MR. MASOOD ALI JAMSHED, MEMBER (ACCOUNTANT).-(1). Through this order we intend to dispose of departmental appeal filed against the order of Learned CIT(A), RTO, Lahore recorded on 11-08- 2008.
2. The D.R. And the A.R. Of the taxpayer have been heard and the orders of the authorities below perused.
3. The first grievance of the department is with regard to deletion of tax of Rs. 16,01,981/- and Rs.
6,39,987/- on sale of imported and local store items to its sister concerns. The facts giving rise to the grievance of the department are that during the audit proceedings the Taxation Officer observed that certain goods falling under the head store were imported and subsequently sold to the sister concerns without any value addition. Similarly, some store items were purchased locally and sold to the sister concerns without any value addition. The taxpayer was, therefore, confronted to the issue of sale of imported raw-material items amounting to Rs. 3,48,05,005/- which according to the Taxation Officer were assessable u/s 148(7) falling under the Presumptive Tax Regime but no tax could be deducted as the taxpayer had been given a certificate of exemption for import of these items for its own use. Similarly, the taxpayer was confronted regarding tax deduction on supply of locally purchased items to the tune of Rs. 24,83,324/- without value addition and as considered by the assessing officer the same fell within purview of PTR as provided u/s 153(l)(a) read with Section 153(b) of the Ordinance. The taxpayer replied to the query stating that these transactions did not attract any tax liability as no profitability was involved as the same were transferred to related parties on cost price basis. The Taxation Officer perused the reply of the A.R.
And observed that the transactions did not relate to stray or isolated transactions because there were 88 transactions in the year and had occurred with a considerable regularity throughout the year. The Taxation Officer also made out a table to strengthen his view point showing that the transactions were continuously taking place almost throughout the year. She was of the opinion that the sales fell within the regime of presumptive tax u/s 148(7) and 153(6). Thus, tax liability was worked out as under: Sale of imported store items to sister concerns2,66,99,678/- Tax @ 6% 16,01,981/- Supply of local store items to sister concerns appearing in store clearing account1,82,85,318/- Tax u/s 153/169 @3.5% 6,39,987/-
4. The matter was agitated before the first appellate authority and it was pleaded that since the tax was not collected at import stage by virtue of exemption certificate the same could not be taxed at a later stage and as such were excluded from the PTR. It was also stated at the first appellate stage that legislative intent was manifested from the language used in sub-section (4) & (4A) governing exemption certificate and sub-section (7) drawing line between Presumptive Tax and tax on actual income. It was further emphasized that the later provision did not contain "exclusively for own use" but the phrase used was "for its own use". It was also stated by the A.R. That exemption certificate issued by the Commissioner was in the field and tax was not collected at import stage, therefore, the taxpayer fell out of the PTR and the same could not be levied on piecemeal basis. The A.R.
Further stated before the first appellate authority that sales of spares were not made under the ordinary course of business but under the exigencies of the situations and the items supplied to the sister concerns were not stock-in-trade and their sale did not effect the profit of the company in any case.
5. With regard to supply of local store items to sister concerns involving tax at Rs. 6,39,987/- it was stated that Section 153(6) of the Ordinance had restricted application to the transactions subjected to deduction of tax under sub-section (1) or (1A) of Section 153 and as the transactions were not subjected to withholding tax the same did not fall within the ambit of PTR. From the arguments of the A.R. The CIT(A) formed an opinion that sale of imported as well as local store items to sister concerns did not fall under the PTR. She was also of the view that in the presence of tangible evidence that the department had issued exemption certificate to the appellant regarding collection/ deduction of tax u/s 148 and 153 the Taxation Officer was not justified in charging tax on sale of imported and local store items to its sister concerns. She, therefore, ordered deletion of the same.
6. The D.R., at the the of hearing of appeal, stated that the taxpayer had imported these items for its own use and had got certificate of exemption from the department but at a later stage these imported items were sold to sister concerns and Sales Tax had also been paid thereon. He stated that it was not a matter of supply of few items to sister concerns on certain exigencies but during the year 88 such transactions were made with a reasonable regularity which is manifested in the table depicted in the assessm ent order. He, vehemently, contended that the CIT(A) was not justified to delete the tax levied by the Taxation Officer. The A.R., on the other hand, repeated the arguments taken before the CIT(A) and stated that tax if at all to be deducted was deductible at import stage and not later on.
7. We have considered the arguments of both the parties and are of the view that exemption certificate had been issued to the taxpayer by the department for import of these items for its own use but the same were sold to sister concerns at a later stage. As a matter of fact, it was misuse of the exemption certificate and the transactions taking place throughout the year with a considerable degree of regularity could not be considered as stray or isolated transactions. The Taxation Officer was fully justified to tax these sales in accordance with the provisions of law. The CIT(A) has misconceived the issuance of exemption certificate which had been issued by the department for import of goods for own use of the taxpayer. The order of the CIT(A) to this extent is vacated and that passed by the Taxation Officer is restored.
8. The second grievance of the department is with regard to deletion of dis-allowance made at Rs.
13,65,347/- on account of proration of expenses between local sales and sales falling under PTR.
The grievance is consequential in nature to the issue discussed above. As the tax on sales falling under PTR has been restored the dis-allowance is also restored in the same manner.
9. The deletion of addition made under the head capital expenses relevant to development is also a cause of grievance to the department. At the the of audit the Taxation Officer observed that certain expenses were claimed in respect of land at Port Qasim which were not incurred during the tax year and the Taxation Officer was also of the opinion that the expenses like demarcation fee, earnest money, drawing approval fee, soil investigation, field testing and physical possession expenses were of capital nature and were not allowable as expenses relevant to the business of the Tax Year 2006. The taxpayer was confronted on this point and it was admitted in the letter of the A.R. That the expenses had been incurred in the period prior to the Tax Year 2006. It was also stated that the expenses were incurred on leased land at Port Qasim in order to put the land in use hence the same were rightly allowable. This plea was not accepted by the Taxation Officer who made an addition of Rs. 15,94,250/- on this account. Before the first appellate authority, it was pleaded that the expenses were wholly and necessarily incurred for taking possession of the leased land and no enduring benefit was secured by spending money under the aforesaid head.
The CIT(A) agreeing with the A.R. That the expenses were incurred wholly and exclusively for running the business hence the same were of revenue nature and admissible. She, therefore, deleted the addition.
10. At the the of hearing of appeal, the D.R. Stated that firstly the expenses were not related to the Tax Year 2006 and secondly the same being acquisition cost of land had to be capitalized. The A.R.
Defended the order of the CIT(A) and repeated the arguments that no enduring benefit was available to the taxpayer, hence these expenses could not be capitalized.
11. We are not convinced with the argument of the A/R that no enduring benefit accrued to the taxpayer by incurring these expenses. The expenses were required to be capitalized and the Taxation Officer had rightly disallowed the claim. The impugned order is vacated on this point and that passed by the Taxation Officer is restored.
12. Another cause of grievance to the department is in respect of the direction of the CIT(A) to allow normal depreciation and initial allowance on building amounting to Rs. 2,88,41,967/-. During the audit proceedings, the taxpayer had been asked to provide documentary evidence in respect of the claim that the building was completed before the closing period of the Tax Year 2006. The taxpayer failed to provide relevant documentary evidence namely: construction plan and completion certificate. Non-furnishing of the documents motivated the Taxation Officer to disallow the claim of depreciation as well as initial allowance. The taxpayer being aggrieved agitated the matter before the first appellate authority and contended that the addition had been made by the Taxation Officer on irrelevant considerations. It was stated that not only the building was in workable condition but plant and machinery were also installed and used for production which had been offered for taxation during the tax year. It was also contended by the A.R. That the Taxation Officer's insistence on the construction plan and completion certificate had no bearing on the admissibility of the claim. The essential condition for admissibility of depreciation was use of the asset for business. He stated that production of DTY(barmag) machines was recorded in the account books and also offered for taxation. In such circumstances, the Taxation Officer was not justified to hold that the building had not been completed and put into use by the taxpayer. The CIT(A), after hearing the arguments, considered the submissions of the A.R. As valid and substantiated by supportive documents. She observed that the Taxation Officer had failed to appreciate the relevant material furnished before her regarding payments made to contractors and the construction expenses incurred for addition in building. The CIT(A) also observed that the Taxation Officer had conceded this issue on page I6 of the assessment order excerpt of which was also reproduced in the appellate order as below: - "The reply of the taxpayer has been scrutinized in the light of the Section 22 and 23 of Income Tax Ordinance, 2001. Since DTY production was done for the first the in December, 2005 that is apparent from the production record and has been duly offered for taxation, it can conclusively be drawn that DTY(barmag) Machinery was put in use in Tax Year 2006 and DTY production could not be made possible without DTY(barmag) Machinery. In addition the gate passes and bills of lading were also provided which authenticate the contention of the taxpayer. Therefore, the contention of the taxpayer is accepted and no adverse inference in drawn on the score".
13. From the above, the CIT(A) concluded that the machinery was used in Tax Year 2006 hence normal depreciation and initial allowance was directed to be allowed.
14. The D.R. Stated that completion certificate and other documents having not been produced, the taxpayer was not entitled for depreciation as well as initial allowance. The A.R. Repeated the arguments taken before the first appellate authority.
15. The arguments of both the parties have been considered and order of the authorities below have carefully been perused. The excerpt of the assessment order reproduced by the first appellate authority makes it abundantly clear that the building was in use and the machinery installed therein also resulted in production which was offered for taxation. The departmental grievance is found devoid of substance. The order of the CIT(A) on this score requires no interference.
16. During audit proceedings the Taxation Officer observed that the taxpayer had sold some used vehicles to its associated concerns. She was of the opinion that the sale proceeds were not according to the provisions of Section 78 of the Ordinance hence she collected information from a car dealer and determined the fair market value resulting in addition of Rs. 16,2000/-. The matter was agitated in appeal where the A.R. Contended that the transaction was completely verifiable and no effort was made by the Taxation Officer to confirm the contention of the taxpayer. It was also pleaded before the CIT(A) that the information gathered from the car dealer was not entertainable. Any inquiry or statement without cross-examination was not admissible as evidence. The transaction was between associated undertakings and was fully verifiable but the Taxation Officer failed to establish any aspect of unfair deal between the parties that could cause prejudice to the revenue. The CIT(A) observed that the contents of the inquiry were not confronted to the taxpayer which was highly unjustified. She also observed that the vehicles sold were quite old and fair market value adopted appeared to be on the higher side. With these observations she reduced the addition to Rs. 6,00,000/-. The D.R. Contended that the fair market value had been determined after collecting information from a renowned car dealer of the city and as such the CIT(A) was not justified to reduce the addition. The A.R. Repeated the arguments taken before the first appellate authority.
17. We are of the considered opinion that when Taxation Officer had collected some information from the third party she was obliged to confront the taxpayer in this regard and provide him an opportunity of cross-examination. This having not been done, we are not inclined to interfere with the impugned order passed by the first appellate authority.
18. The department has also contested the action of the CIT(A) with regard to deletion of addition made under the head 'freight' expenses. The facts of the matter are that during the examination of accounts Taxation Officer observed that some expenses claimed under the head freight had been incurred in the year prior to Tax Year 2006. The taxpayer was confronted on this account who explained through his A.R. That some expenses had actually been paid by the customers and later on claimed from the taxpayer's company. Whereas one such voucher related to freight expenses processed by stores on 30-06-2005 for which payment was effected on 01-07-2005. The contention of the taxpayer did not find favour with the Taxation Officer who proceeded to make addition amounting to Rs. 3,82,625/-. It was pleaded before the first appellate authority that expenses were incurred wholly for the purpose of business and not claimed in the previous year.
Actually the transport companies had issued invoices on later dates and expenses were booked in the accounts on receipt of invoices and this method was consistently and regularly been employed by the taxpayer. The CIT(A) observed that the payments made on account of freight expenses was in accordance with the prevalent mercantile accounting system followed by the taxpayer. The addition being un-warranted was ordered to be deleted. The D.R. And the A.R. Have been heard on this point. It has been observed by us that the Taxation Officer had failed to appreciate the facts of transactions and consistent practice of the taxpayer company. The CIT(A) had rightly deleted the addition and grievance of the department is found misconceived.
19. Another grievance of the department is against the deletion of addition made u/s 21(k) of the Income Tax Ordinance, 2001. The Taxation Officer observed that the Chief Executive was provided a car which was maintained by the company but the said perquisite did not appear in the statement u/s 165 of the Ordinance. In response the taxpayer contended that the car provided to the Chief Executive was only for business purpose and the perquisites paid to the employees were within the prescribed limit of Section 21(k) of the Ordinance. The reply furnished by the taxpayer did not find favour with the Taxation Officer and she, therefore, made addition of Rs. 25,000/- under this head.
20. The D.R. And the A.R. Have been heard on this point and it has been observed that the addition was made on account of gross miscalculation. The impugned order on this point does not require any interference.
21. The department has also assailed the deletion of addition made u/s 21(e) of the Income Tax Ordinance, 2001. During the proceedings it was observed by the Taxation Officer that the appellant had not added back "provision for gratuity" amounting to Rs. 87,58,000/- in Annexure HC of the return. The taxpayer was confronted with the fact that Section 21(e) required that any contribution to an un-approved gratuity fund be disallowed. In response the taxpayer pleaded that provision for staff gratuity was an allowable deduction as held by various judgments of the Superior Courts. The reply furnished by the taxpayer did not find favour with the Taxation Officer and she concluded that the amount claimed in respect of gratuity represented the contribution to an un-approved gratuity fund/scheme and attracted the provisions of Section 21(e) of the Income Tax Ordinance, 2001. The matter was agitated before the first appellate authority. It was contended that the expenses of gratuity were booked on accrual basis by ascertaining the amounts payable on the basis of detailed working by using statistical tools and taking into account the past experience of employees. It was also pleaded that the expenses were wholly and exclusively incurred for business purpose and were duly admissible as held by the Honourable Supreme Court of Pakistan in the judgment reported as (1992) 65 Tax 254. Agreeing with the A.R. The CIT(A) following the ratio settled by case law referred supra, deleted the addition.
22. The D.R. Has stated that the CIT(A) had allowed the provision for gratuity relying on case of the Supreme Court which in fact was distinguishable from the case of the taxpayer under appeal. He further dilated upon his contention and stated that the case of the Supreme Court referred supra was relating to expenses allowable under the Income Tax Act, 1922 whereas the law had undergone a change and under the Income Tax Ordinance, 1979 as well as Income Tax Ordinance, 2001 contribution made to unapproved gratuity fund had specifically been declared as an .
Inadmissible expense. He further stated that the Karachi High Court has beautifully explained the matter and distinguished the case finalized under the Income Tax Ordinance, 1979 from the one decided by the Supreme Court. A copy of the order cited as 2006 PTD 460 was also provided. The D.R. Also relied upon the cases decided by the Tribunal reported as 2009 PTD (Trib.) 1187 and ITA Nos. 764, 1040 & 1041/LB/2008, dated 24-10-2009. The A.R., on the other hand, defended the order of the CIT(A) and repeated his arguments as taken before the first appellate authority.
23. After considering the arguments of both the parties we tend to agree with the D.R. That the CIT(A) had not appreciated the fact that the case law relied upon by the A.R. Was in respect of Income Tax Act, 1922 and after that the law had undergone a major change and under the Income Tax Ordinance, 1979 as well as Income Tax Ordinance, 2001 contribution made to gratuity provident fund has specifically been declared as an inadmissible expense. We are fortified in our opinion by the decision of the High Court cited as 2006 PTD 460 as well as of this Tribunal reported as 2009 PTD (Trib) 1187 and ITA Nos. 764, 1040 & 1041/LB/2008. The order of the CIT(A) with regard to deletion of the add back is vacated. Resultantly, the action of the Taxation Officer on this score stands restored.
24. Lastly, the department has also challenged the deletion of addition made u/s 34(5) of the Income Tax Ordinance, 2001. During the course of audit proceedings, the taxpayer was asked to provide details of the creditors for the years 2004 and 2005 but he failed to furnish the requisite details. The Taxation Officer, therefore, made addition amounting to Rs. 59,20,380/- u/s 34(5) of the Ordinance. The matter was assailed before the CIT(A) as unjustified where the taxpayer had furnished the details of aging of the credit balances. The CIT(A) observed from examination of the details furnished by the taxpayer that liabilities amounting to Rs. 23,45,879/- were outstanding for more than 3 years and warranted action u/s 34(5) hence she curtailed the addition to this extent.
25. The Learned D.R. Contended that since the taxpayer had failed to furnish the requisite details before the Taxation Officer, the CIT(A) was not justified to entertain fresh evidence. According to him, even if some evidence was produced before the first appellate authority, she should have remanded the case back to the Taxation Officer for verification. This contention of the D.R. Has force. We, therefore, deem it appropriate to vacate the order of CIT(A) on this issue and remand the case back to the Taxation Officer for fresh adjudication. The Taxation Officer is directed to provide the taxpayer fresh opportunity so as to enable the respondent to provide the details as furnished at the first appellate forum.
26. The departmental appeal is disposed of to the extent and in the manner indicated above.