Through this consolidated order we propose to dispose of the titled miscellaneous application as well as appeals which arise out of the order of the CIR(Appeals), Islamabad, dated 25-1-2010. The Revenue through the miscellaneous application has sought permission of this court to raise the following new/additional grounds:--
(i) That the learned CIT(Appeals) was not justified to direct for adjustment of other income against carried forward losses, which is in contravention of section 35 of the late Ordinance of 1979.
(ii) That he learned CIT(Appeals) was not justified in directing to apply the rate of tax of 3.5% instead of 6% under subsection (4) of section 50 of the late Ordinance of 1979 read with Circular No,10 of 1996 dated 16-7-1996.
2. Newly raised additional grounds raise important issues which will have vital bearing on the outcome of appeal. They are, therefore, allowed to be taken.
3. Facts relating to appeals filed by the Revenue for the assessment years 2001-2002 and 2002- 2003 are that the assessm ents in the case of taxpayer company were finalized under section 62 of the late Ordinance of 1979 on 27-6-2003 whereby business income of company was partly assessed under normal law and partly under the Presumptive Tax Regime. Figures of presumptive income (imports) for the assessm ent years 2001-2002 and 2002-2003 were taken at Rs,34,29,776 and Rs,1,31,35,626, respectively, which were subjected to tax @ 5% under section 80C of the late Ordinance of 1979. After the finalization of assessments the AR of the company filed rectification application vide his letter dated 25-8-2003 whereby it was pointed out that amounts of presumptive income (commercial imports) were not taken correctly nor was correct rate of tax applied thereto. The said application appears to have remained unattended up to 30-6-2005 and according to the learned AR has borne fruit in terms of section 156(4) of the Income Tax Ordinance, 2001. Subsequently, the taxation officer issued a show-cause notice under section 221(2) of the Income Tax Ordinance 2001, whereby the assessee company was confronted with the wrong set- off of business losses against other income of Rs,19,63,483 disclosed in the audited accounts (Note-20) and asked to explain as to why the assessment may not be rectified under section 221 of the Income Tax Ordinance, 2001 on the ground that the B.F losses which could be set-off only against the business income as provided under section 35 of the late Ordinance of 1979, had been set-off against the income disclosed under Note-20, A which was income from other sources. The assessing officer further pointed out that the imports were to be taxed @ 6% under the Final Tax Regime whereas the assessing officer who finalized the assessment under section 62 of the late Ordinance, 1979 had applied rate of 5% thereby causing loss to the revenue.
4. In response to the show-cause notice the learned AR pleaded that the notice under section 221 of the Income Tax Ordinance, 2001 was illegal being based upon change of opinion. He also challenged the legality of action under section 221 of the Income Tax Ordinance, 2001 on another ground and asserted that the assessments for both the years, having been finalized under section 62 of the late Ordinance of 1979 fell within the domain of the repealed Ordinance, 1979 and as such section 221 of the Income Tax Ordinance, 2001 was not applicable. On merits, the learned AR argued that the income earned by way of exchange gain and return on bank deposits was an integral part of the business income of the company as the transactions in the bank accounts of the company had been made in the normal course of business and the amounts deposited in the bank accounts were the surpluses of the business which, for the time being, could not be utilized in normal business activities. The learned AR also raised objection to the application of higher rate of tax on presumptive receipts and stated that for the purpose of taxation of commercial imports under section 80C of the late Ordinance of 1979, the value of imports was to be taken equal to the cost of imports plus duties and sales tax as laid down under section 50(5a) of the late Ordinance of 1979 whereas the assessing officer, had assessed the sales proceeds of commercial imports as presumptive income which obviously was not correct.
5. The plea of the learned AR did not, however, find favour with the assessing officer who proceeded to finalize the proceedings in the manner confronted through the show-cause notice. Being aggrieved, the company filed appeal before the CIR(Appeals) who vide his order dated 25-1-2010 annulled the assessm ent orders passed under section 221 of the Income Tax Ordinance, 2001. Now the Revenue feeling aggrieved has come up in appeal before us agitating against the annulment of assessm ents.
6. Perusal of the order of the CIR(Appeals) reveals that for the annulment of assessment he placed reliance on the case of Elly Lilly Pakistan (Pvt.) Limited reported as 2009 PTD 1392 wherein the honorable Supreme Court held that:- "....The assessm ent of any income year ending on or before 30th June 2002 shall be governed by the repealed Ordinance as if the Ordinance had not come into force.. "
We have gone through the judgment of the apex court carefully but express our inability to subscribe to the view of the learned first appellate authority because in the said judgment the honorable Court dwelt upon scope of the provisions of section 122 of the Income Tax Ordinance, 2001 only which deals with the amendment of assessment either on the basis of (i) definite information or (ii) if the assessm ent is considered to be erroneous in so far as it is prejudicial to the interests of revenue. In the instant case the taxation officer has not made recourse to the provisions of section 122 of the Income Tax Ordinance, 2001 and for this reason the ratio of the judgment relied upon by the first appellate authority is not applicable.
7. The rectificationery provisions as held by the hierarchy of the courts of this country cover not only mistakes of facts but also of law which are apparent on the face of record and do not entail a process of long drawn argumentation and counter argumentation for their resolution. In other words, controversial issues which entail debate and discussion from both sides do not fall within the ambit of rectificationery action. We may however, clarify that a controversy no longer remains a controversy as soon as it is resolved through an authoritative pronouncement by a competent court which while interpreting a provision of law with reference to the specific facts of a case not only removes ambiguities about the meaning of the said provision of law but also highlights its correct import and if the said provision of law is found to have been applied in a manner contrary to the interpretation of the competent court, the said application would constitute a mistake of law which is required to be brought in harmony with the interpretation of the competent court. In the instant case there were mistakes apparent on the face of record in the shape of adjustment of B.F business losses against other income as well as levy of tax on presumptive income at a rate not prescribed by law. They would, in our opinion, be taken care of through rectificationery action under section 221 of the Income Tax Ordinance, 2001 notwithstanding the fact that the assessments for both the years had been finalized under the repealed Ordinance, 1979. In arriving at this conclusion we are fortified by the judgment of the Sindh High Court reported as (2009) 99 Tax 371, wherein the honorable Court held that the mistakes of law and fact which crept into assessments finalized under the repealed Ordinance, 1979 could be rectified under the corresponding restriction provisions of the new Ordinance, 2001 if, at the time of promulgation of the new Ordinance, they had not become past and closed transactions.
8. Facts of the case under consideration to which the learned taxation officer applied the rectification provisions are quite complex. As is evident from the record presumptive income (commercial imports) adopted by the taxation officer does not represent the value of commercial imports as laid down under section 50(5a) of the late Ordinance of 1979 i,e, cost of imports plus duties and sales tax. Instead, he adopted the sale proceeds of these commercial imports as presumptive income which obviously is higher than the figure to be calculated under section 50(5a) of the late Ordinance of 1979. In view of this situation an application for rectification under section 156 of the late Ordinance of 1979 was filed on behalf of the assessee on 25-8-2003 which was not disposed of by the taxation officer up to 30-6-2005. After the lapse of another two years, the taxation officer issued a show-cause notice bearing No,358 dated 6-6-2007 whereby the assessee company was confronted with the taxation of commercial imports of Rs,34,29,776 and Rs,1,31,35,626 for both the assessm ent years respectively at the correct applicable rate. In response, the assessee company took the stance that the amount of imports confronted to it was, in fact, the sale value of these imports whereas for the purpose of tax, value of commercial imports was required to be worked out in accordance with the method laid down in section 50(5a) of the late Ordinance of 1979. The learned AR of the company also pointed out that an application for rectification highlighting the same mistake had been filed vide letter dated 25-8-2003 which, because of having remained unattended was deemed to have borne, fruit. Reply submitted on behalf of the company, however, failed to impress the learned taxation officer who proceeded to finalize the rectification proceedings in the manner confronted through the show-cause notice dated 6-6-2007. The CIR(Appeals) annulled the orders passed under section 221 of the Income Tax Ordinance, 2001 by placing reliance on the judgment of the Supreme Court of Pakistan in the case of CIR v. Elly Lilly Pakistan (Pvt.) Limited reported as 2009 PTD 1392 ratio of which, for reasons discussed earlier has been wrongly applied to the fact of the instant case.
9. After careful consideration of the facts available on record, we have come to the conclusion that the assessm ent of commercial imports under the Presumptive Tax Regime has not been accorded lawful treatment both in terms of determination of value of imports and applicable rate of tax. In the original order passed under section 62 of the late Ordinance of 1979 on 27-6-2003 the assessing officer, instead of taking the value of commercial imports equal to the value recorded in the bills of entry for the purpose of charging income tax took the amount of their sale proceeds at Rs,34,29,776 and Rs,1,31,35,626 and charged tax thereon @ 5% whereas under the provisions of section 50(5a)/80C the imports could have been charged to tax on the amount recorded in the bills of entry for the purpose of charging income tax.
10. It appears that through the rectification application filed by the learned AR, mistakes referred to above were sought to be rectified. It further transpires that during the course of rectificationery proceedings initiated by the taxation officer through issuance of a show-cause notice dated 6-6- 2007, the AR again pointed out the mistakes that the predecessor of the taxation officer had committed but again the plea of the learned AR was brushed aside casually and the learned taxation officer finalized the proceedings by applying the tax rate of 6% to the sale proceeds of commercial imports resulting into raising of additional demand of Rs,34,297 and Rs,131,356 for the respective two years. This treatment is also not in accordance with law for reasons discussed supra. Annulment of assessm ent by the learned first appellate authority by placing reliance on the judgment of Supreme Court of Pakistan i,e, Ely Lilly Pakistan (Pvt.) Limited reported as 2009 PTD 1392 is also not lawful as discussed in the earlier part of this order.
11. From the facts discussed above we have no hesitation to hold that mistakes of fact as well as law exist both in the original order dated 27-6-2003 passed under section 62 of the late Ordinance of 1979 and the subsequent orders passed 'under section 221 of the Income Tax Ordinance, 2001.
However, while rectifying the mistakes, he repeated the earlier mistake committed by his predecessor and applied 6% rate to the sale proceeds of commercial imports instead of the cost of imports to be calculated under the provisions of section 50(5a) of the late Ordinance of 1979. Under these circumstances, we are left with no alternative except to vacate the orders of both the authorities below and remand the case to the taxation officer with the direction that for the purpose of charging tax under section 80C the value of commercial imports be taken from the relevant bills of entry in accordance with the procedure laid down in section 50(5a) of the late Ordinance of 1979 instead of charging tax on the sale proceeds thereof.
12. This brings us to the next ground of appeal which pertains to the adjustment of BF losses against other income of Rs,541,110 and Rs .19,63,483 for the assessment years 2001-2002 and 2002-2003. The learned DR contended that "other income" in both the years consisted of interest from bank and exchange gain which being assessable as "income from other sources" could not be set off against the BF business losses of company. The learned AR, on the other hand, pleaded that other income earned by the company from bank deposits and fluctuation of exchange rate was in the nature of business income which had rightly been set off against the BF business losses.
13. We have given due consideration to the rival arguments and also gone through the relevant record available on file. As far as interest income from bank deposits is considered, it is distinct and separate from the business income as held by the Supreme Court of Pakistan in the judgment Much power (Pvt.) Limited and others v. I.T.A.T of Pakistan reported as (2010) 102 Tax 69 S.C. Pak. And as such it cannot be set off against the accumulated business losses of the previous years. We may, however, clarify that accumulated unadjusted depreciation allowance carried forward from year to year is to be treated as an admissible expense of the current year in terms of subsection
(4) of section 57 of the Income Tax Ordinance, 2001 and adjusted against income assessable under any other head under section 56(1) of the Income Tax Ordinance, 2001. Similarly expense incurred for earning interest income is also to be allowed as a deduction from the interest income in view of the ratio of the judgment of Supreme Court of Pakistan quoted supra. As far as exchange gain is concerned, the learned AR explained that at the time of booking of vehicles the company receives the price in advance from its customers in foreign currency which is kept in the company's foreign currency account till it is remitted to the foreign supplier. It may yield profit or loss to the company depending upon the fluctuation in exchange rate. The learned AR thus explained that gain accruing from the transactions in the foreign currency bank account was essentially a business gain because the bank deposits from which the gain emanated were made in connection with and in the course of the normal business of the company. The explanation submitted by the learned AR of the company, in our view, is quite forceful and convincing. Accordingly, we direct that other income to the extent of exchange gain be treated as part and parcel of the business income for the purpose of set-off of the preceding year's accumulated business losses.
Cross Appeal (Tax year 2005
14. The revenue feels aggrieved by the direction of the learned first appellate authority regarding proration of expenses as well as deletion of add backs under the heads sales promotion, entertainment and penalty whereas the taxpayer company feels aggrieved by the confirmation of disallowance under the heads donations and initial allowance on vehicles. It is also not satisfied with the quantum of relief allowed by way of curtailment of disallowance of entertainment expenses and has prayed for further enhancement in relief.
15. We have given due consideration to the rival arguments and also gone through the relevant record available on file. From the perusal of the amended assessment order dated 22-6-2009 it transpires that the appellant company disclosed income taxable under normal law as well as Presumptive Tax Regime and filed the following computation:-- (Rupees)
Contract(Rupees)
Civil(Rupees)
TotalBasis of Allocation Sales 306,229,743 275,093,114 581,322,857 Cost of Sales Raw material, store and spares consumed136,342,934 26,0798,871 397,141,808 Actual consumption Technical assistance and services changes54,933,986 20,461,424 75,395,410 Actual consumption Salary, wages and other allowance1,274,879 1,145,252 2,420,131 Value of Sales Travelling and conveyance620,403 557,323 1,177,726 Value of Sales Canteen subsidy488,926 439,213 928,139 Value of Sales Repair and maintenance1,511,284 1,357,620 2,868,904 Value of Sales Rent 565,644 508,131 1,073,775 Value of Sales Insurance 801,121 719,666 1,520,787 Value of Sales Freight and material handing5,543,011 10,602,757 16,145,768 Value of Imported Spares Depreciation 4,133,515 3,713,231 7,846,746 Value of Sales 206,215,706 300,303,488 506,519,194
(1) (2) (3) (4) (5)
Opening stock work in process10,453,551 - 10453551 Closing stock work in process8,825,387 5,892,279 14,717,666 Cost of goods manufactured1,628,164 207,843,870(5,892,279)
294,411,209(4,264,115)
502,255,079 Opening stock goods657,893 657,893 Closing stock finished goods657,893 31,164,584 31,822,477 Cost of goods available for sales (31,164,584) (31,164,584)
Cost of goods sold207,843,870 263,246,625 471,090,495 Cross profit 98,385,873 11,846,489 110,232,362 Salary, wages and other allowance13,609,542 11,834,617 25,444,159 Value of Sales Utility expenses481,256 418,492 899,748 Value of Sales Telephone expenses963,920 838,208 1,802,128 Value of Sales Mobile phone 452,771 393,721 846,492 Value of Sales Traveling and conveyance1,574,494 1,369,153 2,943,647 Value of Sales Office expenses1,116,519 970,905 2,087,424 Value of Sales Entertainment 296,161 257,537 553,698 Value of Sales Postage and courier254,547 221,349 475,896 Value of Sales Printing and stationery758,832 659,867 1,418,699 Value of Sales Vehicle running maintenance449,748 391,092 840,840 Value of Sales Repair and maintenance205,168 178,410 383,578 Value of Sales Legal and provisional charges1,456,532 1,308,435 2,764,967 Value of Sales Audit Fee 57,946 52,054 110,000 Value of Sales Rent 1,995,980 1,735,669 3,731,649 Value of Sales Insurance 1,715,222 1,491,526 3,206,748 Value of Sales
(1) (2) (3) (4) (5)
Donation 79,162 68,838 148,000 Value of Sales Depreciation 437,080 380,077 817,157 Value of Sales Sales promotion3,136,313 2,817,421 5,953,734 Value of Sales Amortization of Deferred cast--- 788,855 788,855 Actual Bed debt expenses186,482 186,482 Actual Fines and penalties28,483 25,586 54,069 Value of Sales Administrative and Selling Expenses29,256,158 26,201,812 55,457,970 Operating Profit for the year69,129,715 14,355,323 54,774,392 From the perusal of the above tabulated computation it is evident that the company charged expenses under the heads "technical assistance", and "service charges", "freight and material handling", amortization of deferred cost" and "bad debts" to the category of income to which they, in the opinion of the company, actually pertained in accordance with section 67 of the Income Tax Ordinance, 2001 read with Rule 13 of the Income Tax Rules, 2002. The company also produced books of account and the relevant record before the taxation officer to substantiate its assertion regarding the correctness of the allocation of expenses. The taxation officer, on the hand, prorated both cost of sales and P & L account expenses on the basis of ratio of turnover between the two types of income without realizing that the expenses which were exclusively attributable to either type of income could not be prorated and only those common expenses which were attributable to both types of income could be prorated on the basis of section 67 of the Income Tax Ordinance, 2001 read with Rule 13 of the Income Tax Rules, 2002. The allocation made by the taxation officer without identifying and confronting the taxpayer with any defect in the allocation made by the company cannot be held as sustainable. The departmental appeal on this score stands dismissed.
16. As regards disallowances made under the heads "Sales Promotion, Entertainment, Fine and Penalty." We do not find any substance in departmental appeal because the disallowances have been made on the basis of stock phrases without identifying the element of un-verifiability. The amount added under section 21(g) of the Income Tax Ordinance, 2001 treating it as fine or penalty is also without any valid basis because it represents payment of the principal amount of sales tax and not the penalty. It appears that the taxation officer did not bother to go through the detailed explanation submitted by the learned AR in this behalf during the course of audit proceedings. The addition stands0 deleted.
17. Coming to the appeal of the taxpayer the learned AR did not press the ground regarding disallowance of initial allowance on vehicles and donations. The add back to the extent of 20% out of the entertainment expenses as directed by the learned CIR(Appeals) appears P to be just an estimate against the other. As discussed above, the add-back has been made on the basis of stock phrases without identifying element of un-verifiability and is, therefore, not sustainable. The same is directed to be deleted in to.
18. All the appeals are disposed of as above.