The appellant M/s. A&A (Pvt.) Ltd., Lahore is a Private Limited company deriving income from construction and development projects. Brief facts giving rise to the present appeal by the appellant, are that the returns of income for the Tax years 2004, 2005, 2006 were filled by the tax payer declaring following results; .
Tax year 2004Nil Tax year 2005(13,571,547)
Tax year 2006(28,046,784)
2. These returns of income tax were treated as assessment order u/S. 120 of the Income Tax Ordinance 2001. The cases of appellant were selected for audit u/S. 177 of the Income Tax Ordinance, 2001 for all the tax years as stated above. During the course of audit the assessing officer raised certain issues which shall be discussed in detail in ensuing paras and passed amended assessm ent orders u/S. 122(1) and 122(5) of the Income Tax Ordinance, 2001 by making certain additions to income in Tax years 2004, 2005, 2006.
3. Being aggrieved with this treatment, the tax payer filed appeal with learned Commissioner Inland Revenue Appeals-ll, RTO Lahore who upheld the impugned order passed by assessing officer u/S. 122(5).
4. This resulted in present appeal by the appellant against the order of learned Commissioner Appeals-ll, RTO Lahore. Since three tax years are involved, therefore, issues raised in these years are discussed separately under the relevant headings of each tax years.
TAX YEAR 2004
5. The main issue in the present appeal was that Tax payer claimed Rs. 2,655,401/- as pre- commencement expenses u/S. 25 of the Income Tax Ordinance, 2001, the detail of which is given herewith: 1.Salaries & Wages 300,000 2.Company registration expense289,600 3.Loan administration charges2,065,801
6. The assessing officer rejected the claim on a plea that these were incurred prior to incorporation of the company and are not allowable expense under Section 25 of the Ordinance.
7. The learned A.R. Mr. Qamar Rashid, FCA agitated the treatment of assessing officer and argued that it was against the law and spirit of Section 25 of Income Tax Ordinance 2001 and case-law'* of superior Courts on the issue. He argued that the salaries and wages of' Rs. 300,000/- were paid in pre-incorporation period to the staff hired by the company for preparation of initial setup and for company incorporation. Company's registration charges of Rs. 289,600/- were paid as the expenses incurred on the incorporation of the company and fee paid to increase the authorized capital of the company. Loan administration charges such as feasibility study of proposed projects of the company, consultancy charges, loan documentation charges etc. Were made directly to financial consultants and legal advisers of the company for obtaining loan for the company.
Company was incorporated on 21.11.2003 and loan was sanctioned on 23.11.2003 only two days after incorporation which proves that all the related expenses in obtaining loan were incurred prior to incorporation. Moreover, he pointed of that Section 25 deals with pre-commencement expenses which simply means that all the expenses incurred by an enterprise before the commencement of its business operations are included in this category. This Section does not exclude pre- incorporation expenses from this category. He also referred to Section 25(5) where pre- commencement expenses have been defined as expenditure incurred before the commencement of a business wholly and exclusively to derive income chargeable to tax, including the cost of feasibility studies, construction of prototypes, and trial production activities,, but shall not include any expenditure which is incurred in acquiring land, or which is depreciated or amortized under Section 22 or 24. He stated that expenses on feasibility study are part of pre-commencement expenditures whereas feasibility studies are normally prepared before incorporation of company to determine the viability of business and if business is feasible then management proceeds to incorporate company to legitimize the legal set up of business. Only exclusion mentioned in the aforesaid Section is any expenditure which is incurred in acquiring land, or which is depreciated or amortized under Section 22 or 24. He concluded that treatment of assessing officer is based on misconstruction and misunderstanding of Section 25 and should not be maintained. The AR also argued that the action of the Taxation Officer was against the spirit of decision/judgments of higher Courts as cited 1991 PTD 1043 (HAT) in which preliminary expenses incurred for the purpose of forming a new company were allowed by the Income Tax Appellate Tribunal to be capitalized in the cost of plant and machinery, which was to be depreciated in profit and loss subsequently.
8. The learned DR pleaded for maintaining the impugned order being in consonance with the law. It was contended by the learned DR that assessing officer has rightly passed order by disallowing aforesaid expenses and his treatment is in accordance with law.
9. We have heard the arguments of learned counsels for both the parties and have also gone through the relevant order alongwith case-laws cited at bar. We are of considered view that the arguments advanced by the learned A.R. Carry Weight. Section 25 deals with precommencement expenses. By referring to the dictionary meaning of the term "pre-commencement" it transpires that it simply means "before the commencement of business operations". Moreover, Section 25(5) defines precommencement expenses as: "Expenditure incurred before the commencement of a business wholly and exclusively to derive income chargeable to tax, including the cost of feasibility . Studies, construction of prototypes, and trial 'production activities, but shall not include any expenditure which is incurred in acquiring land, or which is depreciated or amortized under Section 22 or 24".
9. Therefore, all the directly attributable expenses incurred by an enterprise before commencement of business are to be included in this category. This Section does not specifically exclude pre-incorporation expenses from the aforesaid category which definitely means that preincorporation expenses, if qualify the definition of pre- commencement expenses, can be the part of this category.
10. The arguments of AR as regards inclusion of expenses on feasibility study as part of pre- commencement expenditures is also convincing. It is frivolous to assume that if expenses on feasibility study were incurred before incorporation of company then these shall not be allowed as pre-commencement expenses in presence of express inclusion of said expense in Section 25.
Moreover, only exclusion from these expenses as mentioned in the said Section is expenditure incurred in acquiring land, or on asset which is depreciated or amortized under Section 22 or 24.
The case-law cited as 1991 PTD 1043 (ITAT) by the AR is also relevant. In this case, the Tribunal held that preliminary expenses incurred for the purpose of forming a new company were allowed to be capitalized in the cost of plant and machinery, which is depreciated in profit and loss in future periods. Based on above, we are of considered view that all the aforesaid expenses qualify the definition of precommencement expenses u/S. 25 being directly related to the prospective business of the company and for earning future income therefrom.
11. In the light of supra discussion and case-law cited at the bar the order of Additional Commissioner of Income Tax u/S. 122(5) and learned CIT appeals is hereby deleted and the relevant assessing officer is directed to allow these expenses as pre-commencement expenses u/S. 25 of the Income Tax Ordinance, 2001.
TAX YEAR 2005
12. The only issue agitated by the AR of the tax payer for the said tax period was the taxability of receipts against sale of farm house under presumptive tax regime. During the course of audit proceedings, the assessing officer observed that the gross receipts representing sale of houses at Rs. 43,110,000 included an amount of Rs. 13,000,000/-, which was received from M/s. Vision Developers (Pvt.) Ltd. He treated the arrangement between the tax payer and the said company as of employer and contractor instead of seller and buyer and taxed the receipts of Rs. 7 million, after deducting purchase cost of land of Rs. 6 million, under Section 153(6) of Income Tax Ordinance, 2001 as final discharge of tax liability on the aforesaid transaction.
13. The learned A.R. Agitated the treatment of assessing officer and argued that it was against the law and spirit of Section 153(6) of Income Tax Ordinance, 2001 and case-law of superior Courts on the issue. He argued that the assessing officer's treatment is based on assumption, surmises and suppositions which cannot be made subject matter for passing assessment order u/S. 122(5) where definite factual or legal information is required for amendment in the order. He argued that sale of Farm House to M/s. Vision Developers (Pvt.) Ltd. At Rs. 13,000,000/- was a consolidated transaction in which responsibility of the company was to purchase land, construct farm house and then deliver it to customer in complete and finished form at an agreement price. Under the terms of the contract land was arranged by the company, payment against the purchase of land was made by the company and land was directly transferred to the name of customer M/s. Vision Developers (Pvt.) Ltd. At the end of contract. He also produced the certificate from M/s. Vision Developers (Pvt.) Ltd. In which the said company confirmed that it never purchased the land under question and the title of land was transferred in its name at the end of contract after making full payment. He also pointed, of that assessing officer has himself admitted the aforesaid fact in the following para: However, the 'contention of the AR that the sale proceeds of Rs. 13,30,000/- include the cost of land at Rs. 6" million, have to be excluded in case, the transaction under reference: is to be taxed under presumptive tax regime was found to be supported by the documentary evidence in the shape of vouchers, copy of ledger account and letter from M/s. Vision Developers (Pvt.) Ltd. The explanation offered by the AR is found satisfactory to the extant of exclusion of the amount of Rs. 6 million which has been credited in the sales value as well as debited in the cost. Tax liability on Gross contractual receipts, accordingly works of at Rs. 420,000 @ 6% of the receipts of Rs. 7 Million.
14. He pointed of that assessing officer arbitrarily excluded cost of purchase of land from aforesaid receipts thus assuming that company did not earn any profit on land component of this transaction. He agitated that this capricious and arbitrary treatment of assessing officer has resulted in taxability of profit earned bn land component u/S. 153 which is against the spirit of law and case-law of superior Courts on the issue. He concluded his argument by submitting that company earned overall gross profit margin of 10% on sale transaction of farm house valuing Rs. 13 million and exclusion of land component from this transaction is against the facts of the case and based on supposition, surmise and guesswork and order passed u/S. 122(5) is defective being not based on definite information.
15. He also agitated the treatment of assessing officer on legal premises and stated that provisions of Section 153 are not applicable in this case because Section 153 is not applicable on combined transaction of sale/purchase of land alongwith construction thereon. Section 153 is not a charging Section as compared to Section 80C of Income Tax Ordinance, 1979 by virtue of its sub-section (4) and there is no comparable provision in Section 153. Section 153(6) is applicable only if tax is deduction under any of the provisions of the said Section. If no tax is deducted u/S. 153 by withholding agent due to its understanding as regards applicability of withholding tax provisions or otherwise, tax payer cannot be treated under presumption tax regime by charging tax @ 6% u/S. 153 by the department.
16. The learned DR pleaded-for maintaining the impugned order being in consonance with the law.
It was contended by the learned DR that since land was directly transferred in the name of M/s. Vision Developers (Pvt.) Ltd. Therefore, assessing officer has rightly passed order by treating Rs. 7 million as construction receipts and his treatment is in accordance with law.
17. We have heard the arguments of learned counsels for both the parties and have also gone through the relevant order alongwith case-laws cited at bar. We agree with the contention of AR that provisions of Section 153(1)(c) are applicable on situations where land has already been purchased by the company and afterwards it awards a construction contract to a contractor for construction of building or development of real estate. All the payments under this contract of construction shall attract the provisions of Section 153(1 )(c) for deduction of tax which shall be treated as final discharge of tax liability by virtue of Section 153(6) of the contractor. Whereas in the present case, situation is altogether different. The buyer company has certified that it never purchased the land under question directly from original seller. The land was purchased by the tax payer and title of land was transferred at the end of the term of contract when full payment under the contract was made to tax payer. This fact was also admitted by the assessing officer on the basis of plausible documentary evidences. It is a normal practice in real estate transactions that developers companies purchase land under "an agreement to purchase" from original seller, title is not transferred in their name to save incidence of transfer fees and related costs which vary between 6 to 10% of value of land, construction or development work is completed on the said land and title of land is directly transferred in the name of purchaser from original seller upon delivering possession of aforesaid property. There is a similar situation' in the present case and the tax payer has essentially acted as developer/seller of constructed property on which provision of Section 153(1) are not applicable. Moreover, the treatment of assessing officer in which he implicitly assumed that company did not earn any profit on land component and excluded the cost of purchase of land from over all receipts of the project being arbitrary and illogical in nature is also not supported by Section 122(5) wherein he can only proceed on the basis of definite information as to the nature of transaction. In addition to above, it has also been laid down by superior Courts through judgments cited as 1999-80 TAX 262 (High Court), 2005 91 Tax 399 (Trib.) and 2004 89 Tax 316 (Trib.) that transaction involving land and building are not liable for deduction of tax under Section 50(4) of repealed Income Tax Ordinance, -1979. In our opinion, the purchaser company acted in accordance with law by not deducting tax on payment against the impugned transaction u/S. 153(1 )(c) and the action of assessing officer by charging tax @ 6% u/S. 153(6) is technically erroneous and does not have any legal' support. We also feel persuaded by the second limb of .Arguments of the learned A.R. That Section 80-C of Repealed Ordinance, 1979 was a charging Section by virtue of its sub-section (4) whereas there is no equivalent provision in Section 153 which creates it a charging Section. In Repealed Ordinance, 1979 Section 50(4) dealt only with the deduction of income tax at source against payments on account of supply of goods, services rendered and execution of- contract. Relevant provisions of Section 50(4) are given hereunder:
(4) Notwithstanding anything contained in this Ordinance,-
(a) any person responsible for making any payment in full or in part (including a payment by way of an advance) to any person [, being resident,] (hereinafter referred to respectively as "payer" and "recipient"), on account of the supply of goods or for service rendered to, or the execution of a contract with the Government, or a local authority, or [a company] [or a registered firm,] or any foreign contractor or consultant or consortium shall, [ ] deduct advance tax, at the time of making such payment, at the rate specified in the First Schedule, and credit for the tax so deducted in any financial year shall, subject to the provisions of Section 53, be given in computing the tax payable by the recipient for the assessm ent year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom Section 72 or Section 81 applies, the assessm ent year, if any, in which the "said date", as referred to therein, falls, whichever is the later:
19. Section 153(1) is equivalent provision to aforesaid Section in Income Tax Ordinance, 2001. Section 80C of repealed Ordinance 1979 dealt with the treatment of tax deducted at source under various Sections of repealed Ordinance 1979 in the hand of tax payers whose tax was deducted. Sub- section (4) of the aforesaid Section specified certain tax deductions under Section 50 to be treated as final discharge of tax liability in the hand of recipient of payment. Relevant provisions are reproduced hereunder: 80C(4) Where the assessee has no income other than the income referred to in sub-section (1) in respect of which tax has been deducted or collected, the tax deducted or collected under Section 50 shall be deemed to be the final discharge of his tax liability under this Ordinance and he shall not be required to file the return of total income under Section 55 [:] [Provided further that where the tax deducted or collected under any sub-section of Section 50 specified in clause (a) of sub-section (2) is, for any reason, not collected or deducted in accordance with the said sub-section or the tax so deducted in less than the amount deductible or collectable, the assessee shall be required to pay the said amount.
20. Proviso contained in the. Aforesaid sub-section made it charging Section which consequently empowered the assessing officers to charge tax if tax was not deducted by deducting authorities.
Whereas Section 153(6) which is partially equivalent to Section 80C(4) does not contain any such provision. This sub-section is reproduced hereunder: 153(6) The tax deducted under this Section shall be a final tax on the income of a resident person arising from transactions referred to in sub-section (1) or (1 A):
21. Aforesaid sub-section clearly states that only tax deducted by prescribed person under this Section shall be final discharge of tax liability. This sub-section does not contain any proviso which makes Section 153 a charging Section. If tax is not deducted u/S. 153 by withholding agent due to its legal understanding as regards applicability of withholding tax provisions or otherwise, tax payer cannot be treated under presumption tax regime by charging tax @ 6% u/S. 153 by the department.
It was held in the judgment of the Hon'ble Supreme Court cited as 1993 SCM R 1523 that what is expressly excluded cannot be included on any principle of interpretation. In our opinion, the action of assessing officer by charging tax @ 6% u/S. 153(6) is erroneous in law since the same is not supported by said sub-section.
22. In light of supra discussion and case-law cited at the bar the order of Additional Commissioner of Income1 Tax u/S. 122(5) and learned CIT Appeals is hereby deleted and the relevant assessing officer is directed to tax the impugned transaction under normal tax regime of the Income Tax Ordinance, 2001.
TAX YEAR 2006
23. The first issue agitated by the AR of the tax payer in this tax period was the taxability of receipts against sale of farm house under presumptive tax regime. During the course of audit proceedings, the assessing officer observed that the gross receipts representing sale of houses at Rs. 35,389,07$ were received from M/s. Vision Developers (Pvt.) Ltd. He treated the arrangement between the tax payer and the said company as of employer and contractor instead of seller and buyer and taxed the receipts of Rs. 21.389 million, after deducting purchase cost of land of Rs. 14 million, under Section 153(6) of Income Tax Ordinance, 2001 as final discharge of tax liability.
24. Taxability of such type of transactions has been discussed in detail in year 2005. In light of supra discussion on the same issue in Tax Year 2005, the order of Additional Commissioner of Income Tax u/S. 122(5) and learned CIT appeals is hereby deleted and the relevant assessing officer is directed to tax the impugned transaction under normal tax regime of the Income Tax Ordinance, 2001;
25. The other issue agitated by the AR of the Tax payer related with the share deposit money of Rs.
13,0, 000 which was prima facie received by the company from one of its director by way of cash instead of through crossed banking channels and was taxed by the assessing officer u/s. 39(3) of the Income Tax Ordinance, 2001 as "income from other sources".
26. The A.R. Of the taxpayer agitated the proposed treatment while contending that cash credits as disclosed in bank statement of Rs. 13,000,000/- were all paid by Mrs. Naseem Khan, one of the director of the company. He also stated that Mrs. Naseem Khan availed the benefits of investment tax scheme u/S. 120A of the Income Tax Ordinance, 2001 in respect of her undisclosed income which was invested in movable property i.e. Share deposit money of A&A (Pvt.) Ltd. The said amount was incorporated in the books of Mrs. Naseem Khan as investment in A & A (Pvt.) Ltd with the corresponding entry in the books of company as share deposit money. The AR also contended that provision of Section 39(3) is not applicable in this case as Section 120A sub-section (3) and (4) give exemption from Section 111 and other deeming provisions if undisclosed income is disclosed under the provisions of Section 120A read with Circular 3 of 2008 rules 2 and 5. AR also presented two case-laws of honorable High Court cited as 2006 PTD 2602 and 2006 PTD 415 in which honourable High Court decided that Section 12(18) was introduced with a specific purpose which was to check fictitious loans and to discourage introduction of backdated cash credits to meet financial liabilities. It was also declared that that the Assessing Officer cannot make addition under Section 12(18) of Income Tax Ordinances, 1979, if the amount received is from verifiable party and from its genuine sources and there is no element of factitiousness in the impugned transaction.
27. The learned DR pleaded for maintaining the impugned order being in consonance with the law.
It was contended by the learned DR the share deposit money of Rs. 13,000,000 received by the company by way of cash instead of through crossed banking channels was rightly taxed by the assessing officer u/S. 39(3) of the Income Tax Ordinance, 2001 as "income from other sources".
28. We have heard the arguments of learned counsels for both the parties and have also gone through the relevant order alongwith case-laws cited at bar. The learned AR referred provisions of Section 120A read with Circular 3 pf 2008 rule 2 and 5 and cited two case-laws of honourable High Court cited as 2006 PTD 2602 and 2006 PTD 415. Relevant extracts from aforesaid legal provisions and case- laws are reproduced hereunder: 2006 PTD 2602 (High Court)
Assessee claimed to have obtained loan from his company through two bearer cheques. Although genuineness of both the cheques was beyond doubt, yet Assessing Officer declined to give any benefit to the assesse for the reason that the cheques' were not crossed, as required under Section 12(18) of Income Tax Ordinance, 1979. Plea raised by assessee was that sub-section (18) had been introduced with a specific purpose which was to check fictitious loans and to discourage introduction of back dated cash credits to meet financial liabilities. Validity Central Board of Revenue committed no excess of jurisdiction in issuing Circular No. 3 of 1992, dated 27.1.1992. As the assessee had obtained loan through bearer cheques, which fact was verified by the concerned bank, - therefore, order passed by Income Tax Appellate Tribunal was set aside-High Court declared that the Assessing Officer could not make addition under Section 12(18) of Income Tax Ordinance, 1979, of the amount received by assessee through bearer cheques.
2006 PTD 2602 (High Court)
Company received cash loans from directors. The assessing officer made addition u/S. 12(18). It was held that Income Tax Appellate Tribunal in the circumstances of the case was justified to confirm the order of Commissioner Income Tax (Appeal) regarding deletion of addition under Section 12(18) of Income Tax Ordinance, 1979, made by Assessing Officer to assessee Company's income on account of cash loans declared in balance-sheet as having been received from directors.
120A. INVESTMENT TAX ON INCOME.-
(1) Subject to this Ordinance, the Board may make a scheme of payment of investment tax in respect of undisclosed income, representing any amount or investment made in movable or immovable assets.
(2) Where any person declares undisclosed income under sub-section (1) in accordance with the scheme and the rules, the tax on such income called investment tax shall be charged at such rate as may be prescribed.
(3) Where a person has paid tax on his undisclosed income in accordance with the scheme and the rules, he shall---
(a) be entitled to incorporate in his books of account such undisclosed income in tangible form; and
(b) not be liable to pay any tax, charge, levy, penalty or prosecution in respect of such income under this Ordinances.
(4) For the purposes of this Section-
(i) undisclosed income means any income, including any investment to be deemed as income under Section 111 or any other deemed income, for any year or years, which was chargeable to tax but was not so charged; and
(ii) investment tax means tax chargeable on the undisclosed income under the scheme under sub-section (1) and shall have the same meaning as given in clause (63) of Section 2 of the Income Tax Ordinance, 2001.
29. The argument of AR is convincing in view of both the aforesaid case-law Of honourable High Court cited at bar. Share deposit money under consideration was given by one of the directors of the company from her declared sources under investment tax scheme. The assessing officer could not prove that the amount received in the impugned transaction is from unverifiable party and is a factitious transaction. Moreover declaration u/Ss 120A was accepted by the department and achieved its finality in view of clause 6 of Circular 3 of 2008. Both the aforesaid case-laws are squarely relevant in the present case and the action of assessing officer treating share deposit money as deemed income u/S. 39(3) of the Income Tax Ordinance, 2001 as "income from other sources" is not justified and against the decision of superior Courts quoted supra.
30. The AR of the tax payer could not propound convincing arguments against the disallowance of expenses of Rs: 1,422,889/- in tax year 2005 hence the said disallowance is hereby confirmed and the order of assessing officer is maintained in this regard.