All these five appeals filed by appellant/assessee are directed against the order of learned CIT(A) dated 13.11.2008 for tax years 2006 and 2006 on the basis of the following grounds of appeal reproduced separately for all the appeals:- Ground of appeal for I.T.A. No. 3/KB/2009: "2. The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer in disallowing expenses of Rs. 569,000/- under Section 21(1) of the Income Tax Ordinance, 2001.
3. The Commissioner of Income Tax (Appeals) has erred in maintaining the order of the Taxation Officer in disallowing exchange loss of Rs. 153,783/-.
4. The Commissioner of Income Tax (Appeals) has erred in upholding the order of the Taxation Officer of assessing profit earned on saving and term deposit of Rs. 30,952,010/- under the head "income from other sources" without allowing expenses there against."
Ground of appeal for I.T.A. No. 4/KB/2009: "2. The Commission of Income Tax (Appeals) has erred in maintaining the action of Taxation Officer in refusing to rectify the amended assessment order passed under Section 122(5A) of the Income Tax Ordinance, 2001.
3. The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer for refusing to allow deduction of the exchange loss of Rs. 806,347/- realized in the year under appeal, which has been disallowed in tax year 2005 for being unrealized loss."
Ground of appeal for I.T.A. No. 5/KB/2009: "2. The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer in disallowing expenses of Rs. 406,265 under Section 2(1) of the Income Tax Ordinance, 2001.
3. The Commissioner of Income Tax (Appeals) has erred in not giving decision of the following grounds of appeal:- "3. The Taxation Officer has erred in disallowing bad debts written off amounting to Rs. 286,598/-.
4. The Taxation Officer has erred in calculating Workers Welfare Fund liability at 2% of accounting profit before tax as against 2% of the total income assessable under the Income Tax Ordinance, 2001.
5. The Taxation Officer has erred in not allowing credit for adjustment of determined refund of Rs.
1,014,911/- of assessment year 2002-2003 against the tax demand under Section 137 of the Ordinance."
Grounds of Appeal for I.T.A. No. 6/KB/2009: "2. The Commission of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer in refusing to rectify the amended assessment order passed under Section 122(5A) of the Income Tax Ordinance, 2001.
3. The Commissioner of Income Tax (Appeals) has erred in maintaining the order of the Taxation Officer by holding that the Workers' Welfare Fund is chargeable at 2 per cent of accounting profit under the provisions of Section 4(1) of the Workers' Welfare Fund Ordinance, 1971.
4. The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer for refusing to allow deduction of the exchange loss of Rs. 153,783/- realized in the year under appeal, which had been disallowed in tax year 2006 for being unrealized loss."
Grounds of appeal for I.T.A. No. 7/KB/2009: "2. The Commissioner of Income Tax (Appeals) has erred in maintaining the action of the Taxation Officer in refusing to rectify the amended assessment order passed under Section 122(5A) of the Income Tax Ordinance, 2001.
3. The Commissioner of Income Tax (Appeals) has erred in holding the Workers' Welfare Fund was rightly charged on accounting profit before taxation in view of the definition of 'total income' under clause (i) of Section 2 of the Workers' Welfare Fund Ordinance, 1971."
4. The Commissioner of Income Tax (Appeals) has erred in maintaining the order of the Taxation Officer without considering the charging provisions of Section 4(1) of the Workers' Welfare Fund Ordinance, 1971 for levy of Workers' Welfare Fund."
GROUND NO. 2 FOR TAX YEAR 2006 & TAX YEAR 2007:
2. On the issue of disallowance of expense under Section 21(1) on alleged payment other than through a crossed cheque or a crossed banking instrument, the learned AR of the taxpayer/assessee has argued that the learned CIR(A) has erred in maintaining the action of the Taxation Officer in disallowing expenses of Rs. 569,000/- and Rs. 406,265/- for tax years 2006 and 2007 respectively under Section 21(1) of the Income Tax Ordinance, 2001.
3. Elaborating his arguments, the learned AR of the taxpayer/assessee has further argued that the Taxation Officer has arrived at the figure of cash payments by grossing up the. Taxes suffered on account of cash withdrawals under Section 31 (A) of the Income Tax Ordinance, 2001 at the applicable rate of 0.2 percent for each tax year. According to him, the Taxation Officer thereafter alleged that the entire cash withdrawal is to be disallowed as such withdrawal was used to make payment of expenses by cash and thereby ignored the exclusion clauses of Section 21(1) and 21
(m) of the Ordinance. In response thereto, the taxpayer/assessee furnished the petty cash ledger account to the assessing officer for each location at Quetta, Karachi and Lahore and explained that the cash is used for the payment in respect of the conveyance and travelling, freight, entertainment, postage, social welfare, motor vehicle tax, and for other transactions and exceeding Rs. 10,000/- which do not attract the mischief of Section 2(1) of the Income Tax Ordinance, 2001.
4. The learned AR of the taxpayer/assessee further detailing his arguments has stated that the taxpayer/assessee makes numerous daily payments to various individuals, therefore, considering the huge quantum of entries; only a single journal voucher is prepared and posted during the day in the petty cash ledger account. According to learned AR, these entries are supported by the underlying evidences proving that no violations have taken place attracting the disallowance under Section 21(1) of the Income Tax Ordinance, 2011. The learned AR further pointed of that the Taxation Officer has examined the petty cash ledger and accepted the appellant's explanation except the payment made in respect of Entertainment Expenses and Social Welfare Expenses for each of the above tax years under consideration. According to him, the assessing officer apparently picked various amounts exceeding Rs. 10,000/- from the petty cash ledger and arrived at the disallowances made in the impugned orders.
5'. The learned AR pointed of that had the Taxation Officer provided the list of individual payments picked by him for the disallowance, the appellant could have extracted the underlying information to prove that the provisions of Section 21(1) of the Income Tax Ordinance, 2001 were not attracted as such entries were comprised of many minor payments which did not exceed the limit of Rs.
10,000/-.
6. The learned AR further submitted that the observation of the learned CIR(A) that the assessing officer before making the addition had specifically confronted the appellant is misdirected as the break-up of the total amount of disallowance was not provided to the appellant for rebuttal of the proposed action. The learned AR, therefore, prayed that the disallowance may be set aside with the direction to the Taxation Officer to provide the break-up of individual entries picked up from the petty cash ledger and provide an appropriate opportunity to the taxpayer to submit its rebuttal.
7. While rebutting the arguments advanced by the learned AR of the taxpayer/assessee, the learned DR has supported the order learned CIR(A) and has, therefore, argued that the learned CIR(A) was justified in upholding the order of the Taxation Officer while deciding the issue in question for both the tax years involved. The learned DR has prayed that the order of learned CIR(A) being fully in accordance with the tenets of law, may be upheld.
8. We have heard the learned representatives from the two sides and have also perused the impugned order of the learned CIR(A), the order of the Taxation Officer and other relevant record of the case.
9. Regarding the above issue taken up for the two years under appeal, we have arrived at the opinion that the Taxation Officer before making the addition had adequately confronted the appellant and has given his categorical findings for both the years on the issues. In our considered view, the learned AR, at the first appellate stage, miserably failed to plead his case against the action of the Taxation Officer. Under the facts and circumstances of the case, we confirm the order of the learned CIR(A) on the issue.
GROUND NO. 3 FOR TAX YEAR 2006:
10. So far as' the issue of disallowance of Exchange Loss of Rs. 153,783/- for tax year 2006 is concerned, the learned AR of the taxpayer/assessee has argued that the learned CIR(A) was not justified in maintaining the order of the Taxation Officer in disallowing the exchange loss. He has further argued that the appellant being a company is required to follow the accrual system of accounting as defined in Section 32(2) of the Income Tax Ordinance, 2001. He has submitted that the appellant is consistently following the said accounting method to record foreign currency transactions. While simplifying his viewpoint, the AR has further submitted that these transactions are accounted for in accordance with the provisions of Section 71 of the Income Tax Ordinance, 2001 Whereby such transaction are accounted for at rates of exchange prevailing on the date of transaction. According to him, assets and liabilities in foreign currency are translated into Pak Rupees at the rates prevailing on the balance sheet date. And exchange differences, if any, are taken to profit and loss account. He has further submitted that the accounting of these transactions was also in accordance with International Accounting Standard (IAS-21). According to him, such International Accounting Standards are required to be followed under Rule 32(2) of the Income Tax Rules, 2002. Hence, according to learned AR of the taxpayer/assessee; the Taxation Officer has no cause available to disallow the alleged notional exchange loss.
11. The learned AR of the taxpayer/assessee has further argued that the question of 'notional' gain or loss or making the provision for exchange loss does not arise in appellant's case as it essentially follows the 'accrual basis' of accounting. The learned AR has invited our attention to the fact that exchanges loss recorded at the year end date on conversion of foreign currency liability is reworked at the time of actual payment in the next year. This in effect result in recording actual loss in two steps, once at the year end rate and the balance amount at the time of actual payment in the subsequent year. He has, therefore, emphasized that the loss claimed in the aforesaid two steps remained equal to the total loss incurred by the taxpayer. According to him, no loss is caused to revenue from accounting to the transaction under accrual system of accounting.
12. The AR of the taxpayer/assessee has relied on case reported as (2008) 97 Tax 417 (Trib.) wherein it has been held that the exchange loss due to revaluation of loan is admissible deduction. The relevant para from the above decision is reproduced below:- "The assessee had obtained foreign currency loans from non-resident lenders in respect of which, the assessee incurred loss on account of devaluation of local currency. The differential amount was claimed as a revenue deduction, assessee being maintaining books of accounts under mercantile system of accounting. It is not a disputed position that the provisions of Rule 8(8) (e) of the 3rd Schedule to the repealed Income Tax Ordinance, 1979 are not attracted in the present case and hence, the deduction was claimed as a revenue expenditure. It is the only objection of the Department that it was a notional loss and since the expense was not actually realized due to non-payment of the loan amount was not an admissible deduction. In the years, where the learned CIT(A) has annulled the addition, the reliance was placed on reported judgments on the subject, whereby the expense was held to be admissible on such basis, where mercantile system was being followed. The decisions of the learned CIT(A) are based on the decisions reported as 2004 PTD 151, 1991 PTD 171, 63 Tax 14 & 1993 PTD 1327. The findings being based on reported judgments are upheld.
The appeals filed by the Department in this regard are, therefore, dismissed, as the learned CIT(A) has deleted the addition placing reliance on the reported decisions.
In the assessment year 1996-97 the CIT(A) decided the matter against the assessee on the ground that expense is allowable when actual payment is made. This finding of the learned CIT(A) is contrary to the position clarified in reported judgments and against the principles followed under mercantile system of accounting. The order, being contrary to the established principles, is annulled. The appeal filed by the assessee for 1996-97 on this issue is allowed. The Taxation Officer is directed to allow the relief accordingly."
13. In view of the above and the fact that policy of recording exchange loss/(Gain) is in accordance with the recognized accounting standards, the learned AR of the taxpayer/assessee has prayed that the disallowance made by the Taxation Officer may be deleted.
14. Controverting the arguments of the learned AR, the learned DR has stated that the learned CIR(A) was rightly justified in disallowing Rs. 153,783/- in respect of exchange loss (only notional loss). He has, therefore, pleaded that the order of learned CIR(A) being just and reasonable and in accordance with the principles of law, may be upheld.
15. Having considered the rival arguments of the two sides on the issue, we have found that the learned CIR(A) while endorsing the finding of the Taxation Officer that total claim amounting to Rs.
12,214,032/- of of which only notional loss to the tune of Rs. 153,783/- is disallowed which is legally and factually justified, upheld the order of the Taxation Officer on the issue. We, therefore, find no warrant for interference in the order of learned QIR(A), which is upheld.
GROUND NO. 3 FOR TAX YEAR 2006 & GROUND NO. 4 FOR TAX YEAR 2007 IN APPEALS FILED UNDER SECTION 221:
16. On this issue, the learned AR of the taxpayer/assessee has argued that the learned CIR(A) has erred in maintaining the action of the Taxation Officer for refusing, to allow deduction of the exchange loss of Rs. 806,347/- for tax year 2006 and Rs. 153,783/- for tax year 2007 realized in the year under appeals which had been disallowed in tax years 2005 and 2006 respectively for being unrealized loss. While elaborating his arguments, the learned AR , has contended that the exchange loss be allowed in full as per the method of accounting. The learned AR has further submitted that the Taxation Officer has disallowed unrealized exchange loss for being a notional amount. Consequently, the unrealized/notional loss disallowed in the immediately preceding tax year is to be allowed as deduction as such loss became realized on payment in the next year.
Accounting to learned AR, not allowing the loss realized in the succeeding year would amount to making disallowance of exchange loss for entirety which is neither intended nor justified. In his view, there is no dispute between the Department and the taxpayer on the allowability as such loss as a business expense and the only contention of the Department is that it is unrealized/notional loss. He has, therefore, prayed that in case if disallowance of alleged notional loss is maintained then a deduction for exchange loss made in the immediately preceding year may be allowed as it has been realized during the year under consideration.
17. In response to the averments made by the learned AR of the taxpayer/assessee, the learned DR has fully supported the order of the learned CIR(A) on the issue of deduction of exchange loss. He has argued that the learned CIR(A) has rightly confirmed the order of the Taxation Officer under Section 122(5A) of the Income Tax Ordinance, 2001 for the tax years 2006 & 2007. He has, therefore, prayed that the impugned order of learned CIR(A) for the above two years' being in accordance with law, is liable to be confirmed by this Tribunal.
18. We have examined the impugned order of the learned CIR(A), and we find ourselves in full agreement with his findings on the issue for the two tax years under appeal. Therefore, we see no reason to interfere with the order of learned CIR(A) and confirm the same. As a result, the appeal of the taxpayer/assessee stands dismissed on this issue.
GROUND NO. 4 for tax year 2007 (UNDER SECTION 221) AND GROUND NO. 3 FOR TAX YEAR 2007 (UNDER SECTION 221):
19. Regarding Ground No. 3 for tax year 2007 in appeal filed under Section 221 of the Income Tax Ordinance, 2001, the learned AR of the taxpayer/assessee has contended that the learned CIR(A) has erred in holding that Workers' Welfare Fund was rightly charged on accounting profit before taxation in view of the definition of 'total income' under clause (i) of Section 2 of the Workers'
Welfare Fund Ordinance, 1971. Whereas regarding Ground No. 4 for tax year 2007 in appeal filed under Section 221, the learned AR has contended that the learned CIR(A) has erred in maintaining the order of the Taxation Officer without considering the charging provisions of Section 4(1) of the Workers' Welfare Fund Ordinance, 1971 for levy of Workers' Welfare Fund.
20. Elaborating his arguments, the learned AR of the taxpayer/assessee has argued that the Taxation Officer has levied Workers' Welfare Fund @ 2% of account profit as against 2% of the total income assessable under the Income Tax Ordinance, 2001. He has further argued that the provisions of Section 4(1) of the Workers' Welfare Fund Ordinance, 1971 specify that Workers Welfare Fund shall be paid by an industrial establishment at 2 per cent of its total income as is assessable under the Income Tax Ordinance, 2001. The provisions of Section 4(1) are reproduced below:- "4. Mode of payment by, and recovery from, industrial establishment:-"
(1) Every industrial establishment, the total income of which in any year of account commencing on or after the date specified by the Federal Government in the Official Gazette in this behalf is not less than five lakh of rupees shall pay to the Fund in respect of that year a sum equal to two per cent of so much of its total income as is assessable under the Ordinance."
21. According to learned AR, the term 'Ordinance' has been defined Section 2(ff) of the Workers'
Welfare Fund Ordinance, 1971 to mean the Income Tax Ordinance, 2001 and 'total income' under the provisions of Section 10 of the Income Tax Ordinance, 2001 means the sum of the person's income under each of the head of income for the year.
According to him, the heads of income given in Section 11 of the Income Tax Ordinance, 2001 includes the following:-
(a) Salary.
(b) Income from Property.
(c) Income from Business.
(d) Capital Gains.
(e) Income from Other Sources.
22. The learned AR has further stated that the income under the above heads is computed on the basis of the relevant provisions of the Income Tax Ordinance, 20011 In this regard, the learned AR has pointed of, that the Finance Act, 2008 has amended the provisions of Section 4(1) of the Workers' Welfare Fund Ordinance, 1971. As a result of the amendment, the words "as is assessable under the Ordinance" have been deleted. According to Teamed AR, now with effect from tax year 2009, the Workers' Welfare Fund will be calculated on the basis of total income as defined in Section 2(i) . Of the Workers' Welfare Funds Ordinance, 1971. In his view, this amendment clearly proves that in prior years (tax year 2008 and preceding years) Workers' Welfare Fund is to be calculated at the rate of 2 per cent of total income as is assessable under the Income Tax Ordinance, 2001.
23. Summing up his arguments, the learned AR of the taxpayer/assessee has stated that the learned CIR(A) has, therefore, erred in observing that the Workers' Welfare Fund Is payable at the rate of 2 percent on accounting profit and hence has maintained the order of the assessing officer.
He has, therefore, prayed that the Taxation Officer may be directed to re-compute Workers' Welfare Fund @ 2% of total income as determined under the Income Tax Ordinance, 2001 for the tax year 2007.
24. The learned DR while rebutting the arguments of the learned AR of the taxpayer/assessee, has vehemently urged that the learned CIR(A) has consciously passed his order while confirming the action of the Taxation Officer on the above issue. He has, therefore, requested that the order of learned CIR(A) being in consonance with the canons of law may be upheld.
25. We have heard the learned representatives from the two sides and have also perused the impugned order of the learned CIR(A), the order of the Taxation Officer and other relevant record of the case., In this issue the learned CIR(A) observed as under:- "I have minutely gone through the above submissions vis-a-vis the findings of the assessing officer, it is noted that original assessment in this case was amended under Section 122(5A), however on the point of levy of Worker's Welfare Fund, the appellant filed application under Section 221 of the Income Tax Ordinance praying rectification of amended order on the ground that Worker's Welfare Fund should have been charged on income assessed under the ordinance, and not on the accounting profit declared by the appellant, which was rejected by the Additional Commissioner. According to amended (2007) Section 4(1) of Worker's Welfare Fund, W.E.F. Shall be paid by an industrial establishment, at an income which less than Rs. 500,000/- is liable to pay equal to 2% on accounting profit under the Ordinance. Therefore, keeping in view the above provisions of Worker's Welfare Fund Ordinance as amended I find that action of the Taxation Officer is justified hence confirmed."
26. After considering the findings of the learned CIR(A) on the issue, we observed that according to amended (2007) Section 4(1) of Worker's Welfare Fund Ordinance, Worker's Welfare Fund is payable by an industrial establishment at an income which is less than Rs. 500,000/- @ 2% on accounting profit under the Ordinance. In view of the above position of law, we fully endorse the finding of the learned CIR(A) on this issue and confirm the same. As a consequence, the appeal filed by the taxpayer/assessee is dismissed.
GROUND NO. 3 FOR TAX YEAR 2007:
27. The learned AR of the taxpayer/assessee has invited our attention that the learned CIR(A) has erred in not giving decision on the following grounds of appeal:-- "3. The Taxation Officer has erred in disallowing bad debts written off amount to Rs. 286,598/-.
4. The Taxation Officer has erred in calculating the Workers' Welfare Fund liability at 2% of accounting profit before tax as against 2% of the total income assessable under the Income Tax Ordinance, 2001 in view of the provisions of Section 4 of the Workers' Welfare Fund Ordinance, 1971.
5. The Taxation Officer has erred in not allowing credit for adjustment of determined refund of Rs.
1,014,911/- of assessment year 2002-2003 against the tax demand under Section 137 of the Ordinance."
28. In view of above, the learned AR has prayed that the learned CIR(A) may be directed to give his decision on the above grounds in the light of our arguments already made and submitted to his office.
29. We have heard the submissions of the learned AR on the above issues and we are of the opinion that after carefully examining the impugned order of the learned CIR(A), we have found that the plea taken by the learned AR is genuine that the learned CIR(A) has not decided the issues listed above. In the view of the matter, we remand back the above issues to learned CIR(A) for adjudication after listening to the arguments of the taxpayer/assessee as well as the Department.
30. All the five appeals of the taxpayer/assessee are disposed of to the extent and in the manner indicated above.