunal Inland Revenue concurred with such finding after ascertainment of entire facts of the case and by making correct interpretation of provisions of S.18(1)(d) of Income Tax Ordinance, 2001---Decision of Appellate Tribunal Inland Revenue was based on correct finding on facts, which finding did not suffer from any factual or legal infirmity---High Court declined to interfere in the orders passed by Appellate Tribunal Inland Revenue---Reference was dismissed in circumstances.

Aqeel Qureshi for Applicant.

ORDER

Through instant reference application, the applicant department has proposed the following two questions for the opinion of this Court which according to the learned counsel for the appellant, are the questions of law arising from the impugned order dated 13.04.2016, passed by Appellate Tribunal Inland Revenue, Karachi in I.T.A. No.534/KB/2013 (Tax Year 2011):

a)Whether the receipt of an interest free loan by the taxpayer company from its directors is an actual and tangible benefit attracting application of section 18(1)(d) of the Income Tax Ordinance, 2001?

b)Whether the relationship between a Taxpayer Company and its Directors constitutes "business relationship"?

2.Learned counsel for the applicant, after having read out the proposed questions and the impugned order passed by the Appellate Tribunal Inland Revenue, Karachi as well as the orders passed by the authorities below, submits that while passing the impugned order the Appellate Tribunal Inland Revenue has failed to appreciate the explanation added to the provisions of section 18(1)(d) of the Income Tax Ordinance, 2001 wherein, according to learned counsel, it has been explained that the word "benefit" includes any benefit derived by way of waiver of profit on debt or the debt itself, therefore interest free loan from its directors attracts provisions of section 18(1)(d) of the Income Tax Ordinance, 2001. It has been prayed that the impugned order may be set-aside and the questions proposed may be answered in affirmative, in favour of the applicant.

3.We have heard the learned counsel for the applicant perused the impugned order passed by the Appellate Tribunal Inland Revenue, Karachi as well as the orders passed by the authorities below with his assistance. We have also examined the provisions of section 18(1)(d) of the Income Tax Ordinance, 2001 which read as under:--

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

(a)To (c) not relevant.

(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.. (Emphasis added through underline)

Explanation---For the purpose of this clause, it is declared that the word "benefit" includes any benefit derived by Hwy of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department's, Circular No. 29 of 2002 or in any other scheme issued by the State Bank of Pakistan."

4.From bare perusal of the aforesaid provisions, it is clear that legislature intended to treat fair market value of any benefit, 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, as income from business. As evident from the aforesaid provision, if the fair market value of any benefit or perquisite, as referred to hereinabove, is derived by any person in the course of any business relationship, then such amount can be treated as income from business, whereas, in the absence of any business relationship such amount cannot be treated as income from business.

5.Admittedly, in the instant case, there is no business relationship between the Company and its directors, who are directors of the company, and have advanced interest-free loan to the Company, whereas, the taxation officer could not establish any business relationship between the respondent company and its directors, nor any finding to this effect has been recorded by the taxation officer. Accordingly, treating such amount as income from business in terms of section 18(1)(d) by the taxation officer in the instant case, is contrary to facts and law. Such addition was rightly deleted by Commissioner (Appeals) vide his order dated 16.4.2016 in the following terms:--

"The language of section 18(1)(d) states "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". As it is clear from the provisions of section 18(1)(d), here are three essential ingredients of this addition.

(i)Benefit- there must have an element of benefit.

(ii)Fair Market Value- this benefit must be based on a fair market value.

(iii)Business Relation- there must be a business relation.

All the above ingredients are important but the most important condition for applicability of section 18(1)(d) is "business relation". As has been held by the courts "business" means some real, substantial and systematic activity with a set of purpose. Business relation normally means a trade relationship of buying/ selling of commodities/goods/import/export, use of trade mark/ franchise etc. These do not exist in the appellant's case and

Additional Commissioner Inland Revenue has failed to establish business relationship.

The benefit should be real one and not notional as misconstrued by Additional Commissioner Inland Revenue. The Supreme Court held in CIT v. Smith Kline and French of Pakistan Ltd. and 2 others 1991 PTD 999 = 1991 SCMR 2374 that to treat a receipt as Income it necessarily require a finding of fact that it was covered by the word "income" as defined in income tax law. In all the cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. The department has not established this fact as defined by Supreme Court of Pakistan.

In view of the above discussion the fair market value of the benefit is not an income, and there is no such benefit derived by the appellant except what was declared in the return of income. Besides above the Officer Inland Revenue could not establish exact business relation between the loaner and the appellant."

6.The Appellate Tribunal Inland Revenue has concurred with such finding after ascertainment of entire facts of the case and by making correct interpretation of the provisions of section 18(1)(d) of Income Tax Ordinance, 2001. We are of the opinion that decision of the appellate tribunal is based on correct finding on facts, which finding does not suffer from any factual or legal infirmity. Accordingly, we do not find any substance in the instant reference application which being devoid of any merits, is hereby dismissed in limine along with listed applications, whereas both the questions proposed hereinabove are answered in Negative, in favour of the respondent and against the applicant department.

MH/C-23/Sindh Reference answered in negative.