The instant four cross appeals relating to the assessment years 2002-2003 and tax year 2003 arise out of the two orders of the CIR (Appeals) both dated 27-5-2009.
2. As regards the assessm ent year 2002-2003 the Taxation Officer amended the assessment order passed under section 62 of the late Ordinance of 1979 on 28-6-2003 by invoking the provisions of section 122(5) of the Income Tax Ordinance, 2001. Appeal filed against the said order by the taxpayer company was rejected by the CIR (Appeals) vide his order dated 28-4-2009.
Subsequently, the taxpayer company moved a rectification application under section 221 and contended that the grounds bearing Nos.3, 1-6, 18 relating to the vires of section 122 of the Income Tax Ordinance, '2001 with reference to the assessment year 2002-2003 had not been adjudicated.
3. After considering the submissions of the learned AR of the company and relying upon the cases reported as 1993 Tax 197 SC Pak(sic) (Kashmir Edible Oil v. CIT), 2005 PTD 1316 H.C. Karachi (Honda Shahrah-e-Faisal v. CIT) and 2006 PTD 97 H.C. Karachi (Fauji Terminal and Distribution Co. Limited) and 1997 Tax 393 L.H.C.(sic) (Idrees Cloth House v. CIT), the CIR(Appeals) vacated the order of the Taxation Officer passed under section 122(5) of the Income Tax Ordinance, 2001 holding that the provisions of section 122 could not be invoked for the amendment of assessment for the assessm ent B year 2002-2003. Since the taxpayer has been given adequate relief through the order passed under section 221 of the Income Tax Ordinance, 2001 its appeal for the tax year 2002- 2003 has virtually become infructuous.
4. The Revenue, on the other hand, has contested the action of the CIR (Appeals) whereby he assuming jurisdiction under section 221 of the Income Tax Ordinance, 2001 rectified his earlier order dated 28-4-2009 and also vacated the order of the Taxation Officer passed under section 122 of the Income Tax Ordinance, 2001.
5. Arguing the case on behalf of the Revenue, the learned DR vehemently agitated against. The action of the CIR (Appeals) contending that the earlier order dated 28-4-2009 had been passed by the CIR(A) after conscious application of mind which could not be reversed through rectification action as the scope of rectification, being limited in nature, did not include resolution of controversial issues through a process of debate and argumentation.
6. We have given due consideration to the rival arguments and also gone through the relevant record available on file. We are of the considered opinion that the scope of rectification as settled by the Supreme Court of Pakistan in the well-known cases of National Food and Shadman Cotton Mills reported as 2008 SCMR 204 = 2008 PTD 253 and 1992 SCMR 687 is restricted to the mistakes which are so apparent on the face of record that they do not 'require any debate or argumentation for their resolution. Having said that we would also like to add that a legal controversy remains a controversial and debatable point so long as it is not authoritatively adjudicated upon by a competent court of law. As soon as an authoritative pronouncement regarding the controversy emanates from a competent court, it sets the controversy at rest by enunciating the correct import of law. If, in some case, law is found to have been applied in a manner contrary to the rulings of the competent court, that application of law would be a mistake apparent on the face of record which can be got rectified through recourse to the rectification provisions, if the matter has not become a past and closed transaction by virtue of limitation. We have noted that in the instant case the CIR (Appeals) disposed of the appeal of the taxpayer vide his order dated 28-4-2009 against the explicit enunciation of the High Courts of Lahore and Karachi which, to the extent of repugnancy with the said judgments constituted a mistake of law and was rightly rectified by him to bring his order in conformity with the judgments of the High Courts. We, therefore, do not find any substance in the departmental appeal and dismiss the same.
Tax year 2003 (Cross Appeals)
7. As far as tax year 2003 is concerned the Revenue feels aggrieved by the deletion of various add backs whereas the taxpayer company feels dis-satisfied by the treatment accorded in respect of export rebate/customs duty draw back, proration of expenses, confirmation of additions under section 21(k) of the Income Tax Ordinance, 2001, Gratuity, disallowances on account of personal use of vehicles, donations and non-proration of other income and financial charges.
8. First we take up the departmental appeal whereby the Revenue has agitated against the deletion of add backs of Rs,35,83,321 identified by the Taxation Officer under the following heads:- Particulars Amount Postage, telegram/telephone Rs,571,878 Printing and Stationery Rs,248,988 Motor Car expenses Rs,715,846 Particulars Amount Travelling and conveyance Rs,1,426,408 Fuel and Power Rs,390,737 Repair and maintenance Rs,218,965 General expenses Rs,334,818
9. The learned DR took us through the relevant part of the order of the Taxation Officer wherein he had identified each and every unverifiable expense under the above heads aggregating to Rs,35,83,321. He further stated that the taxpayer was duly confronted with the un-verifiability of the expense because of non-availability of credible documentary evidence and the additions were made only when the taxpayer could not furnish any satisfactory explanation. He took strong exception to the direction of the learned first appellate authority regarding deletion of disallowance of the expenses with the observation that in cash economy like ours proper vouchers are not issued in respect of numerous items of purchases. He, therefore, pleaded that the disallowance be restored.
10. The learned AR of the taxpayer, on the other hand, repeated the same argument which was taken before the first appellate authority and contended that in an undocumented economy it is not possible to obtain proper voucher for each expense because vendors of various items from whom different petty items are purchased do not issue proper vouchers. He, further clarified that because of proper system of checks and balances operative within the company, bogus, fictitious, and fake vouchers cannot even be thought of. He further stated that without such effective internal control, the company could not manage and run its business effectively. As a matter of fact, the learned A.R argued, absence of such effective and fool proof controls could work havoc with the financial health of the company as proper administrative and audit controls in the company ensure that only such expenses as are genuinely and actually incurred in connection with the business of the company are claimed and accounted for.
11. We have given due consideration to the rival arguments and also gone through the relevant record available on file. We feel that the arguments advanced from both the sides are fully reflective of their respective perspectives. The Taxation Officer may be well within his right to assert that it is only documented and properly vouched expenses that can be allowed as admissible deductions but we cannot be oblivious of the factual position on ground vis-a-vis petty business concerns which carry on their business on cash basis and issue katcha vouchers and that too on demand by the customers. It is not possible for the buyer to obtain proper vouchers from these petty business concerns because they are not in the habit of doing so. Be that as it may, we can also not casually brush aside the assertion of the learned A.R. That in the case of a public limited company having business operations scattered over a number of places, it is not possible for it to manage its business affairs without effective and efficient internal controls and in the presence of such fool proof controls, it is not possible to book fake and bogus expenses and claim them as deductions. We also find force in the argument of the learned A.R that if loose and ineffective control is allowed to remain operative in a business organization it may cause irreparable loss to the company at the hands of unscrupulous employees. Having weighed arguments from both the sides, We, therefore, are of the considered opinion that the CIR(Appeals) rightly deleted the disallowance.
12. Now coming to the appeal of the taxpayer we take up the various issues agitated by the taxpayer one by one.
Exports Rebate
13. During the course of audit the Taxation Officer noted that the taxpayer had excluded export rebate of Rs .7,58,38,607 from profit allocated to local business. This treatment was not approved by the Taxation Officer who was of the view that the compensatory rebate, though not taxable as additional income from the business of exports, was to be added to the export sales for the purpose of proration of expenses. He accordingly enhanced the export sales by the amount of H compensatory rebate and thereafter allocated the expenses charged to the revenue in proportion to the ratio between the two types of sales. The learned first appellate authority also confirmed the treatment meted out by the Taxation Officer.
14. During the course of hearing the learned AR referred to Board's Circular No, 14 of 1993 dated 19- 8-1993 whereby it was clarified that:- "Duty draw-backs (i,e, customs rebates, compensatory rebate, export exchange difference. Etc.) in respect of exports already subjected to withholding fax under section 50(5A) shall not be considered as additional receipts. The amount of such duty drawbacks shall be deemed to have been covered for tax purposes, under presumptive tax regime under section 80CC."
He took strong exception to the proration of expenses on the basis of enhanced export sales and contended that the method of proration of expenses adopted by the Taxation Officer amounted to treating the export receipts as part of the turnover against the explicit directions of the Board contained in the Circular referred to above. He also referred to the judgment of the Tribunal reported as 2004 PTD (Trib.) 1890 and Lahore High Court, Lahore reported as 2001 PTD 1649 wherein the deduction of export rebate from the cost of sales was considered to be the most realistic method of placement of compensatory rebate. In the latter judgment the High Court while dilating upon the possible placement of export rebate in the accounts held as under:-- "A deduction from cost though increases gross profit rate is most realistic and correct manner to treat the rebate of the kind. Adding it to sales account or treating it as an item of profit and loss account is not warranted for at least two reasons. Firstly, it has no direct nexus with the sales or actual exports. Secondly no profit is earned by an assessed on a rebate."
15. The learned DR on the other hand, supported the orders of the authorities below and relied upon another judgment of this Tribunal reported as 2009 PTD (Trib.) 869 wherein export rebate was held to be part of the export proceeds for the purpose of allocation of expenses charged to the revenue.
16. We have given due consideration to the rival arguments and also gone through the relevant record available on file. We feel that the case-law relied upon by the learned DR is per-incursive because of being discordant with the earlier case of the Tribunal reported as 2004 PTD 1890 as well as High Court reported as 2001 PTD 1649. It appears that the author of the judgment 2009 PTD (Trib.) 869 was not assisted properly and resultantly omitted to consider the judgments of the Tribunal as well as the High Court which were in the field at the relevant time and also binding upon the bench.
17. In the light of discussion made hereinabove we are of the considered opinion that/compensatory rebate, as a matter of fact, is the refund of the taxes which entered into the cost of manufactured products exported by the taxpayer, which has the effect of reducing the cost of sales rather than enhancing the export proceeds. We therefore, do not approve of the treatment meted out to the export rebate by the authorities below and direct that the rebate may not be treated as part of the export proceeds for the purpose of proration of expenses. Its adjustment against the cost of sales appears to be fairly logical and just in the light of judgment of the Tribunal and the High Court relied upon by the learned AR of the taxpayer.
Gratuity
18. Taxation Officer noted that the taxpayer paid gratuity amounting to Rs,57,90,006 to its employees on which tax was not deducted at source. The expense was therefore, held to be inadmissible deduction in terms of section 21(c) of the Income Tax Ordinance, 2001. The learned first appellate authority also endorsed the treatment meted out by the Taxation Officer.
19. During the course of hearing of appeal, the learned AR of the taxpayer company pleaded that the Taxation Officer had wrongly held that the payment of gratuity Rs,57,90,006 was made to the employees. As a matter of fact the payment had been made to the gratuity fund which was established by the company and also duly approved by the CIT. To substantiate his assertion the learned AR filed copy of the corrigendum No,2241/J dated 8-3-2001.
20. The learned DR on the other hand, asserted that the payment had been made to the employees and not to the fund and the taxpayer company was duty bound to deduct tax from the payments made to different employees and failure to do so rendered the expense as an inadmissible deduction in terms of section 21(c) of the Income Tax Ordinance, 2001.
21. We have given due consideration to the rival arguments and also gone through the relevant record available on file. We feel that the controversy whether the expense on account of gratuity was incurred by way of payment to the approved gratuity fund or to the employees can be resolved through further investigation. Accordingly, we vacate the orders of the authorities below on this point and remand the case to the Taxation Officer with the direction to ascertain the factual position in this regard. If the payment is found to have been made to the duly approved gratuity fund it should be allowed as deduction.
Addition under section 21-K of the Income Tax Ordinance, 2001
22. During the course of audit the Taxation Officer examined the statement of salary filed by the company under section 165 of the Income Tax Ordinance, 2001 and noted that it had paid excess perquisites of Rs,26,56,116 to its employees. Employee wise details of the excess amount was confronted to the company which contended that the working of excess perquisites had not been made correctly because out of total salaries of all the employees declared in the withholding statement only six monthssalaries related to the accounting period under consideration. On the basis of this explanation the taxpayer revised calculation of excess perquisites which was also accepted by the Taxation Officer for the purpose of working out excess perquisites. The learned first appellate authority also upheld the treatment meted out by the Taxation Officer. During the course of hearing of appeal the learned AR could not submit any plausible explanation for our intervention because the working of excess perquisites which was made basis for addition under section 21(K) had been provided by the company itself. We, therefore, uphold the orders of the authorities below on the point of addition of Rs,970,854 under section 21(k) of the Income Tax Ordinance, 2001.
23. Next ground pertains to the disallowance of Rs,19,00,007 on account of personal use of Vehicles.
The said disallowance was made on account of personal and non-business use of vehicles provided by the company to its employees and directors. The learned AR contended that the CIR(Appeals) erred in upholding the 25 % disallowance out of the expense claimed because the law provided specific and well-defined parameters for taking cognizance of personal and non- business use of vehicles. He took us through Rule 6-C to contend that the Taxation Officer could only make addition in the hands of employees in the light of Rule 6-C instead of making disallowance of the expense in the hinds of company. He further stated that in the presence of Rule 6-C of the Income Tax Rules, 2002 the Taxation Officer, while dealing the so-called non-business use of vehicles, was bound to remain within the pre sprints of the said rule and treat the expense to the extent of non-business use of the vehicles as a perquisite in the hands of the employee rather than reaching out to the company and affecting its income by way of disallowance.
24. The learned DR on the other hand, contended that the reference to Rule 6-C of the Income Tax Rules, 2002 by the learned AR was irrelevant because the said Rule referred to the various methods of working out the value of perquisite in the handsof an employee who was provided vehicle by his employer. He further stated that under section 20(1) of the Income Tax Ordinance, 2001 a taxpayer was entitled to claim deduction of an expense if it was incurred wholly and exclusively for the purpose of business. He further stated that the fact that the vehicles were provided by the company to its employees both for personal and business use, constituted a sufficient evidence to establish that the expense borne by the company in connection with the running and maintenance of vehicles was not wholly and exclusively for the sake of business. He asserted that the expense in the hands of the company could be treated as an admissible deduction in the case of the company only to the extent the expense was incurred for the sake of the business of the company.
25. We have given due consideration to the rival arguments and also gone through the relevant record available on file and feel persuaded by the arguments of the learned DR because Rule 6-C and section 20(1) of the Income Tax Ordinance, 2001 deal with two different situations - one relating to the recipient and the other to the payer - and are also not mutually exclusive. The learned AR of the taxpayer has also not denied the observation of the learned Taxation Officer that the vehicles provided by the employer are meant both for business and personal use. There is thus no cavil with the fact that the expense incurred in connection with the running and maintenance of vehicles is not wholly and exclusively incidental to business. The disallowance made by the Taxation Officer and confirmed by the CIR(Appeals) is, therefore, upheld.
26. Last ground pertains to the disallowance of donation of Rs,28,12,000. From the perusal of the amended assessm ent order it transpires that the donation of Rs,28,12,000 was made to Service Charitable Trust which was not approved as a non-profit organization under section 2(36) of the Income Tax Ordinance, 2001. At the time of hearing of appeal the learned AR could not produce evidence regarding the "approved" status of the done at the material time. We, therefore, do not find any reason to interfere with the findings of the learned first appellate authority, which, being in accordance with law, are maintained.
30. All the cross appeals are disposed of as above.