This appeal has been filed by the appellant company against the Order-in-Appeal No,126 dated 7- 2-2011 passed by Commissioner Inland Revenue (Appeals), Multan on the following grounds:--
(1) That the order passed by the learned commissioner Inland Revenue (Appeals), Multan is bad in law and contrary to facts on the records of the case.
(2) That the order of the CIR (Appeals) confirming the addition of Rs,22,843,984 as unaccounted for interest income, is manifestly perverse in law and facts as misread and misleading as much as the interest income in question was shown to have been duly accounted for and recorded in the applicant's books of account produced before him during the course of hearing of the appeal, the impugned additions thus liable to be deleted in to.
(3) That the order of the CIR (Appeals) upholding the addition in the amount of Rs,2,466,933 on account of sale of shares not written back as inadmissible in the appellant's return is liable to be annulled as being arbitrary; and perverse in law and fact as the said loss stood written back and included in the amount of Rs,4,098,292 appearing in appropriate column of the prescribed E- Return; accounting break up whereof also having been provided at the time of hearing.
(4) The learned CIR (Appeals) is not justified to set aside the issue of bad debts written off, the claim on this account being fully in accord with law and fact.
(5) That the appellant having made apportionment of expenses in conformity with the provisions of section 67 and Rules 13 and 31, the CIR (Appeals) had no justification for not deleting the arbitrary additions made by the Additional Commissioner (Audit) on this account addition of Rs,1,55,791 as expenses incurred but not claimed, all such expenses having in fact been accounted for in the accounting records on which the return of taxpayer was based and fully explained through documentary evidence.
2. Brief facts of the case are that the appellant a private limited company derived income through the local sale of imported Palm Olean, sunflower seeds, wheat, rice etc. As well as export of wheat during the tax year 2009. Notice under section 122(5A) was issued by the Additional Commissioner Audit, RTO, Multan on 22-9-2010 on various issues and after obtaining the appellant's reply the deemed assessm ent finalized under section 120 was amended under section 122 (5A) through his order dated 29-10-2010. The order of Additional Commissioner Audited RTO Multan was contested before the Commissioner Inland Revenue (Appeals) Multan who confirmed almost all the treatments given by the Additional Commissioner Audit, RTO, Multan. Being aggrieved the appellant agitated the impugned order before this Tribunal.
3. The first grounds of appeal against the impugned order is about the additions of markup/interest recovered by the appellant from its associated under takings against the loans provided to them out of borrowed funds. The markup recovered was than deducted from the total markup cost paid to the financial institutions for the borrowed capital by the assessee company.
4. The counsel of the appellant submitted that the finance cost of Rs, 24,626,957 appearing in note 20 of the audited accounts is the net amount of markup expense after deducting the amount of markup recovered from the associated undertakings in the sum of Rs,22,843,984, that was recovered/recoverable on account of amounts due from related parties as appearing in notes 6 and 8 of the audited accounts.
He further argued that the appellant company's short term bank borrowings as at June 30, 2008 and June 30, 2009 stood at 318.688 million and 196.896 million respectively, on which markup totaling to Rs,47,023,340 was paid to bank during the year under reference. The counsel of the appellant specifically explained the above stated facts by the following numerical data that according to him was also explained and provided to the learned CIR (Appeals) and IAC during the hearings of the case:-- Rupees Mark up paid on short term financing obtain from 47,023,340 financial institutions/banks appearing at note-1447,023,340 Less: Markup income accrued on balances due from related parties/associated concerns appearing in note-6 and 8 of the audited accounts(22,843,984)
Add: Bank charges 447,601 24,626,957 The above data clearly states that the gross finance cost paid but claimed by the company after deducting the markup recovered on the amounts due from related parties/associated undertakings.
He further contended that books of account, copy of the reply submitted to the learned IAC against his notice and a copy of the audited accounts of the company for year 2010 (where the company restated the figures of the year 2009 by showing total finance cost of Rs,47,23,340 wherefrom markup/interest recovered in the sum of Rs,22,843,984 was deducted) were provided to and verified by him; and with which he was totally satisfied at that point in time, but concluded otherwise in his order for reasons best known to him.
He further argued that the declared income of the taxpayer under reference would remain the same, alternately, showing the finance cost on gross basis e.g. Showing total borrowing cost as expense and mark up recovered from associates as income separately. Accordingly, the taxing of the interest income would tantamount to double taxation since the same income had already been taxed through adjustment i,e, claiming expense after netting off such income. The same officer had accepted the netting off gross markup expense with markup income which was recovered from its associates in the case of another company Khwaja Bashir Ahmad and Sons (Pvt.) Limited of the same group vide its order dated 17-1-2011. A copy of this order was produced before us.
He further argued that the CIR(Appeal) totally misunderstood the case while confirming the addition of markup income on account of non-deduction of tax under section 151 whereas the appellant is rather earning/recovering the markup charges to be paid to financial institutions.
Accordingly, disallowance of markup expense of the taxpayer who rather earning mark under section 21(c) is not understandable.
5. On the other hand learned DR supported the treatment given by the CIR(Appeal) and contended since the adjustment of markup income with markup expense not disclosed in the audited account therefore additions made by the IAC should be maintained.
6. On this the learned counsel on the other hand contended that there is no requirement to show the breakup of finance cost in the notes to the accounts whereas the books of account properly shows the amount of markup paid and recovered, which had been duly inspected/verified by the learned CIR(Appeals) and IAC and found the assessee company and its AR's contentions in order.
He further argued that the amount of markup receivable or payable to associated undertakings are debited to the concerned associated undertaking account, therefore, no separate disclosures in the accounts is required under any International Accounting Standards (IAS). Accordingly, the amount appearing as receivable from Khawaja Feeds (Pvt.) Limited and Ghreeb Nawaz Flour Mills at notes 6 and 8 respectively is inclusive of amount of markup receivable from these associates.
He further argued that under the circumstances the question of declaring inaccurate particulars, as assumed by the authorities below, did not at all arise.
6A. We have heard arguments of the learned counsel and rival argument of the DR of the department as well as considered the documents produced before us and convinced that additions made by the IAC Audit Multan is contradictory with the facts of the case brought on record and even before him and the first appellate forum. The taxation of markup income of Rs,22,843,984 which had already been taxed through adjustment with total mark up of Rs,47,023,340 would tantamount to double taxation. We have also persuade the audited accounts of the tax year 2009 as well as for the tax year 2010 and noted the profit before taxation amounting to Rs,1,163,024 has remained the same even showing the gross amount of markup expense of Rs,47,023,340 and markup income (i,e, markup recovered from associated undertakings) of Rs,22,843,984. We further noted that the learned IAC had accepted the same treatment/adjustment of markup made by another associated company of the group namely Khawaja Bashir Ahmad and Sons (Pvt.) Limited in his order dated 17-2-2011. Therefore, we have no option but to accept the appellant's contention. Hence the addition made on account of markup income recovered by appellant from associated undertakings is hereby deleted in to.
7. The next ground of appeal is about the addition of loss on the sale of shares of listed companies.
The learned counsel of the appellant argued that capital loss of Rs, 2,466,933 on disposal of shares of public limited companies claimed under the head administrative expenses in note 18 of the audited accounts has been voluntarily added back while computing the taxable income of the appellant company. He produced a copy of the e-filed income tax return of the appellant and pointed out that the following details of the inadmissible and admissible deductions of Rs,4,098,292 and Rs,2,439,716 respectively appearing at line 66 and 70 of the income tax return were filed with the both the authorities below for their consideration but strangely did not considered/appreciated the factual figures:-- Inadmissible Expenses Rupees Accounting depreciation 1,626,214 Unrecognized provident fund 3,300 Loss on sale shares investment 2,466,933 Donation 1,845 4,098,292 Admissible Deductions Rupees Tax depreciation 2,439,716 He further argued that loss on sales of share is a capital loss but since the gain from sales of shares is exempt from tax therefore this loss cannot be carried forward and adjustable against any capital gain of the subsequent years. Therefore, the appellant had rightly added back inadmissible expenses of Rs,4,089,292 that included the loss of shares amounting to Rs,2,466,933 as also apparent from the above detail.
8. On the other hand the learned DR of the Department supported the treatment given by the CIR (Appeal) and contended that the taxpayer had not disclosed the sale of shares in the audited accounts as normal sale, therefore, the addition made by learned IAG is correct and therefore should be maintained.
9. To this the learned counsel of the appellant stated that the disposal of shares of listed companies is not a normal business sale of the taxpayer rather it is a disposal of asset, therefore, the difference between the sale proceeds and cost of such is taken to profit and loss account under head administrative expenses. Reference to note 18 of the accounts was given, which was voluntarily added back in the accounting profit to arrive at taxable profit
10. We heard and considered the arguments of the rival parties as well as persuade the record. We totally agreed with the appellant that the authorities below were unable to understand the simple facts of the case. Since the appellant herself added back the loss of shares of listed company which was claimed in P&L under the head administrative expenses, therefore any further add back of the same amount will be tantamount to double taxation, therefore, the addition made on this count merits deletion.
11. The next ground of appeal is about setting aside the issue of bed debts written off amounting to Rs,2,071,024. The counsel of the appellant submitted that the major amount which taxpayer had written off was Rs,1,800,000 which was due from Messrs J.L Traders which was outstanding since 2005-2006. The brief facts of the case are that an amount of Rs,9,245,109 was receivable from Messrs J.L Traders Faisalabad. An Association of Person (AOP) since the year 2005-06 on account of sale of cloths. The AOP consisting of two members namely Mr. Rana Jarar. Hussain and Mr. Ghulam Habib having 50:50 shares issued a cheque for the amount but on the due date this cheque was dishonored therefore the company lodged F.I.R. Against AOP but in vain. In the year 2009 the management of the 'company was able to trace one of member Mr. Rana Jarar Hussain, who was residing abroad in Kenya. He agreed to make payment but to the extent of his share in the AOP i,e, 50% of total debt but on the waiver of Rs,1,800,000 and made an out court agreement with company.
Accordingly, the amount of actual waiver was written off after the approval of the Board of Directors of the company, having authority under the Companies Ordinance, 1984 and claimed waived amount as bad debt written off under the head P&L expense in terms of the provisions of section 29(1) reproduced as under:--
29. Bad debts-(1) A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are satisfied, namely:
(a) The amount of the debts was--
(i) Previously included in the person's income from business chargeable to tax; or
(b) The debt or part of the debt is written off in the accounts of the person in the tax year ; an
(c) There are reasonable grounds for believing that the debt is irrecoverable.
He further argued that the balance amount of Rs,271,024 was receivable from two traders since 2003-2004, who were not contactable, therefore there was no hope to receive any amount from them and even the cost to recover the debt would be more than actual debt so rightly written off on the recommendation of Board of Directors of the appellant company.
He contended that the learned CIR (Appeal) is thus erred in setting aside the assessee's claim of bad debts written off in the sum of Rs,2,071,024, which in the opinion of the management of the company was impossible even after making all possible efforts, duly approved by the Board of Directors of the company in accordance with the provisions of Companies Ordinance, 1984. Further the CIR (Appeals) also acted in disregard with provision of section 29 as well as the ratio settled on the instant issue reported as: 2007 PTD (Trib.) 1529.
'....Whether assessee is the best judge to determine as to what part of its bad debts requires writing off and assessee cannot write off debt only to save taxes, as in this way, he loses more than he appears to gain-Held yes. Whether there is no justification for disallowing the claim filed by the assessee-Held yes....
12. On the other hand the learned DR supported the, treatment given by the CIR (Appeal) and contended that the amounts written off as bad debts was a loan given to an employee of the company, therefore different what is stated by the counsel of the appellant. He further contended that recovery measures were not intimidated to Department. Furthermore the learned CIR (Appeal) also pointed out that the medium of special purpose vehicles was not used to recover this amount.
The DR also argued that reliance was made on a number of judgments of the apex courts therefore the addition confirmed by learned CIR (Appeal) in line with law.
13. On the other hand the learned counsel of the appellant argued that CIR (Appeal) has treated the normal business debts as loan given to employees therefore cases quoted in his order are either inapplicable or irrelevant in this case. He further argued that since all the condition laid down in section 29(1) had been fulfilled and the appellant claim was fully in line with the ratio settled in the case referred to supra, therefore the addition made by the learned IAC should have been deleted in to.
14. After considering both the arguments of learned counsel and DR as well as reviewing the documents available on record, we find it difficult to accept the treatment given by the authorities below. We further find that the cases relied upon by the CIR (Appeal) are distinct from this case, therefore the addition made by the learned IAC on this count is hereby deleted.
15. The next ground is about the addition made by the learned IAC on account of proration of expense and profit under section 67 read with Rules 13 and 231 between normal and PTR turnover.
The learned counsel submits that the learned CIR (Appeal) was not justified while confirming the addition made on this count. He stated that the assessee company is maintaining single books of account and the apportionment of expenditure/income has been properly made 'in accordance with the section 67 read with rules 13 and 231 of the Income Tax Rules 2002. Accordingly profit amounting to Rs,2,500,970 related to presumptive tax regime has been excluded from the total profit of Rs,2,821,600 as appearing in the income tax return for the year under reference to arrive at the income related to normal tax regime. A copy of computation of taxable income submitted to the authorities below was also. Produced before us.
16. On the other hand the learned DR supported the treatment given by the learned CIR (Appeal).
17. The learned counsel further submitted that working of proration provided to the IAC as well as CIR(A) clearly shows that all the expenses directly relatable to PTR income were charged to PTR income and common expense prorated between PTR and Normal income in accordance with the law. He further argued that the order of the learned CIR (Appeal) was not a speaking order.
18. We heard the argument of the learned counsel and rival argument of the learned DR and also consulted the documents available on record and found the arguments of the appellant's counsel well supported. The appellant had properly prorated the profit between PTR and Normal sale in line with section 67 read with rules 13 and 231. Further in other taxpayer case, namely Khawja Bashir Ahmad and Sons (Pvt.) Limited, of the same group the same learned IAC Audit, Multan N had accepted such proration made by the taxpayer. Therefore, to meet the end of justice the appellant also deserves for the same treatment, hence the addition made on this count is also deleted being arbitrary and discriminatory.
19. The last ground of appeal is about addition of Rs,1,559,791 on account of alleged difference between the amount of salaries appearing in annual withholding statement of the company and figures of salaries as appearing in the audited accounts. The learned counsel of the appellant 0 stated that although a proper reconciliation along with supporting documents were provided to the learned CIR (Appeal), and also produced the related record in this context, but he went on to confirm the additions without considering the factual position, as under:- Rupees Amount of salaries shown in annual withholding statements2,838,000 Less: Director remuneration (note-18 of audited accounts) (1,200,000)
Salaries, wages and other benefits (note-18 of audited accounts)(78,209)
Balance amount grouped in proportionate head office expenses (prorated on the basis group sales) appearing as Rs.3,193,120 (note-18 of the audited accounts)(859,791)
Difference 0 He further argued that since a Proper reconciliation was made duly supported by verifiable documents, therefore any addition in this context was not justified, and therefore the addition on the issue should have been deleted. On the other the learned DR supported the treatment given by the learned CIR (Appeal).
20. After hearing the arguments of the rival parties, we convinced that no addition is called for on this count as the entire amount is fully recorded, properly reconciled and duly supported with documentary evidence. Accordingly, this addition is hereby deleted.
21. The appellant appeals succeed in the manner stated herein above.