Through these four cross appeals two separate impugned orders of the learned CIR(A) dated 26- 2-2009 for Tax Years 2003 and 2004 have been objected by both the parties.
The department has objected the impugned orders on the following grounds:-- TAX YEAR 2003 (2) That the learned CIR (Appeals) was not justified in deleting the addition made on account of canteen subsidy and cost of living allowance at Rs.33,21,235 being excess cost of perquisites under section 21(k) of the Income Tax Ordinance, 2001.
(3) That the learned C1R (Appeals) was not justified in deleting the addition made under the head loss on scrapped, assets at Rs.5,252,715.
(4) That the learned CIR (Appeals) was not justified in directing to compute the WWF by applying the Ratio of 2/102 as taxable income.
TAX YEAR 2004
(2) That the learned CIR (Appeals) was not justified in deleting the addition made under the head loss on account of idle assets written of amounting to Rs.74,68,255.
(3) That the learned C1R (Appeals) was not justified in directing the addition made under the head loss on account of scrapped assets at Rs.5,252,715.
(4) That the learned CIR (Appeals) was not justified in directing to allow the provision for customs duties amounting to Rs.42,000,000,
(5) That the learned CIR (Appeals) was not justified in deleting the addition made under the head loss on account of perquisites under section 21(k) at Rs.4,791,280.
(6) That the learned CIR (Appeals) was not justified in directing to compute the WWF by applying the rate of 2/102."
While the Taxpayer through cross appeals for the above two tax year has objected the impugned order on the following grounds:-- TAX YEAR 2003 "(1) The order dated February 26, 2010 (served on March 15, 2010), passed by the Commissioner Inland Revenue Appeals-I, Lahore (C1R(A)') in the matter of amendment order dated December 29, 2008 passed by the then Additional Commissioner of Income Tax, Audit-C.
Large Taxpayers Unit, Lahore (`ACIT') under section 122(5A) of the Income Tax Ordinance 2001 ('Ordinance') is bad in law and against the facts of the case.
(2) That the learned CIR(A) has erred in upholding the amendment order disregarding the fact that such order was void ab initio as the then Commissioner of Income Tax, Audit Division, Large Taxpayers' Unit, Lahore did not hold the assessment be erroneous and prejudicial to the interest of revenue and thus fundamental pre-requisite for invocation of Provisions of section 122(5A) of the Ordinance remained unfulfilled.
(3) That without prejudice to ground of Appeal No. 2 above learned CIR(A) has erred in upholding the disallowance of expense Rs.14,850,000, incurred on account of contribution to gratuity Fund, without appreciating the fact that ACIT's reliance in this respect on provisions of section 21(e) of the Ordinance read with Rule 117 of the Income Tax Rules, 2002 (Rules') was misplaced.
(4) That without prejudice to grounds of Appeals Nos.2 and 3 above, learned CIR(A) has erred in confirming the disallowance of Rs.14,850,000 without appreciating the fact that the disallowance was initially confronted to the extent of Rs.9,875,000 and thus provisions of section 122(9) of the Ordinance were not complied with the ACIT while making the disallowance.
(5) That without prejudice to ground of Appeal No.2 above, learned CIR(A) has erred in upholding the disallowance of expense of Rs.4,920,000, representing 'transitional liability' relating to gratuity, without appreciating the fact that ACIrs reliance in this respect on provisions of section 21(e) of the Ordinance read with Rule, 117 of the Rules was misplaced.
(6) That without prejudice to grounds of Appeals Nos. 2 and 5 above, the learned CIR(A) has erred in upholding the disallowance of Rs.4,920,000 as such amount had already been disallowed being included in the amount of Rs.14,850,000.
(7) That without prejudice to ground of Appeal No.2 above, learned C1R(A) has erred in upholding the invocation of provisions of section 21(c) of the Ordinance by ACIT disallowing the expense on account of 'license fee' amounting of Rs.6,611,014 by alleging default under section 152 of the Ordinance.
(8) That without prejudice to grounds of Appeals Nos. 2 and 7 above, learned C1R(A) has erred in upholding AC1T's action of disallowing the expense of Rs.6,611,014 under section 21(c) of the Ordinance as no default under section 152 of the Ordinance existed there being no payment of such expense during tax year 2003.
(9) That without prejudice to the grounds of Appeals Nos. 2, 7 and 8 above, learned C1R(A) has erred in endorsing the disallowance of entire amount of expense on account of 'license fee' as admittedly the alleged default under section 152 of the Ordinance was relatable only to the one- half of the amount of such expense.
(10) That without prejudice to ground of Appeal No.2 above learned CIR(A) has erred in directing that appellant should seek relief under section 221 of the Ordinance in the matter of adjustment of tax liability against determined refunds pertaining to various previous assessment years."
TAX YEAR 2004 (1) The order dated February 26, 2010 (served on March 15, 2010), passed by the Commissioner Inland Revenue, Appeals 1, Lahore [CIR(A)7 in respect of amendment order dated January 31, 2009 passed by the then Additional Commissioner of Income Tax, Audit-C Large Taxpayers Unit, Lahore ('ACIT') under section 122(5A) of the Income Tax Ordinance, 2001 ('Ordinance) is bad in law and against the facts of the case.
(2) That the learned CIR(A) has erred in upholding the amendment order disregarding the fact that such order was void ab initio as the then Commissioner of Income Tax, Audit Division, Large Taxpayers' Unit, Lahore did not hold the assessment be erroneous and prejudicial to the interest of revenue and thus fundamental pre-requisite for invocation of provisions of section 122(SA) of the Ordinance remained unfulfilled.
(3) That without prejudice to ground of Appeal No. 2 above, learned CIR(A) has erred in upholding the invocation of provisions of section 21(C) of the Ordinance by ACIT disallowing the expense on account of 'license fee' amounting to Rs.8,973,000 by alleging default under section 152 of the Ordinance.
(4) Without prejudice to the grounds of Appeals Nos.2 and 3 above, learned CIR(A) has erred in endorsing the disallowance of entire amount of expense on account of 'license fee' as admittedly the alleged default under section 152 of the Ordinance was relatable only to one-half of the amount of such expense."
2. In view of the fact that the present appeals are cross appeals and involve more or less the same issues, these are therefore being disposed of through this consolidated order.
Relevant facts, in brief, are that the taxpayer in this case is a public limited listed company engaged in the business of manufacturing and assembling of motor vehicles under the brand name 'Honda'. The appellant also imports spare parts, and vehicles in 'completely Built Unit' condition for sale in local market in the same state. For both the years in appeal the assessm ents were deemed to have been finalized under section 120 of the Income Tax Ordinance, 2001. The Additional Commissioner assumed jurisdiction under section 122(5A) of the Ordinance and amended the assessm ents through separate orders for both the tax years vide order dated 29-12-2008 and 31-1-2009. The Taxpayer assailed the orders passed under section 122(5A) before the first appellate authority who while partially accepting the appeals, upheld the amendment orders on certain issues. Through the present appeals, the taxpayer has agitated the findings of first appellate authority favouring the department. While the department has through cross appeals assailed the impugned orders dated 26-2-2010 to the extent of relief extended to the taxpayer.
3. During the appeal proceedings the Taxpayer company was represented by Mr.Asim Zulfiqar, FCA and the department's contentions were pleaded by Mr. Muhammad Tahir, Additional Commissioner Learned DR. Both the learned representatives elucidated contentions of respective parties and argued their cases at length.
4. For both the years under review the taxpayer has objected the legality of amendment proceedings under section 122(5A) of the Ordinance which is Ground No.2 in both the appeals for the tax years 2003 and 2004.
This ground being not pressed by the learned representative of the Taxpayer, the appeals on this ground stand dismissed the ground in this respect being not pressed by the learned counsel.
5. The two appeals filed by the Taxpayer on the remaining grounds are discussed and decided as under:-- The grounds of Appeals Nos. 3 to 6 in the tax year 2003 are regarding the admissibility of payments made to staff gratuity fund. Facts in brief relating to the issue in hand are that upto the period relevant to assessm ent year 2002-2003 taxpayer/assessee was accounting for the expense on account of staff gratuity payable to employees through a yearly 'provision' charged to profit and loss account. In the past, such provision, was not allowed as a deduction to the taxpayer and only the actual payments made to taxpayer's employees on account of gratuity were allowed as a deductible expenditure against the taxable income. History of expenditure and admissibility practice thereof is not disputed by the parties.
During the period relevant to tax year 2003, taxpayer established a separate 'gratuity fund' for provision of staff gratuity benefits to its employees which was admittedly got duly approved under Sixth Schedule to the Ordinance from the concerned competent authority. Upon establishment of gratuity fund, the taxpayer company got its liability estimated by a qualified actuary whose report recommended that a contribution in this respect is made to the Fund so as to meet the related obligation. In view of the fact that an amount of Rs.7.484 million was brought forward from previous year being the 'unpaid' expense earlier recognized a further expense of Rs.7.366 million (Rs.14.850 million less Rs.7,484 million) was recognized in profit and loss account and the aggregate amount of Rs.14.850 million) was paid to Fund during the year under consideration. In view of the fact that as per history. Taxpayer was only allowed actual payments on this account, the whole amount paid to Fund was claimed as a deduction by the Taxpayer.
The Taxation Officer, considering, the said amount, paid to fund and claimed as deduction to be classifiable as 'initial contribution' to Fund, disallowed the same on the grounds that it required a special approval from concerned Commissioner, Inland Revenue under provisions of Rule 117 of the Income Tax Rules, 2002 which according to Taxation Officer was not obtained by the Taxpayer.
Furthermore, an amount of Rs.4.92 million representing 'transitional liability' computed by actuary was separately disallowed by taxation officer on the strength of an earlier judgment of this Tribunal in I.T.As. Nos.4776 to 4780/LB of 2004 and I.T.As. Nos. 5121 to 5124/LB of 2004 vide order dated 31-1- 2005. While, making such disallowance, taxation officer also disallowed amount of Rs.2.853 million representing the payment on account of statutory gratuity during the year, considering it to be a part of payments made to Fund. However, later on, amendment order was rectified and disallowance of Rs.2.853 million was deleted when it was clarified by the taxpayer company that payment in this respect was on a separate account of 'statutory gratuity' and had no nexus with the payments made to Fund.
Learned first appellate authority CIR(A) endorsed the view point of the taxation officer and refused to interfere into the amended order in this score. Thus the dispute before this Tribunal involves disallowance aggregating to Rs.19.770 million [Rs.14.850 million (alleged initial contribution) + Rs.4.92 million (transitional liability)].
6. The learned A .R's arguments against both the above disallowances are discussed here under separately. Regarding the payment to fund amounting to Rs.14.85 million it is contended that the Taxation Officer has erred invoking the provisions of Rule 117(2) of the Rules as amount of Rs.14.85 million was within the limits prescribed therein i.e. Such amount was not in excess of the participating employees' aggregate salaries for last months of relevant financial year in respect of which benefit of 'staff gratuity' has vested. In this respect it is contended that a similar issue was raised by concerned Commissioner of Inland Revenue at the time of issuance of 'exemption certificate' .To the Fund established by taxpayer company and after examining the underlying record, concerned authority agreed that such amount was not in excess of the prescribed limit and hence no statutory approval under Rule 117 was required. The Fund was issued the requisite exemption certificate after proper verification/satisfaction. In order to substantiate such position, copies of notice dated 12-7-2003, response thereto submitted through taxpayer's AR's letter dated 17-7-2003 and exemption certificate issued to Fund were placed before this bench.
The learned counsel has argued that notwithstanding the above narrated factual position under the provisions of section 21(e) of the Ordinance, only such amount can be disallowed as has not been 'paid' to an approved Fund, which position clearly implies that under the provisions of Ordinance 'payments' to an approved Fund are admissible as a deduction without any qualification. Accordingly provisions of Rule 117(2) of the Rules, even if for arguments sake are regarded at variance with section 21(e) of the Ordinance, a piece of primary legislation cannot take precedence being a part of subordinate/secondary legislation and hence the amount could not have been disallowed.
7. Regarding the transitional liability amount to Rs.4.92 million, the learned counsel has contended that it was included in the amount of Rs.14.850 million and it was a component of contribution of Rs.14.850 million recommended by the qualified actuary. This fact was readily verifiable from the disclosures accompanying the taxpayer's audited financial statements for the relevant year which was produced before the Taxation Officer and the relevant extracts whereof were also furnished before the learned CIR(A) during the appeal proceedings. Hence according to learned A.R. The disallowance of Rs.4.92 million in addition to Rs.14.850 million tantamount to disallowance of a single amount of expense twice which is clearly an error on part of the taxation officer. He has argued that without prejudice to above, facts involved in the earlier judgments 'of this Tribunal relied upon by the Taxation Officer remain distinguishable from the present case. The earlier decision pertained to 'pension' whereas the present issue relates to `gratuity' hence the two cases are distinguishable. Further, the transitional liability in those cases was merely an accounting expense claimed by the taxpayer with no actual payment thereof to the Fund whereas in the instant case, deduction was claimed on the basis that payment was made to Fund, which was admittedly approved and hence not being hit by the mischief of provision of section 21(e) of the Ordinance, amount was fully deductible as explained above.
8. 'The learned D.R. On the other hand is supporting, the inference drawn by the taxation officer on the basis of arguments recorded in the amendment order, however, no further explanations or rebuttals to learned AR's arguments, as explained above were rendered in support of departmental contention.
9. After giving due consideration to arguments of both the parties and the material relied upon by them in this respect, we are inclined to agree with the submissions made by learned A.R. That the authority to enforce the limits prescribed in Rule 117(2) of the Rules rested with the concerned Commissioner Inland Revenue which, in this case, did satisfy himself on this account. This position prima facie verifiable from the documents furnished before this bench by the learned A.R. And which have been conceded to by the learned D.R. We are unable to comprehend as to how taxation officer has formed a view that is clearly in conflict with another departmental official and that too senior in hierarchy to him. The contents of reply dated 17-7-2003 submitted by taxpayer company's AR clearly shows that the amount of Rs.14.850 million was not in excess of limit prescribed in Rule 117(2) and subsequent issuance of exemption certificate substantiates that after due verification, such contention of taxpayer was found to be correct. During the amendment proceedings, taxpayer was not called upon to substantiate that the contribution of Rs.14.850 million was within the subject limit and thus it is very clear that the disallowance has been made on an assumption that was unfounded and was not supported by facts and circumstances. Even if, despite an implied finding of Commissioner Inland Revenue on the matter. Taxation Officer wished to verify taxpayer's compliance with provisions of Rule 117(2) he should have summoned the computations underlying that amount so as to find-out that whether or not such amount was ;Within the subject limits. Disallowance has clearly been made on the basis of an imaginary position, which did not exist. Resultantly, on this account alone, action merits annulment.
Here, we would also like to discuss the matter of 'disallowance' conceived in provisions of Rules 117(2) vis-a-vis the provisions of section 21(e) of the Ordinance. It is a trite law that a right conferred upon a taxpayer under primary legislation cannot be taken away through a subordinate legislation e.g. Rules, notifications etc. This principle finds strength from innumerable judgments of Hon'ble Higher Appellate fora available on record. The learned AR's argument that provisions of section 21(e) of the Ordinance confer a right upon the taxpayers to claim as deduction the 'payments' made to an 'approved fund' is very well founded and is corroborated by the plain text of such legal provisions. Such right admittedly cannot be taken away by placing reliance on the provisions of Rules that are admittedly subordinate to the provisions of Ordinance a creation of legislature. If a fund fails to comply with any of the conditions prescribed in the Rules, the legitimate way is to revoke the approval accorded to such fund in consequence to which provisions of section 21(e) of the Ordinance would come into play and hence the amount in question would stand disallowed.
Taxation Officer has clearly misunderstood the situation and has not only erred in understanding facts of the matter but has also misinterpreted the relevant scheme of law. Consequently, it is directed that amount of Rs.14.850 million paid to an approved Fund by taxpayer company to be allowed as a deduction.
10. As regards the matter of admissibility of Rs.4.92 million representing the transactional liability computed by actuary and disallowed by taxation officer on the strength of earlier judgments of the this Tribunal, it is apparent that though this amount was an 'accounting expense', however, it was a part of aggregate payment of Rs.14.850 million paid by the Taxpayer to the Fund admissibility whereof has already been discussed above. In these circumstances, it is obvious that claim of taxpayer was not properly understood by the taxation officer as not only a double disallowance was made by him but he has also failed to appreciate the basis upon which the taxpayer claimed such deduction viz. Being a 'payment' made an 'approved' Fund. While the findings given by our learned brethren in earlier judgments of this Tribunal cited supra are not disputed by us, these were not applicable in the instant case. Accordingly, arbitrarily disallowance of Rs.4.92 million made by taxation officer is held to be illegal and illegitimate.
11. Regarding disallowance under section 21(c) of the Ordinance, in respect of 'license fee' paid to parent company which are grounds of Appeals Nos.7 to 9 for tax year 2003 and Nos.3 and 4 for tax year 2004 the facts of the issue are that 'license fee' paid to parent company by the taxpayer was subjected to withholding tax @ 15% under section 152(1) of the Ordinance considering it to be in the nature of 'royalty'. The Taxation officer, however, disputed such position and held that license fee was not classifiable as 'royalty' and hence attracted the withholding tax rate of 30% prescribed under section 152(2) of the Ordinance and hence provisions of section 21(e) of the Ordinance were applicable in the case of subject expense. Resultantly expense on account of license fee for both the years was disallowed by taxation officer while amending the relevant deemed assessments.
As is evident from the judgment cited supra there is no justification for the disallowance and hence following the dictum laid down earlier by this Tribunal, in the case of the present Taxpayer it is directed that expense of 'license fee' to be allowed to the Taxpayer as per the claim.
12. Regarding the adjustment against determined funds which is ground of Appeal No.10 for tax year 2003 taxpayer has assailed the view advanced by first appellate authority the learned CIR(A) that matter of adjustment of refunds amounting to Rs.3,095,584 of other tax years against the liability for the subject tax year falls within the domain of 'rectification' and hence taxpayer should seek remedy through filing of an application with the taxation officer under section 221 of the Ordinance.
The appeal filed by the Taxpayer on this issue is decided in the manner supra.
13. DEPARTMENT APPEALS The issue of disallowance under section 21(k) of the Ordinance is the ground of Appeal No. 2 for tax year 2003 and Ground of Appeal No.5 for tax year, 2004. The facts underlying the issue are that while computing the 'excess perquisites' to determine the amount inadmissible under section 21(k) of the Ordinance (that remained on the statute book until June 30, 2005), taxation officer treated the amounts expended on account of 'canteen subsidy', paid to canteen contractor, and 'cost of living allowance paid to employees as 'perquisites'. As a result of this position adopted by Taxation Officer, amounts offered for tax itself by taxpayer under section 21(k) of the Ordinance in the respective returns of total income were increased for tax years 2003 and 2004 by Rs.3,321,235 and Rs.4,791,280 respectively.
Matter was agitated by taxpayer before the learned Commissioner (Appeals) on the strength of Circular No.16 of 1990 issued by the Federal Board of Revenue and it was argued that under such Circular, expense incurred on provision of food etc. To employees during their stay at factory is not classifiable as a 'perquisite'. In respect of cost of living allowance' taxpayer's plea before first appellate authority was that it being a 'statutory allowance' was also not classifiable as a 'perquisite' and hence the action of the taxation officer was not in accordance with the law. The learned first appellate authority accepting the arguments of taxpayer accorded relief on this account and hence the department is in appeal before us on this score.
The learned D.R. Emphasized the arguments on the points as mentioned by the Taxation officer in support of the disallowance as contained in the amendment order whereas the learned A.R.
Contended that finding given by the learned Commissioner (Appeals) being supported by Circular cited supra requires no interference.
After considering the contentions from both the sides we are of the view that the findings recorded by the learned Commissioner (Appeals) is in order and under the provisions of Circular No.16 of 1990, canteen subsidy cannot be classified as a 'perquisite'. Moreover, cost of living allowance being a statutory allowance payable to employees under legislative compulsion also cannot be considered to be includable in 'perquisites'. Accordingly, we, maintain the relief granted by the learned Commissioner (Appeals) and these departmental grounds of appeal fail.
14. The department has objected the admissibility of loss on scrapped assets pertaining to assessm ent year 2002-2003 which are grounds of Appeal No. 3 of both tax years 2003 and 2004.
Background of the matter is that during the period relevant to assessment year 2002-2003 fixed assets having a tax book value of Rs.15.7 million approximately were scrapped by the taxpayer company. These assets were in the nature of jigs, moulds, dyes etc. Used to manufacture proprietary items of 'Honda brand' and were required to be scrapped due to change in model of Honda cars being manufactured by the taxpayer. While these were no longer required in the taxpayer company's manufacturing activity, being items of 'proprietary' nature, these had to be defaced and scrapped so as no unauthorized manufacturing could he undertaken by the buyers of these items. Resultantly, these were sold as 'scrap'. During the assessment proceedings for assessm ent year 2002-2003 taxpayer was confronted on the issue on the grounds that since these were assets on which 'depreciation' was earlier allowed, gain/loss on disposal thereof should be computed by reference to tax written down value and sale proceeds fetched by taxpayer on disposal and hence claim of entire written down value of assets as an expense under the head 'fixed assets scrapped' could not be allowed to this objection, taxpayer explained that amounts fetched on disposal of such assets had been duly offered for tax as 'scrap revenue' and hence effectively the treatment required to be followed by taxation officer has been meted out. Taxation Officer, however, accepted the claim to the extent of 1/3rd thereof on the grounds that it could not be ascertained that all these items were sold during the period relevant to assessment year 2002- 2003 and circumstances suggest that some of these items may have been sold as part of scrape in period subsequent to that relevant to assessment year 2002-2003. Accordingly, he ruled that balance 2/3rd of the taxpayer's claim on this account would be considered for allowance in next two years in equal proportions.
During the amendment proceedings conducted for the years in appeal before us, taxation officer disputed the claim made by the taxpayer on this account i.e. 1/3rd of Rs.15.7 million for each of the tax years 2003 and 2004 on the grounds that taxpayer company could not produce evidence to the effect that related scrape was sold during the periods relevant to such tax years and that the manner adopted by taxpayer in claiming such expense is not in accordance with the provisions of section 22 of the Ordinance where under loss, on disposal was to be computed with reference to tax written down value and sales proceeds in respect of each individual asset.
The learned Commissioner (Appeals) accorded relief to the taxpayer company on the grounds that requisite evidence was duly produced before the taxation officer during the amendment proceedings, which showed that entire defaced items were sold during the period relevant to tax year 2003. It has also been recorded by the learned Commissioner (Appeals) in his order that while evidence produced by taxpayer showed that entire scrapped assets were sold during the period relevant to tax year 2003, taxpayer only claimed 1/3rd of the amount in tax year 2003 as directed by the Taxation Officer while finalizing the assessment proceedings for assessment year 2002- 2003. Thus, he concluded, that being in accordance with the mechanism itself suggested by the department, taxpayer's claim merits acceptance.
Before us, the learned D.R. Has supported the departmental contention on the strength of provisions of section 22 of the Ordinance and has emphasized that the mechanism provided for in these provisions of law should have been adhered to by the taxpayer. Moreover, he has also argued that evidence showing disposal of these items in the scrapped form was also not provided by taxpayer during the amendment proceedings. The learned A.R. On the other hand supported the findings recorded by first appellate authority and also produced before this bench the correspondence exchanged with the Taxation Officer during the amendment proceeding which stated that requisite evidence was being furnished . The learned A.R. Further supported the case of taxpayer by emphasizing the manner agreed with the department keeping in view the peculiar nature of transaction was completely adhered to by the taxpayer and hence departure from understanding earlier reached during the assessment proceedings for assessment year 2002- 2003 has clearly caused a hardship to the taxpayer. Thus he stressed, that relief extended by first appellate authority may please be maintained.
After perusing, the record and hearing, the arguments of both the parties, it is our considered view that taxpayer's claim on this account was proper and legitimate. It is obvious from the facts of the transaction, as explained supra, that sale proceeds of each individual item scrapped by taxpayer was not identifiable as the items were scrapped and sold in bulk. In such a situation departmental stance clearly caused an undue hardship to the taxpayer. We agree with the finding of Commissioner (Appeals) as to disposal of entire scrapped assets in period relevant to tax year 2003 as obviously scrap could not have been carried by taxpayer for the entire year. Keeping in view the peculiarity of transaction and to preserve the interests of revenue to the maximum possible extent the Taxation Officer conducting the proceedings for assessment year 2002-2003 directed the taxpayer to divide its claim in three tax periods. While, such a mechanism was clearly detrimental to the interest of taxpayer in terms of tax cash outflows, taxpayer accepted M such mechanism and adhered to it. The position adopted by taxation officer in years being considered by us is clearly unlawful particularly when it .Is verifiable from the record that the taxpayer duly provided the evidence regarding sale of scrap during the year under consideration. Further we observe that the same is an unwarranted departure from the understanding earlier reached on the matter. The order of the first appellate authority on the matter is thus upheld. It would also be pertinent to record here that since taxation officer was conducting the amendment proceedings under section 122(5A) of the Ordinance, he was not justified in requisitioning the evidence and disallowing the amounts under consideration for want of evidence. This was obviously an action being taken outside the legal jurisdiction available to him. Accordingly, we uphold the findings of the learned Commissioner (Appeals) on the issue and direct that such claim be allowed to the taxpayer.
15. The next issue objected by the department is computation of liability on account of Workers'
Welfare Fund which is ground of Appeal No.4 for tax year 2003 and Ground of Appeal No.6 for tax year 2004. Brief facts underlying the issue are that since levy of 'Workers' Welfare Fund' (`WWF') is allowable as a deduction from taxable income, taxpayer computed such levy by applying a ratio of 2/102 to the income before deduction on this account. The Taxation Officer did not endorse such treatment and while framing the amendment order, N computed WWF @ 2% of income before charging WWF.
The learned Commissioner (Appeals) endorsed the taxpayer's contention on the basis of provisions contained in section 60A of the Ordinance that provide for deduction of WWF from taxable income and provisions of section 4 of Workers' Welfare Fund Ordinance, 1971 that creates the charge of WWF on the basis of 'taxable income'.
Before us the learned A.R. Produced a copy of assessment order for assessment year 2002-2003 in which the WWF was itself computed by the revenue in the manner followed by taxpayer while computing the liability for tax years 2003 and 2004. Moreover, the learned A.R. Elaborated that under provisions of section 60A of the Ordinance, WWF is undisputedly a deductible allowance and hence it was computable by applying a ratio of 2/102 to the income before charging WWF. The learned D.R. Stressed that this manner of computation of WWF is complicated and as per practice followed by department and other taxpayers, levy of WWF is computable @ 2% of income before charging WWF.
We are of the view that departmental stance is at variance with the provisions of section 60A of the Ordinance. Undisputedly, WWF is deductible against income and 'taxable income' is a sum arrived at after deducting such statutory levy. Accordingly, under these provisions of law, WWF is computable by applying a ratio of 2/102 to income before charging WWF. In this manner, both the relevant statutory provisions i.e. Section 4 of Workers' Welfare Fund Ordinance, 1971 and section 60A of the Ordinance would be complied with. Resultantly, the departmental appeals on this account do not find favour with us and are dismissed.
16. The department has also objected admissibility of loss representing write of of Idle assets' which is ground of Appeal No.2 for tax year 2004. Assets having a tax written down value of Rs.7,468,255 not being usable in taxpayer's manufacturing activity were declared as 'idle' and deduction thereof was claimed on the strength of provisions contained in section 75(3A) of the Ordinance. Taxation Officer did not allow such claim, however, learned first appellate authority accorded relief to the Taxpayer on this score. Through the instant ground, such finding of first appellate authority is impugned by the department.
17. The last ground objected by the department is admissibility of provision for customs duty which is ground of Appeal No.5 for tax year 2004. This matter involved admissibility of a provision of Rs.42 million recorded by taxpayer in profit and loss account and claimed as a deduction against taxable income. Facts leading to creation of this provision was that a reduced rate of customs duty was applicable to import of vehicles in 'completely knocked down' from subject to condition that taxpayer company would follow an indigenization of imported parts. Subsequently, it was found by relevant governmental authority that such condition was not fully complied with by the taxpayer and hence remission of customs duty earlier accorded was required to be recouped to a certain extent. Department disputed such claim on the grounds that such amount being penal in nature was hit by the mischief of section 21(g) of the Ordinance and furthermore, any such payment of duty was admissible only when it was actually paid. On the other hand, it was the taxpayer's contention that under accrual basis of accounting, mandatorily required to be followed by taxpayer under sections 32 and 34 of the Ordinance, such amount was admissible as the events giving rise to the expense/liability had already occurred. As regards the provisions of section 21(g) of the Ordinance, it was the taxpayer's contention that such amount being in the nature of general customs duty was not penal in the nature.
The learned Commissioner (Appeals) accorded the relief to the taxpayer on the strength of earlier judgment of this Tribunal in respect of tax year 2005, referred supra, whereby similar issue was decided in taxpayer's favour. The learned A.R. Also invited our attention to the decision of this Tribunal dated 1-10-2010 where again this issue was decided in the taxpayer's favour. Here also following the ratio laid down earlier by this Tribunal, we endorse the findings of the learned Commissioner (Appeals) and thus departmental grounds cannot be entertained on this issue also.
The appeal on this ground is also dismissed.
18. The upshot of all the above discussion is that both the departmental appeals are dismissed on all the grounds while both the cross appeals filed by the taxpayer are partially accepted to the extent and in the manner discussed supra. .