The taxpayer has filed these appeals against the different orders passed by the learned CIR(A) for the tax years 2006 to 2010. The grounds as well as arguments of learned AR are as follows:-- DEPRECIATION ALLOWANCE That the CIR (A) has further erred at law by confirming the order of TO by disallowing the "Depreciation Allowance" amounting Rs.133,249,391, Rs.100,032,479, Rs.98,491,109, Rs.73,629,379 and Rs.88,998,836 for the Tax Years 2006, 2007, 2008, 2009 and 2010 on the pretext of alleged inadmissibility under the provisions of the Ordinance without appreciating that:--
(a) That the opening Written Down Value [WDV] as brought forwarded by the taxpayer has been wrongly rejected by misinterpreting the provisions contained under section 22(5)(b).
(b) Written Down Value [WDV] of the depreciable asset is the cost of the asset as reduced by the total depreciation deductions allowed to the person in the previous taA years. No initial depreciation was wither claimed or allowed; however, the TO has incorrectly revised the amount of opening WDV which is in contravention of the essence of the law.
(c) That the claim of initial allowance is subject to separate and independent provision of law and such a claim is never deemed to be allowed on eligible depreciable assets unless the same meets conditions enumerated therein. The TO, while reviewing the opening WDV, has wrongly adjusted the opening balances by deducting there from the amount of initial allowance on assets as if such allowance is automatically allowable without due process and verification.
(d) That the treatment made by the TO is violative of the principle enshrined in precedent settled by the apex courts of law.
(e) That the deemed allowability of depreciation enacted under Rule 1(3A) of Third Schedule to the Income Tax Ordinance, 1979 is non existent in the new Ordinance. The presumption of the TO that the depreciation and initial allowance allowable under sections 22 and 23 have deemed to be allowed are thus based on fiction and imaginary.
(f) That depreciation under sections 22 and 23 is not based on allowability but on actually allowed basis. In this instant case, appellant has not been allowed such deduction and any reduction made in the opening WDV is against the expressed provision of the law.
The CIR (A) has confirmed the curtailment of following depreciation expense claimed by appellant: TAX YEAR AMOUNT 2006 133,249,391 2007 100,032,479 2008 98,491,109 2009 73,629,379 2010 88,998,836 The disallowance is based on misinterpretation of relevant provisions of law. In this regard, he has observed that the company was assessed to tax under PTR during tax year 2003, 2004 and 2005 and therefore it was required to deduct the amount of depreciation and initial allowance allowed during the said tax years from opening WDV for tax year 2006, resulting in reduced allowance of depreciation in subsequent tax years.
The above observation of TO has been confirmed by CIR(A) without considering the submission of your appellant that such treatment is not tenable under the relevant provisions of law.
Learned AR has argued the case under the following headings OBSERVATION OF THE TAXATION OFFICER: OBSERVATION IN RESPECT OF DEPRECIATION ....................... While calculating the tax depreciation for the year under consideration , opening written down value of the assets has been taken without deducting the initial allowance during the period of availing PTR. Such at treatment is contrary to law and an attempt to claim normal depreciation on higher WDV in the year under consideration.
DISALLOWANCE WITHOUT MENTIONING IN SHOW CAUSE: At the very outset, it is submitted that the taxation officer has confronted appellant for reduction of only initial allowance from opening WDV. Whereas, while passing the assessment order, the WDV has been reduced by both Initial Allowance as well as Normal Depreciation. Such gross defect in notice renders all the assessm ent proceedings unlawful under the principals of natural justice.
DEFINITION OF WDV Notwithstanding the above, the TO has failed to appreciate the definition of WDV as provided under section 22(5)(b) of the Ordinance. The definition clearly enumerate that the cost of a depreciable assets can only be reduced, by normal depreciation and/or any initial allowance allowed to the taxpayer, to arrive at the WDV. The relevant extract of the section is being reproduced for the ease of reference: Section 22: Depreciation 22. Depreciation The written down value of a depreciable asset of a person at the beginning of the tax year shall be-
(b) in any other case, the cost of the asset to the person as reduced by the total depreciation deductions (including any initial allowance under section 23) allowed to the person in respect of the asset in previous tax years.
As per the plain reading of above provision, to arrive at WPV, depreciation or initial allowance cannot be reduced from cost of the asset until or unless it has actually been "allowed" to the taxpayer as an expense, while arriving at income chargeable to tax.
DEFINITION OF DEPRECIABLE ASSETS Further, you will appreciate that taxation of appellant, during the period covered under PTR regime, was governed by section 169 of the ordinance. Section 169 clearly bars allowability of any expense relating to business income when tax collected or deducted on receipts is being considered as final tax. The relevant extract of the section is being reproduced for the ease of reference: Section 169: Tax collected or Deducted as final tax
169. Tax collected or Deducted as final tax
(1) ................. (2) Where this section applies -
(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person;
(b) ho deduction shall be allowable under this Ordinance for any expenditure incurred in deriving the income;
(c) the amount of the income shall not be reduced by---
(i) any deddctible allowance under Part IX of Chapter III; or
(ii) the set of any loss;
(d) the tax deducted shall not be reduced by any tax credit allowed under this Ordinance; and
(e) there shall be no refund of the tax collected or deducted unless the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under this Ordinance.
(3)
Keeping in view the above, how can the TO allow or consider, even deemed to have been allowed an expense whose allowability has: expressly been barred by a specific provision of the Ordinance.
Further to the above, the TO has failed to appreciate that assets being used by appellant during the period of PTR regime were not qualifying the definition of depreciable assets as provided by section 22(15) of the Ordinance. One of the decisive properties of a depreciable asset is that it should have been used by the taxpayer in deriving income chargeable to tax under the head income from business. The relevant extract of the section is being reproduced for the ease of reference:-- Section 22: Depreciation
22. Depreciation ..........
(15) In this section, -
(a) has a normal useful life exceeding one year;
(b) is likely to loose value as a result of normal wear and tear, or obsolescence; and;
(c) is used wholly or partly by the person in deriving income from business chargeable to tax Keeping in view the above definition, attention of Bench is invited toward the section 169(2)(a) of the Ordinance which provides that the income covered under PTR regime shall not fall under any head of income.
169. Tax collected or Deducted as final tax
169. Tax collected or Deducted as final tax
(2) Where this section applies -
(a) the income shall not be chargeable to tax under any head of income in computing the taxable income of the person; The above narrated provisions of law it clearly depicts that the reducing depreciation and initial allowance from WDV, pertaining to the period of PTR, is not lawful act and order issued in this behalf is liable to be annulled.
From the bare perusal of above provisions of the Ordinance, it is evident that WDV at the beginning of a tax year is determined by reducing the cost by the amount of depreciation and initial allowance allowed during previous tax years in the normal tax resume. In the instant case, no depreciation was allowed during tax years 2003, 2004 and 2005 and there is no room for intendment, in the absence of any expressed provision of law to the contrary.
2. We have heard the arguments and perused the relevant record. As per learned AR the fact that depreciation and initial allowance is allowed under the provisions of the Ordinance on 'actually allowed basis' and not under 'deemed allowed' basis has also been endorsed in judgments reported as 1988 PTD 734 ITAT. In view of the foregoing, the depreciation curtailed by the TO is against the clear provisions of law as well as against the settled ratios of High Court, FBR and hence liable to be vacated. The learned DR has supported the view given by the forums below. After hearing respective contentions of the parties we feel no hesitation to say that these judgments pertain to the cases of Tax holiday period. These do not pertain to the cases of PTR which has totally different. Scenario. While deciding such like ticklish issue whole scheme of law, its positive application and dispensation of justice are to be kept in mind. Under PTR, a fixed amount of Tax is paid in Government Exchequer. There is no necessity to furnish the account of income or expense.
Whatever is spent that stands allowed. It is not to be questioned by the department. Tax paid under PTR has to remain same. Strange enough that depreciation remained frozen while other expense did ,not freeze. Section 169 dealing with PTR cases provides that no deduction will be allowable. It does not mean that depreciation shall remain frozen. There is no express provision in law for freezing of depreciation in the Income Tax Ordinance, 2001: Similarly WDV at the beginning of a Tax Year is determined by reducing the cost by the amount of depreciation and initial allowance allowed during the previous tax year of course, it is true but the depreciation' and other expenses already stand allowed in PTR.
Section 22(15)(b) provides that Machinery is likely to loose value as result of normal wear and tear or obsolescence. All of the expenses under PTR whether claimed of not stand allowed. These will not be questioned by tax authority. Resultantly, there is no occasion of allowability or disallowability. It is part of contract under PTR inter-se citizen-and state. It does not mean that it remained frozen because as per section 22(15)(b) asset was loosing its value as per normal wear and tear. When asset was loosing its value during PTR period, how can we assume that depreciation was frozen just on plea that it was not "actually allowed" by the authorities when there was no occasion for it.
Concept of actually allowed becomes irrelevant because it was claimed or not, allowed or disallowed, hardly had an impact on Tax amount. Rates of Tax under PTR are generally lower than normal tax regime.. Cases of PTR are not the subject of audit scrutiny as no accounts to computation of income are requisite to be produced. On the other hand, cases under normal tax regime involves production of record, scrutiny through audit and higher rate of tax. Hence to hold that depreciation of asset regularly used for earning business income suffering from normal wear and tear remains frozen in cases of PTR will be absurd. Moreso, if we study the impact of sections 22, 23, 32 and 34 simultaneously, there appears a concept of continuity and not that of freezing any part of section. If we introduce the concept of freezing of depreciation during PTR period then in the absence of express provision these sections will be appearing as redundant which is never ever intendment of law maker. Moreso, it is Trite law that taking an interpretation towards exemption or freezing provisions of law are to be construed strictly. This grey area is not to benefit the Taxpayer because it will result in huge discrimination to other Taxpayers under normal Tax Regime. If one has to ascertain figure of earned white income, definitely he has to produce the account of receipts and expenditure. In Expense account he cannot be allowed to freeze the depreciation. It has to be figured. There is no concept of freezing the depreciation while calculating net wealth earned under PTR. We are unable to freeze it by making farfetched and wrong interpretation of word "actually allowed" or "will not be allowable". Depreciation is to be deducted as per chart provided. The nutshell of above discussion is that PTR is a contract inter se state and Taxpayer which provides him concession of lower tax rate, saving from audit scrutiny and production of accounts for purposes of amending the assessment. In this contract whatever is spent that stands allowed because there is no concept of enhancing the income. Income under PTR is neither to be reduced nor to be enhanced. Hence expenses in this contract whatever may be stands allowed so they are not allowable. Depreciation along with other expenses also stand allowed. It cannot be considered as frozen. With these observations we decide this issue in favour of the department and against the Taxpayer. View of authorities below is based on just and fair treatment. Hence same is upheld. .