These six appeals arise out of the consolidated order of the CIR(Appeals) dated 26-2-2009, whereby he disposed of appeals tiled by the taxpayer company for the tax years 2004 and 2005 (tax year ending 30-9-2004) and 2005 (tax. Year ending on 30-6-2005). In all the six appeals common issues are involved. We, therefore, propose to dispose them of through this consolidated order.
2. Facts for the purpose of disposal of these appeals, briefly stated, are that the taxpayer is a public limited company which derives income from the manufacturing and sale of yarn and fabrics. It tiled returns for the respective three years declaring income at Rs,55,56,445, Rs,2,61,55,936 and Rs,1,19,58,828, which were deemed to be assessment orders in terms of section 120(1) of the Income Tax Ordinance, 2001. Subsequently, on examination of the record, the Additional Commissioner Audit-A, LTU, Lahore, came to the conclusion that the assessments for the above years deemed to have been finalized under section 120(1) were erroneous and prejudicial to the interests of Revenue on various grounds which were confronted to the taxpayer through a show-cause notice dated 26-4-2008. Reply submitted by the taxpayer company vide its AR's letter dated 12-5-2008 failed to convince the Taxation Officer who proceeded to amend the said assessments by his order dated 27-5-2008 passed under sections 122(5A)/122(4) of the Income Tax Ordinance, 2001. Being aggrieved, the taxpayer company filed appeals before the learned CIR(Appeals) who vide his order dated 26-2-2009 allowed partial relief to the company holding that it was entitled to the benefit of set off of losses of amalgamating companies v. Dawood Cotton Mills, Limited, Bourewals Textile Mills Limited, Lawrancepur Woolen and Textile Mills Limited and Dilon Limited which merged into the appellant company by virtue of the scheme of merger approved by the honourable Lahore High Court, Lahore, vide its order dated 1-4-2003. The learned first. Appellate authority did not, however, entertain the plea of the taxpayer regarding allocation of expenses under section 67 read with Rule 13 of the Income Tax Rules, 2002, as well as calculation of minimum tax under section 113 of the Income Tax Ordinance, 2001 on aggregate turnover including presumptive sales. The Revenue has contested the direction of the learned CIR(Appeals) regarding the set-off of B.F Losses of the amalgamating companies against the income of the amalgamated company whereas the taxpayer company has assailed the confirmation of apportionment expenses as made by the Taxation Officer as well as the method of calculation of minimum tax on normal law sales over and above the tax payable on presumptive sales.
3. We have heard both the learned representatives of the parties and also gone through the relevant record available on the file. First we take up the appeal of the Revenue which assails the direction of the learned CIR(Appeals) to allow the benefit of adjustment of the losses of the amalgamating companies against the income of the taxpayer company. The learned DR vehemently agitated against the direction of the learned CIR(A) and contended that the finding recorded by the learned CIR(Appeals) regarding the adjustment of losses of the amalgamating companies was not in accordance with law. In order to clarify the legal position the learned DR referred to the definition of amalgamation contained in section 2(1A) which as on 30-6-2005 was as under:-- (1A) "amalgamation" means the merger of one or more banking companies or non-banking financial institutions, or insurance companies, in either case being a public company, or a company incorporated under any law, other than Companies Ordinance, 1984 (XLVII of 1984), for the time being in force, (the company or companies which so merge being referred to as the "amalgamating company" or companies and the company with which they merge or which is farmed as a result of merger, as the "amalgamated company") in such manner that--
(a) the assets of the amalgamating company or companies immediately before the amalgamation becomes the assets of the amalgamated company by virtue of the amalgamation, otherwise than by purchase of such assets by the amalgamated company or as a result of distribution of such assets to the amalgamated company after the winding up of the amalgamating company or companies;
(b) the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation.
Subsequently, through amendment made by the Finance. Act, 2005 the words "Or company owning and managing industrial undertaking" were added in section 2(1A) to enlarge the scope of categories of companies going for amalgamation. The learned Additional Commissioner was of the view that insertion of the words, "the company owning and managing industrial undertakings" in the definition of amalgamation through Finance Act, 2005 indicated that the benefit of set-off of business losses in consequence of amalgamation could not be availed by the taxpayer company in respect of losses of amalgamating companies assessed up to 30-6-2005, because industrial undertakings were given the option of amalgamation w,e,f, 1-7-2005 i,e, the tax year 2006 and prior to that only banking companies or non-banking financial institutions or insurance companies could go for amalgamation and enjoy benefits flowing therefrom. With these observations he rejected the claim of the company regarding adjustment of business losses. He also placed reliance upon section 57-A of the Income Tax Ordinance, 2001 for rejecting the claim of adjustment of B/F losses. The learned first appellate authority, however, did not agree with the findings of the Taxation Officer and held that even if the benefit of adjustment of losses of the amalgamating companies which managed and run industrial undertakings against the income of the amalgamated company which also owned and run an industrial undertaking was not available up to 30th June, 2005, the said benefit could not be denied on account of the judgment of the honourable Lahore High Court, Lahore, which had approved the scheme of amalgamation under sections 284 and 287 of the Companies Ordinance, 1984 vide its order dated 1-4-2004, Relevant part of the judgment quoted by the CIRCA) is reproduced hereunder:-- "This petition seeks the sanction of this honourable Court pursuant to sections 284 and 287 of the Companies Ordinance, 1984 (the 'Ordinance" "Scheme") between petitioner No, 1 and its, members, petitioner No 3 and its members and petitioner No, 4 and its members. The scheme envisages the transfer to and working in petitioner No, 1 of the whole of undertakings and business of petitioner No,2, petitioner No,3 and petitioner No,4 (petitioner No,2, petitioner No,3 and petitioner No,4 are hereinafter collectively referred to as the "Merging Companies") together with all the properties, assets, rights, liabilities, quotas and obligations of every kind and description as subsisting on the Appointed Date (as defined in the Scheme), by making allotment of fully paid up ordinary shares of petitioner No 1 to the registered holders of the shares of the Merging Companies in lieu of the shares of the Merging Companies held by them. Upon sanction of this Scheme by the Honourable Lahore High Court, Lahore, the Merging Companies shall stand dissolved without winding up. (A copy of the Scheme dated December 12th 2003 is: appended herewith and marked Annexure-A)"
The learned AR also relied upon the judgment of this Tribunal reported as 1996 Tax 244 wherein it was held as under:-- "We are of the view that the, order in Civil Original No 136 of 1996 of the Hon'ble High Court clearly envisages the merger of all assets, rights, privileges, benefits etc. After concluding the definition of the word "amalgamation" in the new Income Tax Ordinance, 2001 and the order of the Hon'ble High Court regarding the merger of Messrs Elahi Spinning and Weaving Mills in the assessee-company we have noted that it has clearly established that the intention of the Income Tax law is to encourage merger and amalgamation and to give maximum tax benefits to the company absorbing in other companies and merging thereof.
We have no doubts in our mind that the merger approved by the Hon'ble High Court had the legal effect of giving a continuity to the operations of the merged company, which in the instant case is Messrs Elahi Spinning and Weaving Mills as a part of the assessee company i,e, Messrs Taj Textile Mills consequent and vesting the assessee-company with all assets and liabilities of Messrs Elahi Spinning and Weaving Mills (merged company). It is evident that if there was any un-discharged tax liabilities of the aforesaid non-surviving company, the same would have been recoverable from the assessee-company and that the assessee company would have been bound to duly discharge the same.
Similarly, the assessee-company is clearly entitled to have adjustment of the unabsorbed losses that have been brought forward.
We are of the view that the departmental officers are bound by the orders passed by the Hon'ble High Court. This order sanctioned the Scheme of Arrangement under which the assessee- company came to be vested with all rights and liabilities of merged company. These rights included the right of brought forward losses also."
4. We have heard the rival arguments of both sides and also gone through the relevant record available on file. As per order of the Lahore High Court, Lahore, amalgamated company has taken over all the properties, assets, rights, liabilities, quotas and obligations of every kind which according to the CIR(A) include the right to carry forward assessed losses of the amalgamating companies and adjust them against the business income of the amalgamated company. After careful consideration of the facts of the case as well as the case-law relied upon by the A.R., we are not persuaded to subscribe to the finding of the learned first appellate authority because right B to carry forward the assessed losses of the amalgamating companies and adjustment thereof against the income of the amalgamated company is no longer available because of specific prohibition contained in section 57A of the Income Tax Ordinance, 2001 which reads as under:-- "57A. Set off of business loss consequent to amalgamation. The assessed loss (excluding capital loss) for the tax year, other than brought forward and capital loss, of the amalgamating company or companies shall be set off against business profits and gains of the amalgamated company, and vice versa, in the year of amalgamation and where the loss is not adjusted against the profits and gains for the tax year the unadjusted loss shall be carried forward for adjustment up to a period of six tax years succeeding the year of amalgamation."
Honourable Lahore High Court, Lahore delivered the judgment dated 1-4-2004 in the light of sections 284 and 287 of the Companies Ordinance, 1984 without taking into consideration the provisions of section 57-A of the Income Tax Ordinance, 2001 quoted supra. As such the order of the High Court does not have the effect of nullifying the impact of provisions of section 57-A. Be that as it may, we cannot escape the conclusion that in the presence of section 57-A of the Income Tax Ordinance, 2001, the amalgamated company is not entitled to the adjustment of B.F. Losses of amalgamating companies. We, therefore, accept the appeal filed by the Revenue and vacate the order of the first appellate authority and restore the order of the taxation officer on the point of adjustment of B/F losses of the amalgamating companies.
6. As regards the appeal of the taxpayer, its first grievance relates to the apportionment of the expenses on the basis of section 67 D read with Rule 13 of the Income Tax Rules, 2002. The learned AR during the course of hearing of appeal stated that in response to notice under section 122 of the Income Tax Ordinance, 2001 dated 26-4-2008 detailed working regarding the allocation of expenses was submitted identifying commons expenses attributable to exempt income (capital gain on sale of shares) and presumptive income (Dividend) as under:-- Tax year, 2004
(i) Exempt/PTR Income Capital gain on sale of shares Dividend IncomeRs,64,400,709 Rs,89,805,082 Rs,154,205,791
(ii) Head of Common Expenses Employees Salary Chief Executive's Salary Postage, telegraph and telephone Rent, rates and taxes Audit fee Total common expensesRs.1 ,050,552 Rs,60,000 Rs,70,419 Rs,172,186 Rs,5,750 Rs,1,385,907 Tax year, 2005
(i) Exempt/PTR Income Capital gain on sale of shares Dividend IncomeRs,11,362,481 Rs,116,318,201 Rs,127,680,682
(ii) Heads of Common Expenses Employees Salary Chief Executive's Salary Postage, telegraph and telephone Rent, rates and taxes Audit feeRs,1,854,820 Rs,120,000 Rs,144,547 Rs,233,913 Rs,18,000 Total common expenses Rs,2,371,280 Tax year, 2005
(i) Exempt/PTR Income Capital gain on sale of shares Dividend IncomeRs.350,596,184 Rs.131,712,700 Rs.482,308,884
(ii) Heads of Common Expenses Employees Salary Chief Executive's Salary Postage, telegraph and telephone Rent, rates and taxes Audit fee Total common expenses Rs.1,376,330 Rs.152,910 Rs.121,431 Rs.135,016 Rs.180,000 Rs.1,803,687
6. It was further explained by the learned A.R that in the three years under appeal volume of business activity attributable to the earning of dividend income as well as gain on shares of listed companies can be gauged from the following tabulated facts.
(a) Detail of Income:-- Description Tax Year 2004 (30-9-2003)Tax Year 2005 (30-9-2004)Tax Year 2005 (30-6-2005)
Dividend Income 143,492,660 116,318,201 131,712,700 Capital Gain 64,000,000 11,352,241 350,596,184 Total 207,492,660 127,670,442 482,308,884
(b) Number of Transactions: Description Tax Year 2004 (30-9-2003)Tax Year 2005 (30-9-2004)Tax Year 2005 (30-6-2005)
Dividend Warrants Six Seven Three Sales of Shares One Two Two The learned AR contended that keeping in view the number of transactions involved, it was very safe to assume that neither dealings in shares of public limited, companies nor dividend income entailed full swing business activity. He contended that the learned Additional Commissioner, resorted to the formula for apportionment of expenses laid down in Rule 13(3) of the Income Tax Rules, 2002 in a casual way without realizing that the said Rule was subordinate to section 67 of the Income Tax Ordinance, 2001 which provided for apportionment of expenses "on reasonable basis taking account of the relative nature and size of the activities" to which the expense related. The pre-condition laid-down in section 67 was unfortunately not borne in mind while resorting to the formula laid down in sub-Rule (3) of Rule 13. The learned AR also contended that the appellant company had also submitted a certificate issued by a Chartered Accountant regarding allocation of expenses as specified in sub-Rule (5) of Rule 13 of the Income Tax Rules, 2002 but this certificate was also discarded by the learned Taxation Officer without giving any reason. The learned AR also referred to the judgment of this Tribunal reported as 2010 PTD . 25 wherein it was held:-- "We find force in the contention of the learned A.R. That the Taxation Officer has failed to point out a single expense which relates to either to dividend income or the exempt capital gain declared by the assessee. It appears that the Taxation Officer has apportioned the expenditure only on the premise and the assumption that had the taxpayer not invested in the shares then the fund so available would have been invested, in business which shows that the Taxation Officer could not bring on record any evidence to justify his above action. The alleged apportionment is found to have been made on imagination only. We also agree with the contention of the A.R. That the Taxation Officer has failed to prove "relative nature" and size of the activities to which the amount relates, which is an essential requirement as per the provisions of section 67 of the Ordinance. We also find that the claim of the assessee "that the two divisions have no internal financial link" has not been controverted by the Taxation Officer evidently in view of the above narrated facts. Hence we find that the said apportionment made by the Taxation Officer has rightly been deleted the learned C.I.T(A) and no interference in this regard is required. Thus the appeal filed by the Department on this issue is found to be devoid of merit and is hereby dismissed."
7. The learned DR, on the other hand, supported the orders of the authorities below and stated that the expenses charged to the Revenue had been prorated in accordance with the formula laid down in sub-Rule (3) of Rule 13 of the Income Tax Rules, 2002 and there was no legal infirmity or mistake in the allocation made by the Taxation Officer.
8. We have given due consideration to the rival arguments in the light of the section 67 of the Income Tax Ordinance, 2001 read with Rule 13 of the Income Tax Rules, 2002 and are of the considered opinion that the matter has not been properly thrashed out in accordance with the letter and spirit of section 67 of the Income Tax Ordinance, 2001, read with Rule 13 of the Income Tax Rules, 2002 referred to above. The certificate issued by the Chartered Accountant which was produced by the company before the Taxation Officer did not contain the basis of allocation of expenses as required under Sub-Rule (5) of Rule 13 of the Income Tax Rules, 2002. The Taxation Officer, on the other hand, also did not bother to comment upon the contents of the certificate or spell out a reasonable basis of allocation of expenses keeping in view the nature and size of the activities of the company which the company undertook in connection with the dividend income as well gain on sale of shares. We, therefore, deem it appropriate to set aside the amended assessm ent order on this score and remand the case to the Taxation Officer for reconsideration in the light of observations made hereinabove and also the case law available on the subject including the case relied upon by the learned AR of the company.
9. This brings us to the last ground i,e, chargeability of minimum tax on turnover u/s 113 of the Income Tax Ordinance, 2001. The controversy between the Revenue and taxpayer-whether the minimum tax is chargeable on the aggregate turnover including the sales assessable under the Presumptive Tax Regime or it is to be charged exclusively on local sales assessable under normal law over and above the presumptive sales has been a question of long-drawn litigation between the two sides. The controversy has, however, been finally set at rest by the honourable Lahore High Court, Lahore, through its judgment in Appeal No,218 of 2005 wherein Court held as under:-- "A cumulative reading of the section-D gives an impression that the said charge has been created in respect of person including company, a registered firm an individual etc. On his 'turnover from all sources'. The provision does not end there. The charge is on the aggregate of declared turnover.
The legislature has intended and advisedly used the word 'aggregateas it can only be of more than one sources. The legislature would have never used this connotation if intention was to charge it separately in respect of each source of the individual or company etc. The word 'aggregatehas been defined as follows:- "Concise Oxford English Dictionary"
(1) "a whole formed by combining several disparate elements;
(2) a total score of a player or team in a picture comprising more than one game or round; "Law Terms & Phrases"
'Meaning of Aggregatemeans a collection of things in order to form a whole, Mushtaq Textile Mills Limited v. Karachi Metropolitan Corporation 1994 CLC 1516.'
The use of language 'amount representing its turnover from all sourceand then followed by the words 'the aggregate of the declared turnover shall be deemed to be incomeleaves no doubt that the sources like import, export, local supply and local sale etc. All are to be aggregated and 1/2 per cent minimum tax is to be calculated on its total turnover declared by him from all his sources.
Thus if after said calculation the tax deducted or paid in any of the source falls higher than 1/2 per cent of the aggregate turnover from all sources no more tax is required to be paid."
10. Since the provisions of section 80D of the repealed Income Tax Ordinance, 1979, and 113 of the Income Tax Ordinance, 2001 are H identical in content, we are of the considered view that the ratio of judgment of the Lahore High Court quoted supra is fully applicable to the facts of this case. We, therefore, direct that the minimum tax under section 113 of the Income Tax Ordinance, 2001 be charged and calculated on the combined turnover from all sources which means the turnover assessable under normal law as well as the Presumptive Tax Regime.
11. All the appeals are disposed of in the manner and to the extent narrated above.