Through these two cross appeals the impugned order of the learned CIR(A) dated 30-7-2010 has been assailed by both the parties.
2. The Taxpayer has objected the impugned order on the following grounds:-- TAX YEAR 2007 "(1) That the order passed by the Commissioner Inland Revenue (Appeals-III) Large Taxpayer Unit, Karachi is bad in law and on facts.
(2) That the Commissioner Inland Revenue (Appeals) has erred in confirming the additions made under section 21(n) and other disallowances and additions in the order passed by Taxation Officer- XII, Audit Division, Large Taxpayers Unit, Karachi.
(3) That the Commissioner Inland Revenue (Appeals) has erred in confirming the application of provisions of Clause (n) of section 21 of Income Tax Ordinance, 2001 to the case of the appellant.
(4) That the Commissioner Inland Revenue (Appeals) has erred in confirming the disallowance of loss against Lahore Project at Rs,101,838,000 without appreciating the facts of the case, although complete documents and evidences etc. Were produced during the assessment proceedings and were also produced and examined by the Commissioner Inland Revenue (Appeals), Karachi.
(5) That the Commissioner Inland Revenue (Appeals) has erred in confirming the disallowance and addition of Rs,101,838,000 although the said investment having been made for the purpose of carrying on business. The Commissioner Inland Revenue (Appeals) has further erred in confirming the treatment whereby it was treated as a capital expenditure and was disallowed and added to the income of the appellant.
(6) That the appellant had paid Rs,101,838,000 as earnest money or Deposit for Purchase of Immovable Property which does not fall within the ambit of capital assets and should have been allowed as business expenditure.
(7) Without prejudice to Grounds, heretofore recorded above, the Commissioner Inland Revenue (Appeals) has erred in not, directing to allow depreciation under sections 22 and 23 on the quantum of investment at Rs,101,838,000.
(8) That the Commissioner Inland Revenue (Appeals) has erred confirming the rejection of trading results and has further erred in confirming addition of Rs,559,738 in respect of purchases alleged to be unverifiable purely on the basis of incorrect insinuations and allegations, although the declared trading results have always been accepted in the preceding assessment years.
The quantum of addition confirmed in appeal besides being unjustified is not only excessive and exorbitant but also without any basis, hence, liable to be deleted.
That the Commissioner Inland Revenue (Appeals) has erred in confirming the addition of Rs,1,791,340 to the income of the appellant on the ground that the said amount represent expenditure of a capital nature. The entire addition having been made on incorrect insinuation and allegations without appreciating that in Hotel Business which provides "Hospitality Service", the expenditure represents frequent replacement which is a "revenue expenditure".
(10) That the Commissioner Inland Revenue (Appeals) has erred confirming the disallowance the following expenses:--
(i) Out of Travelling and Transport expenses Rs. 131,272 (ii)Out of guest supplies Rs. 108,779 (iii)Out of Lenin, China and Glassware Rs. 141,077 (iv)Out of Printing and Stationery Rs. 120,459 The quantum of expenses disallowed and confirmed in appeal besides being unjustified are not only excessive, and exorbitant, but also on incorrect allegations, hence, liable to be deleted.
(11) That the Commissioner Inland Revenue (Appeals) has erred in not given a finding and deleting the levy of W.W.F. At Rs,509,331. Since the provisions of W.W.F. Is not applicable to the case of the appellant as held by the learned Income Tax Appellate Tribunal and reported as 2007 PTD (Trib.)
2860, the quantum of levy is liable to be deleted.
(12) That the appellant craves permission to add, amend, alter or substitute any further grounds of appeal at the time of hearing of appeal.
3. The. Department has agitated the impugned order on the following grounds:-- "(1) That the order of the learned Commissioner Inland Revenue (Appeals-I), Karachi, is bad in law and on facts of the case.
(2) That the learned Commissioner (Appeals-I) Inland Revenue, Karachi was not justified in deleting the addition of Rs,1,008,620 made under section 34(5) of the Income Tax Ordinance, 2001.
(3) That the appellant craves leave to add, alter or amend the grounds of appeal any time on or before at the time of hearing of the appeal."
4. We have heard the learned representatives from both the sides and have also perused the impugned order, the order passed by the Taxation Officer and the available relevant record of the case.
Briefly stated, facts of the case as explained by the learned counsel for both the sides are that the Taxpayer a Public Limited Company is engaged in hotel business at Karachi by the name of Regent Plaza Hotel which was formally known as Taj Mahal Hotel. In order to facilitate running of hotel business at Karachi and in order to accommodate its valued guests at Lahore, the Taxpayer had decided to open a branch of an already in existence and running business of Regent Plaza Hotel at Lahore. As per mutual agreement and confirmation by consortium of Banks, entire finance cost of extension of running business at Lahore was to be borne by the bankers by issuing TFC.
Accordingly, Taxpayer had entered into an agreement of sale dated 31st March, 2006 with the owner of land Mr. Ajaz Mehmood for purchase of Plots Nos.75-D-1 and 76-B-1, Main Boulevard, Gulberg, Lahore having an area of 12 Kanals, 3 Marlas and 75 square feet for a total consideration of Rs,973,333,333. Earnest money of Rs,97,333,333 representing 10% of the agreed sale consideration was paid through Pay Order No,15000443, dated 31st March, 2006 issued by My Bank Limited, Karachi. It was further agreed that if the balance amount was not paid on or before 31st July, 2006, the earnest money will be forfeited.
That prior to executing of the agreement of sale on 31st March, 2006, a consortium of My Bank Limited and Pak Oman Investment Company Limited along with the Chairman of the Taxpayer Hotel Mr. Ferozuddin Baweja in a meeting held on 28th March, 2006 had agreed to finance Lahore Branch of Regent Plaza Hotel by advancing loan up to Pak Rupees 1,200 million through redeemable finance facilities by issuing term finance certificates for a period of five years. The Bankers had committed to provide entire funds in respect of extension of running business at Lahore on the above mentioned plots. On the basis of financial undertaking given by both the bankers, Taxpayer had not only executed an agreement for purchase of plot but had also paid advance earnest money and had also appointed an architect for preparing site plan of Regent Plaza Hotel, Lahore and had presented site plan for approval of Municipal and Building Authorities etc. Lahore. Fees and other charges were also paid. Thus, the Taxpayer had taken all the steps within its power, but unfortunately one of the members of consortium Messrs Pak Oman Investment Company Limited refused to approve the finance facilities due to dispute with "My Bank Limited".
Photocopy of letter dated July, 31, 2006 was also produced before this Bench, Although, Taxpayer triedto its best to resolved the dispute between My Bank and Pak Oman, but could not succeed. The end result was that as finance facility was not approved, nor received, the balance amount as per agreement of sale could not be paid. The seller of the plots had refused to extend the date and had cancelled the sale agreement by forfeiting earnest money of Rs,97,333,333. In addition to above the amount paid to. My Bank and other expenditure aggregating to Rs,4.508 (M) was also lost. The Taxpayer had also paid advisory and arrangement fees of Rs,1,425,000 for issuance of TFC of Rs,1,200 million to My Bank Limited on 27-4-2006 through cross cheque No,3206604 after deducting withholding tax. Although, the Taxpayer had adhered to all the terms and conditions for obtaining the finance facility and in anticipation thereof had appointed Messrs Imtiaz Ali Associates, Architects, Engineers and Planners of Lahore for preparation of site plan of Lahore Branch of Regent Plaza Hotel. Accordingly, site plan was prepared and also presented for approval of building authority at Lahore. He has also produced original Site Plan before this Bench which has been perused.
5. As per the submission of learned counsel for the Taxpayer, as the extension of same business in existence could not materialize due to dispute between the banks and not due to any default or negligence of the Taxpayer, hence, the Taxpayer could not pay the balance amount as per the terms of sale agreement. The end result was that the amount of deposit of Rs,101.838 (M) was forfeited. The other expenditure incurred for preparing of SITE Plan, approval fees etc. Were also lost and as this loss was incurred during the normal course of business in operation and extension of same business in existence, it is an admissible expenditure and allowable under section 20 of Income Tax Ordinance, 2001.
He has argued that in the Audited Accounts for the Tax Year 2007, Taxpayer had claimed a business loss of Rs,101,838,000. During the audit proceedings Taxpayer had explained the factual position and had also produced documentary evidences including SITE Plan etc. In order to justify and prove that the loss was incurred during the normal course of existing business activities and it is an admissible expenditure of revenue nature. He has contended that the Taxation Officer had disallowed the claim by treating the loss as of capital nature by invoking the provisions of section 21(n) of Income Tax Ordinance, 2001. The first appeal filed before the Commissioner Inland Revenue (Appeals) was dismissed on this issue.
The learned counsel representing the Taxpayer has argued that, the Commissioner Inland Revenue (Appeals) has ignored the fact that the Taxpayer is engaged in the business of operating Five Star Hotel at Karachi and the entire amount aggregating to Rs,101,838,000 was incurred for the purpose of carrying on hotel business which was already in existence at Karachi as a branch of same business at Lahore. Hence, the provision of section 21(n) of Income Tax Ordinance, 2001 is not applicable. He has further contended that the amount paid as earnest money or deposit for purchase of immovable property does not fall within the ambit of capital assets and have been specifically excluded as per section 37(5) of Income Tax Ordinance, 2001.
He has argued that the Taxation Officer had completely ignored the actual facts of the case and in order to build up his case against the Taxpayer and for treating the total expenditure aggregating to Rs,101,838,000 including earnest money deposited and forfeited by the seller, as an expenditure of capital nature has referred to various decisions and case-laws decided under U.K. Laws by English Courts and also Indian Courts without reproducing the exact text of the decision and the narrations are also in his own words. The decisions referred to by the Taxation Officer are not applicable to the case of the present Taxpayer for the reason that the facts of all the cases are totally different and distinguishable. He has once again reiterated his submissions that the Taxpayer had paid deposit for purchase of land at Lahore in order to construct Lahore Branch of Regent Plaza Hotel as an extension of business already in existence and not for any new business, but it was due to reasons beyond the control of the Taxpayer and as the bankers had backed out from their commitment. The Taxpayer was thus totally helpless which resulted in forfeiture of earnest money and other expenses including, the cost of preparing site plan and approval fees etc. In view of admitted facts of the Taxpayer case, he has vehemently pleaded that the loss suffered is of revenue nature and allowable as a business expenditure under section 20 of Income Tax Ordinance, 2001. In support D. Of his contention, reliance has been placed on the following decisions:--
(1) 1983 PTD 58.
(2) CIT v. Dealers reported as (1975)100 ITR 424 (Allahabad High Court).
(3) ITAT Lahore reported as (1959) 1 Tax (V-60).
(4) CIT v. Taxtool Co. Limited (High Court of Madras, India) (1982) 135 ITR 200.
(5) The learned counsel has asserted that the ratio decided of the above referred decisions is fully applicable to the case of the Taxpayer as the expenditure had been incurred during the course of running of business in existence, the entire expenditure is an admissible deduction and allowable under section 20 of Income Tax Ordinance, 2001. He had finally requested that disallowance of Loss of Rs,101,838,000 may kindly be deleted.
6. On the other hand the Learned Departmental Representative has supported the impugned orders passed by both the Officers below. He has contended that Commissioner Inland Revenue (Appeals) is fully justified in confirming the amount disallowed by the Taxation Officer as capital expenditure by relying on the decision reported as 15 Tax 53 (H.C). He has requested that the order passed by the Commissioner Inland Revenue (Appeals) may be maintained.
7. We have heard the arguments of both the sides and have also perused various decisions relied upon by the representative of the Taxpayer and as well evidences produced during. The contention of the representative of the Taxpayer is that as the entire expenditure claimed by the Taxpayer was incurred for expansion of same business which was in existence and carried on, the assumption that it is an expenditure of capital nature is totally incorrect. Both the officers have misunderstood and misdirected the facts, although, it is obvious that in order to improve the quality of service and to accommodate their valued guest at Lahore, the Taxpayer had decided to open a branch of Regent Plaza Hotel at Lahore. Facts as stated by the learned counsel for the Taxpayer has not been disputed by the learned D.R. The question before this bench is, whether the earnest money paid in respect of purchase of plots at Lahore, expenses incurred for site plan, payment of approval fees and also payment made for issue of TFC is allowable as an admissible revenue expenditure or not, especially when there is no negligence nor any default has been committed by the Taxpayer at any stage. We are of the view that if the bankers had provided finance facilities, the entire cost of land and construction of hotel would have been capitalized and eligible for allowing depreciation.
From the perusal of site plan and other documents and evidence produced before this bench, we are convinced that there is no negligence of the Taxpayer and the entire investment was made for the purpose of expansion of running hotel business which was already in existence, but due to unavoidable circumstances and not due to any negligence of the Taxpayer, the entire investment was lost which includes forfeiture of security deposit, which cannot be termed a capital expenditure. Similarly, other expenditure was incurred for the purpose of carrying on same business which was already in existence. Thus, after visualizing the facts of the case and the settled principle that every investment or expenditure is not a capital expenditure and as the loss has been suffered in the cost of business in existence and, regularly carried on, the loss suffered on account of forfeiture or security deposit and other expenses are purely a business lose and allowable as an admissible deduction under section 20(1) of Income Tax Ordinance, 2001. In view of the admitted facts of the case, we have no doubt in our mind that the entire expenditure was incurred for the purpose of carrying on of the same business which was already in existence. As the provision of section 21(n) is not applicable and was wrongly invoked, the disallowance of the claim in this respect is directed to be deleted as the entire expenditure was incurred for the purpose of business which was already in existence. The appeal on this issue is allowed.
8. The next issue contested is in respect of food cost of Rs,559,738. The learned counsel of the Taxpayer has argued that the Taxation Officer has admitted that complete details in respect of purchases of various items debited to food cost (cost of sales) aggregating to Rs,46,697,000 have been filed and are on record. Entire purchases are through various suppliers and the payments have been made through cross cheque. In order to meet the emergency and urgent requirement of Food Department (Kitchen), the Taxpayer had purchased various items from various parties total aggregating to Rs,559,783. Payment was made in cash which works out to 1.198%. It is further contended that payment made in cash is not a crime. The learned A.R. Of the Taxpayer had also produced bills of all the eight parties which consist of small amounts but the purchases are fully vouched and verifiable. He has further argued that the food cost expenses have never been disallowed in the preceding assessm ent years. He had pleaded that the addition of Rs,559,738 may kindly be deleted.
On the other hand the learned D.R. Has argued that the Taxation Officer was fully justified to making the addition of Rs,559,738 in food cost. He has argued that during the assessment, the Taxpayer did not produce any details before the Taxation Officer. He had argued that the order passed by the Commissioner Inland Revenue (Appeals) may kindly be maintained.
We have heard the arguments of both the sides. We have also examined the evidence filed by the appellant. We are of the view that the Taxation Officer was not justified in making the addition in respect of food cost expenses as the Taxpayer has produced evidence in this respect and no instance of un-verifiability has been pointed out. The disallowance made by the Taxation Officer in this respect is therefore deleted.
9. The next issue contested by the Taxpayer is in respect of repairs and maintenance. The A.R. Of the Taxpayer has argued that the complete details along with bills have been produced and examined by the Taxation Officer. However, on Page 9 he has treated the purchase of carpet and repairing cost of Diesel Generator aggregating to Rs,1,791,340 as an expenditure of capital nature.
He has contended that the Taxpayer is carrying on hotel business and provides hospitality services to its guests. Hence, it is essential and necessary that the rooms are kept extremely clean and spotless. Thus, not only carpets are replaced frequently but also other items. In order to maintain the standard of 4 or 5 Star Hotel, the replacement of carpet and also spotless maintenance of rooms also plays an important part in maintaining the standard as the hotels are frequently checked by the International Association of Hotels by sending secret customers as guests in order to assess the rating. There is no specific test of universal application for determining an expenditure of capital or revenue nature. On what basis the Taxation Officer has treated the expenditure incurred on replacement of carpets and repairing of generator as an expenditure of capital nature is best known to him, although it is an admitted fact that even the manufacturers of generators and other electrical items restricts the warranty to six months only. The product of China such as electrical generators and such other items do not carry any warranty of even a day.
He has argued that replacement of carpets in hotel business is a frequent affair and falls in maintenance of standard. Thus, it is the replacement expenditure and the taxpayer had correctly charged the same to repairs and maintenance accounts as there is no guarantee of enduring benefit. He has contended that the Courts have gone to the extent as, the cost of replacement of petrol engine in buses and trucks with diesel engine have been held as a revenue expenditure Reliance in this respect was placed on the following decisions:--
(1) Messrs Goton Lime Syndicate v. CIT, 59 ITR 178;
(2) Messrs Empire Jute Company Limited v. CIT, 124 ITR 1; and
(3) Messrs L.H. Sugar v. CIT, 125 ITR 193 (SC).
It is contended that the Taxpayer is running a hotel and in view of the nature of the business, replacement of carpet and other items is a normal business expenditure of a regular and frequent nature, hence, it cannot be treated as a capital expenditure as it falls in normal repairs and maintenance and replacement. He has argued that the repairs and maintenance expenses have never been disallowed in the preceding assessment years despite the fact that the quantum as well as nature has remained the same. He has therefore requested for deletion of addition made in this respect.
On the other hand the learned D.R. Has argued that the Taxation Officer was fully justified to making the addition of the repairs and maintenance. He has argued that amount in this respect claimed by the Taxpayer is of capital nature. He had pleaded that the order passed by the officers may be maintained on this issue.
We have heard the arguments of both the sides. We have also examined the evidence filed by the representative of the Taxpayer. We are of the view that frequent replacement of carpet and repairing cost of generators, these expenses are of revenue nature and necessity of the Hotel Business. We have further noted that in the past claim in this respect has never been disallowed.
The addition made in respect of repairs and maintenance expenses and disallowance made by the Taxation Officer is therefore to be deleted.
10. The next issue contested by the Taxpayer is in respect of Workers Welfare Funds. The A.R. Of the Taxpayer has argued that the issue has already been decided by this Tribunal in many cases. He has in this respect referred decisions of the Tribunal reported as 2007 PTD (Trib.) 1860 and (2007)
96 Tax 61 (Trib.), wherein it has been held that Workers Welfare Funds is not leviable at all upto the Tax Year 2009, he has also produced the photocopy of Circular No,13 of 2008, dated 23-10-2008, issued by the F.B.R.
On the other hand the learned D.R. Has argued that levy of W.W.F. Is fully justified. The order for W.W.F. May be maintained.
After considering the submissions from both the sides we are of the view that the contention raised by the learned A.R. Of the Taxpayer is correct. Keeping in view of the above referred decisions the levy of Workers Welfare Funds is deleted.
11. Regarding the disallowances made out of Travelling and Transport expenses; Guests supplies expenses; replacement of Linen, China and Glassware and Printing and Stationery expenses we are of the view that the treatment in this respect by the officers below are fair and reasonable. No interference is required in this regard. The appeal on this ground is therefore dismissed.
12. Regarding the cross appeal filed by the Department, after considering the submissions made from both the sides we are of the view that the learned CIR(A) has rightly deleted the addition. The relevant find of the learned CIR(A) are reproduced hereunder:-- "As regards addition of Rs,1,008,620 under section 34(5) of Income Tax Ordinance, 2001 the Counsel for the appellant has vehemently contested that as the liability outstanding is more than 8 to 10 years old the same could have been added under section 25(c) of repealed Ordinance, 1979 and under the Income Tax Ordinance, 2001. I have thoroughly examined the provisions of both the Ordinance. The language of section 25(c) does permit such additions up to a period of eight years but the language of section 345) restricts the addition up to four years only. Since, the Assessing Officer has not examined this issue in its proper perspective, nor has given any finding relating to the period the liability has remained unpaid hence for an old addition, if any, the provision of Income Tax Ordinance, 2001 cannot be invoked in view of a recent decision of Supreme Court of Pakistan reported as 2009 PTD 1392 (S.C. Pak.).
As per provisions-of subsection (5) of section 34 of Income Tax Ordinance, 2001 if any trading liability remains unpaid for three years then it can be added exactly in the 4th year only It means that if it is not added in the 4th year, then it becomes time barred and it cannot be added in the 5th year or 6th year. Since . The liability in this case is about 8 years, so it has become already time barred which cannot be added in the year under appeal hence the same is deleted."
We agree with the finding of the CIT(Appeals) which does not require any modification and appeal filed by the Department is dismissed.
Both the cross appeals are disposed of in the manner indicated above.