' The department has filed these three appeals against two separate impugned orders for the years 2005-2006 dated 1-3-2010 and for the year, 2007 dated 18-6-2010 passed by the learned CIR (A-1) Islamabad on the following grounds:-- Tax Years 2005 and 2006
(i) That the learned CIR (A) was not justified in observing that business loss for the charge years was rightly computed by the taxpayer and in directed that the same was available for set off against income from other source as envisaged under section 56 and section 57 of the Income Tax Ordinance, 2001.
Tax Year 2007
(i) That the CIR(A) was not justified in holding that business loss for the year was rightly computed by the appellant company and was available for setoff against the income from other sources.
(ii) That the CIR (A) was not justified in holding that exchange gain was unrealized.
2. Brief facts of the case are that the taxpayer is a private limited company engaged in the business of commercial and residential properties for the purpose of sale and currently developing housing and commercial project in Defense Housing Authority (DHA). The taxpayer filed return of income for the tax years 2005, 2006 and 2007 declaring losses of (Rs,49,826,071), (Rs,158,623,251) and (Rs,74,794,222) respectively. Assessment was deemed to be made under section 120 of the Income Tax Ordinance, 2001. As per Taxation Officer Company had inadvertently set-off other income against expenses incurred. Other income was liable to be taxed separately as provided under section 39 of the Income Tax Ordinance, 2001. Show-cause notice was issued and confronted to the taxpayer. The taxpayer's reply was found unsatisfactory. The Taxation Officer observed that loss could only be determined after adjustment of expenses towards business revenue. Other income were assessed at Rs,4,016,224 and Rs,13,815,836 for the tax years 2005 and 2006. Tax @ 39 and 37% was levied at 1,566,327 and Rs,5,111,859 for the tax years 2005 and 2006 respectively. For the tax year 2007, the taxpayer contended that exchange gain had been-accrued and recorded in the books of accounts which was to be treated as income from other sources for charging to tax. Taxation Officer considered and found the reply unsatisfactory and unrealized/exchange gain of Rs,46,27,075 was added to the income of the taxpayer. Taxation Officer assessed the other income at Rs, 12,498,253 and tax was levied @33% at Rs,4,374,389 for the tax year 2007.
3. Being aggrieved with the treatment meted out by the Taxation Officer, the taxpayer preferred an appeal before the First Appellate Authority who rejected the action of the Assessing Officer. The CIR(A) held that the business loss for the year was rightly computed by the appellant company and was available for set off against 'income from other sources' under section 56 of the Ordinance with balance business loss to be carried forward for adjustment against income from business of future periods in terms of section 57 of the Ordinance. The Assessing Officer was directed to allow credit of tax payments by way of deductions under various section of the Ordinance made by the company as per the provisions of law.
4. Learned AR contends that the Taxation Officer has misdirected himself by treating the business expenditure claimed by the appellant as unallocated expenses which in view of the facts and circumstances of the case is illegal, unwarranted for and without any basis. He also contends that the Taxation Officer has misdirected himself by observing that "taxpayer after adjustment of other income against expenses has determined losses". This observation is contrary to the facts of the case as Taxpayer has only claimed set-off of loss under the head "income from business against the head income from other sources" as provided in terms of section 56 of the Ordinance. The reliance placed on the judgment of the apex Court is not relevant to the Taxpayer's case. The learned AR states that the Taxation Officer has erred in law by charging tax on the exchange gain without appreciating the facts that same was unrealized. He further argues that the Taxation Officer is not at all justified in not allowing credit of advance tax paid by way of deduction under various sections of the Ordinance.
5. Learned DR has supported the order of Officer Inland Revenue.
6. We have heard the arguments of both the rival parties and perused the relevant record available on file. We are of the view that main contention of the revenue is that there is no business revenue earned by the company yet, hence the expenses claimed cannot be said as admissible deduction identified under section 21 of the Income Tax Ordinance, 2001. Of course if there is no income earned and expenses are made at the primitive stage, it will constitute as negative income. So the controversy in hand mainly relates to the interpretation of the section 56 and section 57(iii). It is also interesting to note that, according to the revenue, the expenditure would disqualify for deduction only if no income results from such expenditures in a particular assessm ent year, but if there is some income, howsoever small or meagre the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs,1,000, if there is income of even Re.1, the expenditure would be deductible and there would be resulting loss of Rs, 999 under the head "Income from other sources". But if there is no income, then, on the argument of the revenue, the expenditure would have to be ignored as it would not be liable to be deducted.
This would indeed be a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. In this way ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not.
That is the plain requirement of proper accounting and the interpretation of section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.
' This view which we are taking is clearly supported by the observations of Lord Thankerton in Hughes v. Bank of New Zealand (1938) 6 ITR 636, 644 (HL), where the learned Law, Lord said: "Expenditure in course of the trade which is un-remunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense."
' We find that the same view has been taken by the Madras High Court in Appa Rao v. CIT (1962) 46 ITR 511 and Mohamed Ghouse v. CIT (1963) 49 ITR 127 (Mad), The Bombay High Court in Ormerods (India) Private Ltd. v. CIT (1959) 36 ITR 329, The Allahabad High Court in Chhail Behari Lai v. CIT (1960) 39 ITR 696, The Madhya Pradesh High Court in CIT v. Dr. Fida Hussain G. Abbasi (1969) 71 ITR 314, The Kerala High Court in M.N. Ramaswamy Iyer v. CIT (1909) 71 ITR 218 and the Orissa High Court in CIT v. Gopal Ch. Patnaik (1978) 111 ITR 86. This view is eminently correct as it is not only justified by the language of section 57(iii) but it also accords with the principles of commercial accounting. For computation of income under a stipulated head of income during a tax year, earning of income during that tax year is not an essential requirement for admissibility of expenses incurred under the provisions of the Ordinance. The only requirement for admissibility of an expense incurred is its incurrence 'wholly and exclusively for the purposes of business' subject to inadmissible deductions identified under section 21 of the Ordinance. Deduction is allowable to the appellant company in respect of administrative, selling and financial expenses, as these expenditures were admittedly incurred 'wholly and exclusively for the purpose of business' despite the fact that the appellant company did not generate any revenue during the relevant periods. In view of the Assessing Officer regarding classification of expenses as 'unallocated' does not find support from the existing scheme of Taxation. The Ordinance does provide for amortization of 'pre-commencement expenditure' under section 25 of the Ordinance incurred prior to commencement of business which is not the case of the appellant company, as discussed- earlier. The pre-commencement expenditure is defined to include cost of feasibility studies, construction of prototypes, trial production activities and exclude depreciation, initial allowance, amortization and expense incurred for acquisition of land. The business activities of the appellant-company ' were in operation during the periods under consideration and the expenses claimed in any case were not classifiable as 'pre-commencement expenditure' owing to their nature. Considering the classification of claimed expenses as 'unallocated' as contended by the Assessing Officer may arguably render such expenditure as 'lost' and not claimable at all which is completely against the spirit of the law owing to the fact that expenses were incurred 'wholly and exclusively for the purposes of business'.
7. In view of the foregoing discussion,' the learned CIR(A) has rightly held that view of the Assessing Officer is not to be endorsed. The business loss for the year was rightly computed by the Taxpayer and was available for set off against 'income from other sources' under section 56 of the Ordinance with balance business loss to be carried forward for adjustment against income from business of future periods in terms of section 57 of the Ordinance. The department has failed to rebut that exchange gain is unrealized. The CIR has rightly directed the Taxation Officer to allow credit of tax payments by way of deductions under various sections of the Ordinance made by the company as per the provisions of law. Hence there can be no exception to the order passed by the learned CIR(A). We are in agreement with the finding of fact recorded by the learned CIR(A).
Therefore, we find no error or lacuna in the order passed by the CIR(A) which is upheld and maintained.
8. These three departmental appeals stand dismissed being bereft of any merit.