' These cross appeals have been directed against the order of CIT(Appeals) Zone-I, Lahore, dated 5-5-2009 whereby the appeal filed by the taxpayer company against the order passed under section 122(4) of the Income Tax Ordinance, 2001 by the Taxation Officer relating to the tax year, 2003 was disposed of. The taxpayer company feels aggrieved by the treatment accord to the interest income and proceeds from the sale of scrap proration of expenses in the light of section 67 of the Income Tax Ordinance, 2001 read with Rule 13 of the Income Tax Rules, 2002, disallowance of initial depreciation on Marata machines purchased from Messrs Suraj Cotton Mills Limited, a sister concern of the company, curtailment of depreciation on residential buildings provided to the employees of the company, addition of Rs,25,00,000 under section 21-K of the Income Tax Ordinance, 2001 on account of excess perquisites, additions out of various Profit and Loss Account expenses and addition under section 34(5) of the Income Tax Ordinance, 2001. The revenue, on the other hand, assails the relief allowed by the first appellate authority by, way of curtailment of addition under section 21-K on account of excess perquisites from Rs,1,31,83,736 to Rs,25,00,000 and also direction of the first appellate authority to allow the statutory tax credit under section 107AA of the late Ordinance of 1979 after verifying the claim of the company from supporting documents.
2. We have given due consideration to the rival arguments of the representatives of both the parties and also gone though the orders of the authorities below carefully and the case-laws cited at the bar. We take up appeal filed by the taxpayer company first and dispose of the issues agitated by it in the grounds of appeal in the following manner:- Interest Income
3. As explained by the learned A.R, the company maintains a bank account with Prime Commercial Bank Limited under a scheme known as Prime Classics on which the bank Offers interest a 4% on the amount which remains deposited in the bank account provided the thresh hold of deposit does not fall below Rs,500,000. From this account the company earned interest income of Rs,39,89,000 which was claimed to be an integral part of the business income on the plea that the surplus funds deposited in the bank account were generated from the business of the company i,e, exports and local sales. The learned AR of the company vehemently contended that logically interest income could only be treated as an integral part of the business income because the amounts which were deposited in the bank account from time to time were generated from the business activities of the company. In this context he placed - reliance on the case of Messrs Crescent Power tech Limited decided by this Tribunal in I.T.As. Nos.4696, 5467/LB of 2003 (assessment year 1999-2000) dated 22-2-2006 wherein, under similar circumstances, it was held that the interest earned by the company was to be assessed as business income of the company. Our attention was also drawn to another reported judgment 2009 PTD 331 wherein interest income was held to be business income. It was held that the business prudence and commercial expediency motivated the taxpayer to invest the surplus funds in bank for generation of further income rather than keeping them idle in its safe custody. The interest income generated by depositing the surplus funds in the bank account was thus inextricably linked to the .Business from which the invested funds were generated. Concluding his argument the learned AR pleaded that the appellant company was justified in treating the interest income as part and parcel of its business activity.
4. The learned DR, on the other hand, contended that the interest income was distinct and separate from the income from business and profession. He explained that the mere fact that both categories of income had been classified under two separate heads under section 15 of the Income Tax Ordinance 2001 amply indicated that both types of income were distinct and separate from each other. He, therefore, supported the orders of the authorities below and contended that the treatment accorded to the taxpayer by both the forums below was perfectly in accordance with law. To further reinforce his contention he placed reliance on the judgments of the Supreme Court of Pakistan CIT v. Liquidator Khulna Bagerhat Railway Company reported as 1962 PTD 415 (5 Tax 262) and General tech Pakistan Limited v. I.T.A.T of Pakistan cited as 2004 PTD 2255. In the first case issue before the honorable Supreme Court of Pakistan was whether the interest income of the company which was engaged in the business of construction and running railways earned from the investment of surplus funds deposited in bank deposits was part and parcel of its business income or not. After considering the facts of the case the Supreme Court of Pakistan reached the following conclusion:-- "If the Company, instead of retaining its surplus moneys in idle condition, invested them under the powers given to them by their Articles of Association, it would to follow that the income so derived would be part of the Company's normal business income. Each case must be decided on its own facts and, in the instant case, the circumstances brought out in the evidence do not indicate that the receiving of interest on invested moneys was really included in the business income of the company. We are, therefore, of the opinion that the view taken by the High Court is not open to any legal exception. The appeal fails and is hereby dismissed with costs."
5. Similar view was affirmed by the Apex Court in the second case i,e, General tech Pakistan Limited v. I.T.A.T reported as 2004 PTD 2255. The appellant in this case was engaged in the business of Power Generation and earned interest income from the surplus funds by investing them in the bank. The company claimed exemption in respect of its interest income under Clause 176 of the Second Schedule to the late Ordinance, 1979 on the plea that the said income was part and parcel of the income of the power generation project as it had been earned by investing the surplus funds of the project. The revenue on the other hand, did not treat it as part and parcel of the business income and assessed it as income from other sources. In the litigation that ensued between the parties the matter reached the Supreme Court which upheld the view of the department.
6. We have given due consideration to the rival arguments and have also carefully gone through the case-law cited, of the bar. Apart from the judgments relied upon by the representatives of both the parties. We have been able to lay hands on another recent judgment in the case of Much power (Pvt.) Limited and others v. I.T.A.T of Pakistan reported as 2010 SCM R 1236 = 2010 PTD 1809, wherein a number of power generation companies filed appeal before the Honorable Supreme Court of Pakistan and pleaded that the term "Profits and Gains of the Project" was of a very wide import and included the interest income of the projects generated from the surplus funds invested in bank deposits. The Appex Courts, however, repelled the contention of the appellants and affirmed its earlier view expressed in the cases of Genentech Pakistan Limited v. I.T.A.T 2004 SCM R 1319 = 2004 PTD 2255 and AES Pakistan Gen. (Pvt.) Limited v. CIT.
7. In view of the facts discussed above we are left with no doubt that the controversy with regard to the treatment of Interest income stands settled through the authoritative pronouncements of the Supreme Court of Pakistan in the judgments quoted supra. Since the interpretation of law by the Supreme Court lays down the correct import of law, the same is binding on the entire judicial hierarchy. Following the judgments quoted supra, we have no hesitation in holding that the interest income earned from investing the surplus funds in bank deposits is distinct and separate from the business income and has rightly been assessed as income from other sources.
Sale of Scrap
8. The learned AR of the company contended that the sale proceeds of scrap amounting to Rs,21,17,426 were an integral part of the business income and should have been clubbed with the local sales or credited to the cost of goods sold. Reliance in this context was placed on the cases reported as 2005 PTD (Trib.) 1208 and 2006 PTD 499, wherein the I.T.A.T. Treated the sale of scrap as business income. The learned DR in his turn supported the orders of the authorities below.
9. We have given due consideration to the rival arguments and also gone through the relevant record available on file as well as the case-law cited at the bar. From the perusal of the amended assessm ent order it transpires that the taxation officer has treated sale of scrap as "other income" which, in our view, is not either fair or according to law. Sale of waste, goods of sub-standard quality produced during the manufacturing process and drums containing dyes and chemicals etc. Etc. And fixed assets are the activities which are inextricably linked to the main manufacturing activity of the company. As such the sale proceeds of these items are the business receipts of the company and an integral part of the business income. We, therefore, direct that the sale proceeds of scrap be treated as business income of the company instead of "other income".
Addition under section 21-K Excess Perquisites
10. Next grievance of the company pertains to addition on account of excess perquisites under section 21-K of the Income Tax Ordinance, 2001. The said addition made at Rs,1,06,83,735 was reduced to Rs,25 ;00,000 by the first appellate authority with the observation that the issue needed to be re-examined with reference to relevant provisions of law to determine as to what items were to be treated as part of salary and wages in order to work out the amount of allowances and perks paid to the employees in excess of 50% of the salary. However, the first appellate authority, thinking that it did not have the authority to remand the case to the taxation officer for de novo consideration deemed it expedient to restrict the disallowance to Rs,25,00,000.
The learned AR of the company contended that the addition made by the taxation officer on account of excess perquisites was violative of the provisions of sections 12 & 13 of the Income Tax Ordinance, 2001. He submitted that the special allowance and cost of living allowance were paid to the employees in pursuance of Punjab Employees Special Allowance Payment Act, 1988 and Employees' Cost of Living Relief Act, 1973 and being statutory allowances they were to be treated as part of the salary for the purpose of working out the amount of excess perquisites. Reference in this context was made to the two cases reported as 1997 PTD (Trib.) 2342 and 2002 PTD (Trib.) 1898. The learned AR contended that if only these two allowances were considered as part of salary, there would remain nothing to be added to the income of the company under section 21-K of the Income Tax Ordinance, 2001. The learned DR, on the other hand, supported the order of the taxation officer but vehemently agitated against the direction of the first appellate authority to restrict the addition to Rs,25,00,000.
11. We have given due consideration to the rival arguments and-also gone through the relevant record. We have noticed that the learned taxation officer worked out the addition under section 21- K of the Income Tax Ordinance, 2001 by placing the sum total of salary on one side and all the allowances and perks on the other which as held by the first appellate authority is not correct as far as working of the amount of excess perquisites under section 21-K of the Income Tax Ordinance, 2001 is concerned. From the chain of case-law on the subjected, we have noted that the controversy between the department and the taxpayer regarding the items to be included in salary for the purpose of working out excess perquisites has been the subject-matter of long- drawn litigation. Apart from the judgment relied upon by the learned AR of the company, we have been able to lay hands on the case of this Tribunal reported as (1998) 77 Tax 2004 wherein the department itself classified the following items as part of the salary:-- ' Overtime ' CLA/SD ' Charge All ' Officiating All ' Adhoc All ' Leave Encashment Bonus ' Whereas the following items were subsumed under the head perquisites and benefits:- ' House Rent ' Conveyance Allow ' Punjab Spl. Allow.
' Site Allowance Risk Allowance Dust Allowance Attendance Allowance ' Hill Allowance Shift Allowance Washing Allowance ' Other Allowance ' Entertainment ' Personal Staff Salary Ex., Gratia/Incentive Med/Reimbursement Stipend ' Subsidy ' Uniform ' L.F.A.
' Long Service Award Transport ' Week and Facility Other Benefits In this judgment the honourable Bench held that the amount paid/payable in compliance with Provincial Legislation was to be treated as part of the salary and not perquisite. We are, therefore, in agreement with the observation of the first appellate authority that the issue of excess perquisites needs thorough examination in the light of cases decided by the hierarchy of Judicial Fora, but at the same we cannot countenance the treatment meted out by him. We, therefore, remand the case to the taxation officer for working out the amount of excess perquisites to be added to the income of the company under section 21-K in the light of judgment cited by us and also the judgment relied upon by the learned AR of the company after excluding labour statutory allowances.
Initial Depreciation
12. Next ground of appeal pertains to the disallowance of initial depreciation on Marata machines purchased by the taxpayer company from Suraj Cotton Mills Limited which is the sister concern of the appellant company. The learned AR of the company explained that the Marata machines were imported by Suraj Cotton Mills Limited but wer e never used by it and were sold to the taxpayer company in the same packed condition in which they were imported. The taxation officer disallowed the initial depreciation on these machines with the observation that the said machines, being the previous assets of the sister concern, were second hand and, therefore, not entitled to initial depreciation. The learned AR of the company stated that the machines imported by the sister concern of the company were never used by the said sister concern in its own business and were sold to the company in brand new condition. However, if the revenue does not feel inclined to treat them as new machines its W.D.V be enhanced next year to the extent of initial allowance disallowed by the department. Contention of the learned AR appears to be fair and logical. We accordingly direct the taxation officer to enhance the Written Down Value of the machinery to the extent of initial allowance disallowed in the year under appeal and allow depreciation on the enhanced W.D.V in the next year.
' Add Backs:
13. Add backs of Rs,299,000 and Rs,720,000 under the heads W.P.P.F and bonus respectively were vehemently agitated by the learned AR of the company who contended that the expenses under both the heads were booked on accrual basis and both the amounts related to the income of the year under appeal. He further explained that the taxpayer being a quoted company, was required to make disclosure of all the expenses which had been incurred in relation to the income of the year but were payable at the end of the year so 'that actual picture with regard to its assets and liabilities was brought to the notice of the shareholders. He clarified that apart from the normal scrutiny carried out by the internal auditors the S.E.C.P. Also exercised strict control over the disclosure made in the final accounts. In such a situation, it was not possible for the company to claim any expense without valid basis, the learned AR asserted.
14. From the perusal of the order of the taxation officer we find that the expense under both the heads was disallowed with the observation that it was only a provision without any basis. We have given due consideration to the matter and feel that both the authorities below have dealt with the matter in a casual manner, not realizing that it was a case of quoted company accounts of which were subject to a number of checks and balances. We find force in the argument of the learned AR that being a quoted company it was required to make disclosure of all of its liabilities and payables etc. Etc. In order to depict and present a true picture of its financial worth to its share holders and for this reason no expense could be booked without any valid basis. What the taxation officer was required to do was to ascertain whether the expenses claimed under the heads bonus and W.P.P.F were actually paid to the employees in the immediately succeeding year or not and this exercise could easily be undertaken by consulting the books and record of the next year but this was not done and an easy way was found in the disallowance of the expenses. We are mindful of the fact that a company is required to maintain its accounts on mercantile basis and' incorporate therein all the definitely ascertainable receivables and payables. The company's version that the provisions under the two heads were booked on valid basis thus needs to be looked into. We accordingly vacate the orders of the authorities below on both the points and remand the case to the taxation officer with the direction that admissibility or otherwise of both the provisions be re- examined in the light of observation recorded herein-above.
Addition under section 21(c)
15. Next ground pertains to the addition of Rs,42,43,575 under section 21(c), of the Income Tax Ordinance, 2001. The said amount represented aggregate of expenses incurred by the company without fulfilling its legal obligation of withholding tax. The expenses include payments made on account of freight brokerage and loading and unloading etc. Etc. From the perusal of the order of the taxation officer passed under section 122(1) of the Income Tax Ordinance, 2001, it appears that the contention of the taxpayer before the taxation officer was that the payments were made to different truck owners who transported cotton bales to the factory of the company and tax under section 153 of the Income Tax Ordinance, 2001 was not withheld from these payments on the ground that all the trucks made only a single journey to the factory premises of the company during the whole year and as such these payments were exempt from the withholding provisions of the Income Tax Law on the basis of C.B.R's Circular No,27 of 1991 as well as Clause (L) of S.R.O.
586(1)191 dated 30-6-1991. The taxation officer, however, did not find the explanation convincing because complete and identifiable particulars of the truck owners were not furnished. The treatment meted out by the taxation officer was confirmed by the first appellate authority for reasons recorded by the taxation officer in his order. During the course of hearing of the appeal, the learned AR pleaded that the evidence with regard to single journey was furnished to the taxation officer but was not kept in mind while passing the order under section 122(1) of the Income Tax Ordinance, 2001. He further submitted that the relevant abilities which substantiated the contention of single journey were available with the company and could still be produced before the taxation officer. With regard to the loading, unloading expenses and brokerage the learned AR pleaded that they are petty expenses which are not hit by the provisions of section 153 of the Income Tax Ordinance, 2001. The learned DR on the other hand, supported the orders of the authorities below.
16. We have given due consideration to the rival arguments and also gone through the relevant record available on file and feel inclined to vacate the orders of the authorities below and remand the matter to the taxation officer for de novo consideration keeping in view the following directions:--
(a) The taxpayer company be allowed to substantiate it assertion with regard to the single journey made by all the truck owners during the whole year with the help of books of accounts as well as copies of relevant abilities. The taxation officer may also examine any other evidence which he considers to be necessary and relevant.
(b) Brokerage is also subject to withholding provisions of the Income Tax Ordinance, the taxpayer will have to explain reasons for non compliance with these provisions before the taxation officer and in case reasons are found to be satisfactory the expense be allowed as a deduction.
(c) Expense on account of loading and unloading is incidental to business and should be adjudicated upon as per practice of the business and also keeping in view the fact that the amounts paid are petty.
Addition under section 34(5)
17. During the course of examination of books of accounts the taxation officer noted various payments which remained unpaid for more than three years. Invoking the provisions of section 34(5) of the Income Tax Ordinance, 2001, he added these payable amounts aggregating to Rs,53 10,541 to the income of the company which was also upheld by the CIT(Appeals). The learned AR of the appellant vehemently agitated against the addition and its confirmation by the first appellate authority contending that the provisions of section 34(5) of the Income Tax Ordinance, 2001 were not applicable to the deductions/expenses which were claimed and, allowed under the repealed Ordinance, 1979. The learned AR specifically drew our attention to the language of the provision of section 34(5) of the Income Tax Ordinance, 2001 which for the sake of reference is reproduced hereunder:-- "Where a person has been allowed a deduction for any expenditure incurred in deriving income chargeable to tax under the head "income from Business" and the person has not paid the liability or apart of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head 'Income from Business' in the first tax year following the end of the three years."
' The learned AR submitted that in the amended assessment order the taxation officer had recorded the breakup of the said, amount (pages 14 and 15 of the order under section 122(1)) and from the perusal thereof it was quite evident that all the deductions pertained to the assessment years in respect of which assessme nts were completed under the Repealed Ordinance, 1979 whereas section 34(5) of the Income Tax Ordinance, 2001, which tax taxation officer invoked, authorized the taxation officer to take cognizance of only that expense which was allowed as a deduction in a "tax year". He further submitted that the concept of the "tax year" was introduced with the promulgation of the new Ordinance, 2001 and omission of "assessment year" from the provision of section 34(5) of the Income Tax Ordinance, 2001 clearly indicated that the deductions allowed in the assessm ent years falling with the domain of the Repealed Ordinance, 1979 could not be dealt with by recourse to the provisions of section 34(5) of the Income Tax Ordinance, 2001. To further reinforce his contention the learned AR of the company referred to the judgments of the Lahore High Court reported as 2Q08 PTD 1420 and this Tribunal in I.T.As. Nos. 720 and 721/LB of 2007 dated 7-11-2007 to contend that the provision of section 34(5) could not be invoked in respect of deductions' claimed and allowed under the Repealed Ordinance, 1979. The learned DR, on the other hand, supported the orders of the authorities below.
18. We have given due consideration to the rival arguments and also carefully gone through the provisions of section 34(5) of the Income Tax Ordinance, 2001 as well as the case-law cited at the bar. We are of the considered opinion that it is a well known principle of interpretation of fiscal statutes that a person can be subjected to tax only on the basis of plain and explicit language of a taxing provision; nothing is to be read in and nothing to be implied. From the plain language of section 34(5) of the Income Tax Ordinance, 2001 it is abundantly clear that only those deductions which were claimed and allowed in any of the tax years more than three years ago which remained unpaid could be added to the income of a taxpayer under section 34(5) of the Income Tax Ordinance, 2001. Since the additions made by the taxation officer are in respect of the deductions allowed in the assessm ent year 1999-2000 the said provision i,e, 34(5) of the Income Tax Ordinance, 2001 could not be pressed into service for adding back the said amounts because the words used in the said provision speak of the deductions allowed against the income of a "tax year" anti not of the "assessm ent year". We, therefore, direct the deletion of the addition made under section 34(5) of the Income Tax Ordinance, 2001 because they are not covered under the said provision of law.
Proration of Expenses
19. As discussed above the taxpayer has income assessable under the normal law as well as Presumptive Tax Regime. The proration of expenses is a consequential step depending upon the determination of ratio of two types of income. In view of the finding recorded hereinabove, the taxation officer is directed to look into the allocation of expenses and work out the ratio between income assessable under the Presumptive Tax Regime and normal law and allocate the expenses to both types of income on the basis of section 67 of the Income Tax Ordinance, 2001, read with Rule 13 of the Income Tax Rules, 2002.
Departmental Appeal
20. The departmental appeal has been directed against the curtailment of addition made under section 21-K of the Income Tax Ordinance 2001 (Excess perquisites) as well as the direction of the CIT(Appeals) regarding the tax credit under section 107AA of the Income Tax Ordinance, 1979. The issue of addition under section 21-K of the Income Tax Ordinance, 2001 has been set aside by us whereas the direction of the CIT(Appeals) regarding the tax credit under section 107AA of the Income Tax Ordinance, 1979 to the effect that the claim of the taxpayer be considered and if it is found entitled to statutory credit the same should be allowed appears to be fairly reasonable and just. We maintain the direction of the learned CIT(Appeals) and dismiss the departmental appeal.
21. All the appeals filed by the taxpayer as well as by the department are disposed of as above.