' These appeals were partly heard on 19-10-2012 and were adjourned to 21-12-2012 on the request of learned D.R. Both the parties have argued the matter at length. Brief facts of the case are, that the, taxpayer, a scheduled banking company registered under the Banking Companies Ordinance, 1962, is working under the rules and regulation framed by the State Bank of Pakistan time to time.
' Cross appeals have been filed, which are being disposed of through this consolidated order.
These appeals arise from orders of Commissioner (Appeals) adjudicating orders, passed under section 122 of Income Tax Ordinance, 2001 [hereinafter "the Ordinance' for assessment, years 1999- 2000, 2000-2001, under, section 122(5A) for tax years 2004 to 2007, under section 122(5) for tax year 2003 and 2008 and orders under section 171 for tax years 2003 to 2005. These appeals were partly heard on 19-10,2012 and were adjourned to 21-12-2012 on the request of learned DR. Both the parties have argued the matter at length. The Authorized Representative (AR) of appellant-bank on previous dates of hearing provided a detailed chart showing issues involved and copies of relevant case-law for comments by the learned Departmental Representative (DR). The learned DR also, submitted Department's point of view on, all issues in writing and provided copies of case-law relied upon by him. After examining the impugned orders, written averments of both the sides and case-law cited, the titled appeals are adjudicated as under:-- ' Before deciding appeals on ,merits, we, deem it necessary to decide the following legal grounds first, having impact for most of the years under appeal:- , ' ASSUMPTION OF JURISDICTION UNDER SECTION 122 FOR YEARS PRIOR TO PROMULGATION OF INCOME TAX ORDINANCE,2001 [ASSESSMENT YEAR'S 1999-2000 AND 2000-2001] Department invoked section 122 of Income-Tax Ordinance, 2001 for assessment years 1999-2000 and 2000-2001 learned Commissioner (Appeals) annulled the orders by holding that section 122 could not be invoked in respect of any order passed prior to 1-7-2003 Department has filed appeals against this decisions. This controversy has finally been set at rest by honourable Supreme Court of Pakistan in CIT v.. Eli Pakistan (Pvt.) and others (2009) 100 TAX 91 (S.C. Pak,) wherein it has been held that section 122 has no application for any year prior to tax year 2003 In view of this legal position, departmental appeals are dismissed.
' ASSUMPTION OF JURISDICTION UNDER SECTION 122(5A) OF INCOME TAX ORDINANCE, 2001 [TAX YEARS 2005 TO 2007] ' This has been a controversial issue, as many conflicting judgments were in the field. The honourable Islamabad High Court in a recent judgment has decided the issue in favour of the department in Writ Petition No,2412 of 2009 dated 27-4-2012. No contrary decision 'of Lahore High Court or any other High Court is available at the moment. It was conveyed by the learned AR that the honourable Sindh High Court also decided the matter in favour of the Department through a short order, but detailed order is yet not, released. The AR argued that on the basis of latest order by Islamabad High Court, the Tribunal has to decide the matter accordingly but arguments advanced and adjudicated against assumption of jurisdiction by the Additional Commissioner in 2010 ,PTD 705 (Trib), ITA. No,625/IB, of 2010 dated 16-3-2012 and ITAs Nos.69,1 to 694/LB of 2011 dated 26-3-2012 should be considered as integral part of this order so that appellant. Bank could agitate the matter in Lahore High Court where many writs and appeals on the same issue were pending.
We have no objection to this proposition and thus following the judgment of honourable Islamabad High Court (supra), we dismiss all the appeals of the appellant-bank on this issue and allow that of Department c as way, done earlier by a division bench of this Tribunal in a case of another bank reported as 2913 PTD (Trib.) 246 2012 (PTR 124 (Trib.).
' ASSUMPTION OF JURISDICTION UNDER SECTION 122(5) OF INCOME TAX ORDINANCE, 2001 TAX YEAR 2008 ' Department selected the case for audit under section 177 and made additions by invoking section 122(5)' of the Ordinance. Invoking of sections 177 and 122(5) was upheld 'by Commissioner (Appeals) with the following observation:- 1 "it has been contended that the Taxation Officer has assumed the jurisdiction unlawfully under section 122 as no definite, information was acquired as a result of audit is also not convincing. The assessing officer collected information from the document produced and audited accounts of the appellant, and after pointing out and confronting to the appellant element of suppression of income made additions under different heads. It is further observed that additions made under different heads for tax year under appeal were also made in previous year which were mostly maintained by the appellate forum., Hence it concluded that this ground of appellant is also wit/tout any legal support.
' The learned AR argued that additions were made on'the issues on which either disagreement on interpretation of provisions of law were in existence or favourable decisions of higher courts were available at the time of amendments. In this respect, he furnished the following details::- S. No. Additions Favourable judgments/provision of law
1. Disallowance of provision for non- performing loans.(i) 2002 PTD (Trib.) 1898
(ii) (2002) 85 Tax 245 (Trib.)
(iii) 2003 PTD (Trib.) 1189
(iv) (2006) PTD (Trib.) 1292
(v) R.A. No,349/LB of 2002
(vi) (2004)'90 Tax 116 (Trib.)
(vii) 2006 PTD (Trib.) 356
2. Taxation of compensation on delayed refund2006 PTD 1888 (Trib.)
3. Leasehold improvement ITA No:93/LB of 2001 dated 14- 6-2002
4. Allocation of expenses against exempt capital gain and dividend(i) 1993 PTD (Trib.) 472
(ii) 2005 PTD (Trib.) 344
(iii) ITA No,106/LB of 2000
(iv) ITA No,1658/LB of 2003 dated 23-2-2004 = (2004) 90 - Tax 116 (Trib.)
5. Allocation of tax credit under section. 61 to PTR incomeInterpretation of section 67
6. Allocation of expenses to ijara financing businessInterpretation of section 67
7. Amortization of software Estimation of life, of computer software ' The learned AR argued that legal disagreements over issues narrated above were ill existence and department had filed appeals with appellate authorities. The courts had adjudicated these issues in the favour of appellant bank. The resort to section 122(5) by Taxation Officer was not based on acquisition of definite information. He further submitted that information on.' the basis of which jurisdiction under section 122 was assumed was already available on record it was neither acquired through audit nor otherwise came to the knowledge of the department as contemplated in section 122(5). The learned AR further argued that bona fide disagreement over legal interpretation of section 67 and estimation of life of computer software is 'not definite information.
The learned AR also pointed' out that for other years, the department invoked section 122(5A) on the same issues holding that acceptance of declared version on these issues is "erroneous" as well as "prejudicial to the revenue". The Department by its own conduct admitted that the issues involved were 'subject matter of section 122(5A) and not that of section 122(5). The learned DR supported orders of authorities below and argued that these additions were made on factual basis too and therefore provisions of section 122(5) of the Ordinance have rightly been invoked for this years too.
We are persuaded to agree with the arguments of learned AR that, are-requisite for invoking section 122(5) of the Ordinance was definite information with, regard to escapement or under assessm ent of income or assessm ent at too low a rate or subjection of excessive relief D or, refund.
Further, the definite information must have come in the possession of Department after completion of assessm ent---this dictum is elaborated in detail by the honourable Supreme Court in CIT v. Eli Lilly Pakistan (Pvt,) Ltd 2009 SCMR 1279 = 2009 PTD 1392 and Central Insurance Co. And others v.
CBR, Islamabad and others 1993 SCMR 1232 = 1993 PTD 766. We are also in agreement with the arguments of learned AR that in the presence of favourable judgments of higher' courts E on the issues the department could not invoke section 122(5) as mere disagreement with the decisions of higher courts did not constitute definite information. The honourable Lahore High Court in Saitax Spinning Mills Ltd. v. Commissioner of Income Tax 2003 PTD 808 disapproved reopening of a completed assessm ent, for want of definite information. Moreover, mere disagreement over legal interpretation of section 67 and estimation of life of computer software was not definite information as vvrongly assumed by the Department. We therefore, decide the appear for this year in favour of taxpayer by declaring invoking of section 122(5) of above issues as unlawful.
ON MERITS'
' Summary of issues pending for adjudication in departmental and cross appeals for assessment years 1995-96 to tax year 2008 are tabulated as under:-- S. No.Issue Year Appellant
1. Miscellaneous application for condonation of delay in filing of appeal2008 Department
2. Miscellaneous application for entertainment of amended memorandum of appeal2008 Department
3. Expenses against income of AJK branches1995-96 Department
4. Initial depreciation on building 1995-96 Department
5. Relief under section 124A 2005 to 2008 Bank
6. Provision for non-performing loans2003 to 2008 Department/Bank
7. Bad debts written off directly 2005 Bank
8. Bad debts against provision 2003 and 2004 Department
9. Allocation of expenses against 2003. To Department/dividend and exempt capital gain2003 to 2008 Department/Bank
10. Allocation of expenses to Ijara financing income2008 Bank
11. Allocation of those expenses against dividend and exempt capital gain which have been disallowed2008 Bank
12. Allocation of tax credit under section 61 to PTR income2008 Bank
13. Excess perquisites 2003 Department
14. Concessional loans 2003 and 2004 Department
15. Amortization of intangibles 2003 to 2008 Department/Bank
16. 50% disallowance of depreciation on vehicles used by directors and executives2003 to 2007 Department/Bank
17. 50% disallowance of traveling and motor vehicle expenses on2003 to 2007 Department/Bank vehicles used by directors and executives
18. Branch renovation/improvement of leasehold premises2003, 2005 to 2008 Department/Bank
19. Diminution in value of investment2006 to 2008 Bank
20. Taxation of compensation on delayed refund2008 Bank
21. Compensation on delayed refund2003 to 2005 Department/Bank ' Issue-wise and year-wise adjudication is made as under:--
(1) MISCELLANEOUS APPLICATION FOR CONDONATION OF DELAY IN FILING OF APPEAL - 2008
(2) MISCELLANEOUS APPLICATION FOR ENTERTAINMENT OF AMENDED MEMORANDUM OF APPEAL 2008 ' The department filed appeal vide ITA No,930/LB/2010 wherein tax year 2003 was mentioned in memorandum and grounds of appeal. On the date of hearing, respondent-bank objected that no order for tax year 2003 was passed in 2010 against which this appeal has been filed. The learned DR sought time for seeking instructions. On next date of hearing, the learned DR pointed out that department inadvertently mentioned tax year as '2003' in appeal whereas the same in fact related to tax year 2008. Department filed Miscellaneous Applications for entertainment of amended memorandum of appeal and condonation of delay. The learned AR said he had no objection if these miscellaneous applications were accepted and adjudicated on merit. Accordingly, these applications are accepted.
(3) EXPENSES AGAINST INCOME OF AJK BRANCHES ASSESSMENT YEAR 1995-96 ' In original order under section 62 of Income Tax Ordinance, 1979 hereinafter "the repealed Ordinance"], income from Azad Kashmir operations was not taxed. Therefore, department did not allow expenses against said income. While passing order under sections 62/135 of the repealed Ordinance dated 26-6-2003 on the directions of this Tribunal, the department taxed bank's global income but expenses relating Azad Kashmir operations were not allowed. In appeal, the learned Commissioner (Appeals) directed to allow said expenses. Department has G filed appeal against, said decision. In our view, since bank's global income, including income from Azad Kashmir operation, was taxed, there was no justification for not allowing expenses relating thereto. We find no legal infirmity in order of learned Commissioner Appeals), which is hereby confirmed.
(4) INITIAL DEPRECIATION ON BUILDING - ASSESSMENT YEAR 1995-96 ' The bank claimed initial depreciation on building which was disallowed by the department. In first appeal, AR of the bank argued that in accordance with Rule 5(1) of Third Schedule to the repealed Ordinance, in order to claim initial depreciation, the appellant Bank was required to fulfill following conditions:-
(1) Building should was erected between, 1,-7-1976 and 30-6-2000 (both dates inclusive).
(2) Initial depreciation allowance was available in the year of erection of building or in the year in which it is used for' the first time by the assessee for the purpose of his business.
' In this case, building was newly erected and it was used for the first time for the purpose of appellant's business in the period relevant to assessment year 1995-1996. There was no condition in the law that the Person who erected the building should be the same who used it for his town business for the first time. The two requirements are that building should be newly erected within the specified dates and that it should be used for the first time for the purpose of taxpayer's business. This is an undisputed fact that the Bank used it for the first time in its business and the building was also newly erected by the seller in the period between 1-7-1976 to 30-6-2000. In Rule 5(2)(b); the legislature clearly mentioned that initial depreciation would not be available to "any machinery or plant which has previously been used in Pakistan'. This negative condition was not extended to buildings meaning by that a taxpayer was entitled to initial depreciation even if he acquired a newly erected building from the owner but used it for its own business for the first time.
Since no negative provision exists in respect of buildings that were previously used, such a taxpayer will not be disentitled for initial depreciation under Rule 5(1). Had it been the intention of legislature to restrict initial depreciation in the case of a building which has been previously used, it could have added it in the negative list provided in Rule 5(2). The AR of bank also argued that the expression "written down value" on which both normal and initial depreciation is to be allowed is defined in Rule 8(7) of the Third Schedule to the Income Tax Ordinance, 1979: For the purpose of this rule, the legislature has clearly provided in Rule 8(8)(c) that:-- "where, before the date of acquisition by the assessee, any such asset had at any time been used by any person for the purposes of his business or profession, the actual cost to the assessee shall, except in any case where sub-clause (d) applies, be deemed not to exceed the fair market value thereof".
' According to him, it also proves that unless there is a case of succession, on second hand purchase of any asset, the actual cost to the buyer should be the amount paid for acquisition of the said asset but in no way should it exceed the market value thereof. He also argued that Rule 5(1) explicitly provides that initial depreciation on a newly erected building (built within 1-7-1976 to 30-6-2000) cannot be denied it' a person acquires it from the owner and uses it for its own business for the first time. After considering above arguments, learned Commissioner accepted the appeal and allowed initial depreciation.
The learned DR argued that initial depreciation was rightly disallowed as the bank did not furnish any proof showing that the building was newly constructed and was not used by any one before coming into the ownership of the bank.
' We have examined arguments of both sides. The controversy is of legal nature as nowhere in the order the allegation of use of building, after its completion, by a person other than by a bank is mentioned. The objection of DR is factually incorrect. The Commissioner has dealt with the issue comprehensively both on factual. And legal grounds. We find no infirmity in the order of learned Commissioner (Appeals), which is hereby confirmed:--
(5) RELIEF UNDER SECTION 124A OF THE ORDINANCE-TAX YEARS 2005 to 2008 ' The AR argued that on the following legal issues, there were favourable judgments of this Tribunal in bank's own case after first day of July, 2002 and in benefit of section 124A was unjustifiably denied:-- S. No. Issue involved Judgment
1. Provision for bad debt (2004) 90 Tax 116 (Trib.)
2. Allocation of expenses to exempt income(2004) 90 Tax 116 (Trib.)
The appellant-bank argued that in view of section 124A of the Ordinance, the department should have followed these judgments. The department rejected this argument on the ground that legislature has used words "may" which gives option to Commissioner to invoke or not to invoke said section. Commissioner (Appeals) rejected the appeal endorsing the point of view of the department.
' The learned DR supported the observations of authorities below and argued that relief under section 124A is directory and not mandatory.
' Before adjudicating this issue, we would like to reproduce section 124A of the Ordinance as under:- - 124 A. Powers of tax authorities to modify orders, etc.---(1) Where a question of law has been decided by a High Court or the Appellate Tribunal in the case of an assessee, on or after first day of July 2002, the Commissioner may, notwithstanding that he has preferred an appeal against the decision of the High Court or made an application for reference against the order of the Appellate Tribunal, as the case may be, follow the said decision in the case of the said assessee in so far as it applies to said question of law arising in any assessment pending before the Commissioner until the decision of the High Court or of the Appellate Tribunal is reversed or modified.
(2) In case the decision of High Court or the Appellate Tribunal, referred to in subsection (1), is reversed or modified, the Commissioner may, notwithstanding the expiry of period of limitation prescribed for making any assessme nt or order, within a period of one year from the date of receipt of decision, modify the assessment or order in which the said decision was applied so that it conforms to the final decision.
' The usage of word "may" in a statute has been interpreted by honourable Supreme Court of Pakistan in Abu Bakar Siddique and others v. Collector of Customs 2004 PTD 2187 (S.C. Pak.),as under:- "It is well-settled that word 'may' is discretionary and an enabling word and unless the subject- matter shows that the exercise of power given by the provision using the word 'may' was intended to be imperative for the person to whom the power. Is given, it might not put him under an obligation to necessarily exercise such power but if it is capable of being construed as referring to a statutory duty, it will not be entirely for such person to exercise or not to exercise the power given to him under the law. The use of word 'may' in the statute in the plain meaning is to given discretion to the public authority to act in their option in the manner in which such authorities deem proper but if the public authorities are authorized to discharge their functions in their option in a positive sense, the word 'may' used in the provision would be suggestive of conveying the intention . Of Legislature of imposing an obligation. The word 'may' usually, , and generally does not mean 'must' or 'shall' but it is always capable of meaning 'must' if the discretionary power is conferred upon a public authority with an obligation under the law. The word 'may' is not always used in the statute with the intention and purpose to give uncontrolled powers' tO' an authority rather oftenly it is used to maintain the status of the authority on whom the discretionary power is conferred as an obligation and thus the legislative expression the permissive form, sometime is construed mandatory. It is, however, only in exceptional circumstances in which a power is conferred on a person by saying that he may do a certain thing in his discretion but from the indication of the relevant provisions and the nature of the duty to be done, it appears that exercise of power is obligatory. This is an accepted principle of law that in a case in which the statute authorizes a person for exercise of discretion to advance the case of justice, the power is not merely optional but it is the duty, of the such person to act in the manner it is intended."
Bear reading of section 124A reveals that this section is aimed at avoiding repetitive appeals on any legal issue on which Tribunal or Higher Courts had already given a judgment in the case of a taxpayer. In this section no discretion has been given to Commissioner, rater an obligation is imposed. The very purpose of insertion of this section has been to avoid repetitive order/appeals on an issue which is sub judice before a court. It is strange to see that department despite clear verdict of honourable Supreme Court of Pakistan On word 'may' and remedy already provided by the legislature itself under section 124A(2) of the Ordinance has been repeating the same additions every year Which are not maintainable in the law. The right course for the department to implement section '124A and get the orders reversed from the court where the matter is sub judice as remedy is available to the Department under section 124A(2) which says: "In case the decision of High Court or the Appellate Tribunal, referred to in subsection (1), is reserved or modified, the Commissioner may, notwithstanding the expiry of period of limitation prescribed for making any assessm ent or order, within a period of one year from the date of receipt of decision, modify the assessm ent or order in which the said decision was applied so that it conforms to the final decision".
' In view of above discussion, the issue is decided in favour of the taxpayer and against the department:--
(6) PROVISION FOR NON-PERFORMING LOANS - TAX YEARS 2003 TO 2008
(7) BAD DEBTS WRITTEN OFF DIRECTLY - TAX YEAR 2005 ' This has been a controversial issue in the cases of ;banks as many conflicting judgments were in the field. In order to resolve the conflict, a five-member bench of this. Tribunal was constituted wherein the following question was taken up for adjudication: "Whether on facts and in the circumstances of the case receivable amount could be written off by debiting it in the Profit and loss account as .Expenditure with the nomenclature.. "provision for bad debts' or not."
' The larger bench after examining various judgments of this Tribunal and higher courts including judgments of honourable Sindh High Court in I.T.A. No,565 of 2000 dated 1-3-2006 ITRA 291 of 2008 dated 13-10-2010, decided the issue in favour of banks with the majority of'4-1 vide its order dated 10-2-2011, reported as 2012 'PTD (Trib.) 1139 with the following observation:-- " We have no doubt in our mind that there is .No reason for disallowance of the claim of bad debt for the banks under discussion. The only criterion is adoption of rules fixed by the State Bank. If there is no deviation of the Prudential Bank Regulation, the claim of bad debt cannot be disallowed. Since it is not, the case of the department that there is deviation, the claim of bad debt of the banks are hereby allowed in full."
' A large number of appeals of various banks were taken upon for adjudication by five-member bench out of which the following appeals relate to this appellant-bank: ITA No. Tax year Appellant ITA No,7141/LB/2005 2003 Department ITA No,7142/LB/2005 2004 Department ITA No,914/LB/2009 2005 Bank ITA No,915/LB/2009 2006 Bank ITA No,916/LB/2009 2007 Bank ' Judgment of five-member bench dated 10-2-2011 covers the above appeals. By following this judgment, the issue is also decided in favour of taxpayer in ITA No,893/LB of 2010 which was not put before five-member bench.
In view of above, all the departmental appeals fail and that of taxpayer succeed following the binding judgment reported as 2012 PTD (Trib.) 1139.
(8) BAD DEBTS AGAINST PROVISIONS - TAX YEARS 2003 AND 2004 The bank claimed deduction of bad debts against provision at Rs,1,859,000 and 14,531,000 for tax years 2003 and 2004 respectively as provisions for bad debts were disallowed in earlier years. This claim was made in computation chart only Learned Commissioner (Appeals) deleted the additions against which department has come up in appeal 'before us. The learned DR supported the order and argued that additions were rightly made as provisions for bad debt has already been allowed in N appeal. In our view, when provision for bad debt has been allowed, there is no justification for claiming write offs made through provision unless these are direct writes offs not routed through provisions. The additions are therefore, confirmed. However, if at any later stage provision is disallowed by any order of the higher court, these actual write offs should be allowed:-
(9) ALLOCATION OF EXPENSES AGAINST DIVIDEND AND EXEMPT CAPITAL GAIN - TAX YEARS 2003 TO 2008
(10) ALLOCATION OF EXPENSES TO IJARA FINANCING INCOME -- TAX YEAR 2008 Department disallowed expenses by allocating expenses to dividend and exempt capital gain for tax years 2003 to 2008. Department also disallowed expenses by allocating expenses to ijara income. Commissioner (Appeals) disapproved this allocation for tax years 2003 0 and 2004 with the observation that this issue has already been decided by this Tribunal in favour of taxpayer. For tax years 2005 to 2008, learned Commissioner (Appeals) upheld allocation.
' The learned DR while supporting the order of department argued that Rule 13 read with section 67 specifically provide proration of expenses if income is derived from more than one head of income.
He relied on the cases of 2005 PTD 2161 (Trib.) and 2005 PTD 2599 (H. C. Lah.).
' The learned AR argued that this issue has already been decided in favour of the bank in (2004) 90 TAX 116 (Trib.) and in other cases in 2006 PTD 2678 (H.C. Lah.), 1993 PTD (Trib.) 472, (2006) PTD (Trib.)
1292, 2006 PTD (Trib.) 356 and 2005 PTD (Trib.) 2041. He argued that cases referred by learned DR were distinguishable on facts as in those cases taxpayers failed to provide details. In the present case, the Department has failed to bring on record any evidence that certain expenses were allocable to capital gains and dividends earned. He further argued that this legal issue was decided in favour of the taxpayer after 1st July, 2002, therefore, in view of section 124A, the department was bound to follow this judgment unless reversed by a higher Court.
We have examined the judgment reported as (2004) 90 TAX 116 (Trib.) wherein this issue has been decided in favour of the bank. Bear reading of section 124A reveals that this section is aimed at avoiding repetitive appeals on any legal issue on which Tribunal or Higher Courts had already given a judgment in the case of a taxpayer. In this section no discretion has been given to Commissioner, rater an obligation is imposed. The very purpose of insertion of this section is to avoid repetitive order/appeals on an issue which is sub judice before a court. It P is strange to see that department despite clear remedy provided by the legislature itself under section 124A of the Ordinance has been repeating the same addition which is not maintainable in the law. The right course for the department is to apply section 124A and get the orders reversed from the court where the matter is presently sub judice.
' In view of above discussion, the issue is decided in favour of the taxpayer and against the department.
(11) ALLOCATION OF THOSE EXPENSES AGAINST DIVIDEND AND EXEMPT CAPITAL GAIN WHICH HAVE BEEN DISALLOWED - TAX YEAR 2008 ' The learned AR pointed out that while allocating expenses to dividend and exempt capital gain the department- did not exclude those expenses which were disallowed by it. Perusal of order reveals that contention of learned AR is correct. However, since we have already disapproved allocation of expenses, the ground has become infructuous.
(12) ALLOCATION OF TAX CREDIT UNDER SECTION 61 TO PTR INCOME The bank claimed tax credit of donation of Rs,14,810,000 under section 61 of the Ordinance. The department curtailed it to Rs,10,441,532 by allocating donation of Rs,4,368,468 to exempt income.
Learned Commissioner (Appeals) confirmed this allocation with the following observation: "it is observed that appellant's income is being, bifurcated under three heads, exempt income, PTR income and NTR income Thus an expense cannot be attributed to a particular mode of income"
' The learned AR argued that restriction of credit of donations vis-a-vis exempt income is without any lawful authority. It is not an expense attributable to exempt income as wrongly assumed. This is a credit admissible under the law. In this respect, he referred decision in CIT v. Azlak Enterprises (Pvt.) Ltd., Karachi 2003 PTD 1309 wherein following question of law was posed before honourable Sindh High Court for adjudication:- "Whether on the facts and in the circumstances of the case, the learned Tribunal is justified in allowing deduction of Zakat attributable to the exempt income towards the taxable income?"
' Honourable Sindh High answered the question-in affirmative with the following observation:-- "it appears that both the officers below have disallowed Zakat on the principle that an expenditure incurred for earning exempt income cannot be allowed as deduction. However, with due respect to them we are not inclined to accept their conclusion."
"The order of the learned ITAT is so well-reasoned and exhausted that no addition is required by us. The impugned order of the Tribunal is upheld in entirety and the question referred to us by the ITAT is answered in affirmative."
Learned DR, while supporting order of both the officer below, argued that credit under section 61 has rightly been apportioned. However, he did not produce any contrary judgment on the issue.
' We have examined arguments of both sides and case-law cited above. We are persuaded to agree with the learned AR that this is not an expense attributable to exempt income. This is a credit admissible under the law. By following the judgment of honourable Sindh High Court cited above, we decide the issue in favour of the bank.
(13) EXCESS PERQUISITES - TAX YEAR 2003 ' Amounts under the following heads were treated as perquisites and added in income of the bank under section 21(k) of the Ordinance:-
(i) Entertainment
(ii) Conveyance
(iii) Travelling fare
(iv) Staff training
(v) Staff refreshment
(vi) Staff uniform ' It was argued before Commissioner.(Appeals) that these expenses were incurred wholly and exclusively in relation to performing of duties by the employees and by no stretch of imagination can be construed as allowance, perquisites or benefit within the meaning of section 21(k) of the Ordinance. Commissioner (Appeals) also observed that on same grounds addition was made for assessm ent years 2001-2002 and 2002-2003. In appeal these addition were set-aside. In re- assessm ent, the department accepted bank's point of view and did not make any, addition.
Learned DR supported the order of department. However, he did not give any plausible reason for accepting bank's point of view in earlier years and making same addition in subsequent year. We are persuaded with the observation of the learned Commissioner (Appeals) that above expenses are not allowances, perquisite or benefit within the meaning of section 21(k) of the Ordinance. We find no infirmity in order of learned Commissioner (Appeals) which is hereby confirmed.
(14) CONCESSIONAL LOANS - TAX YEARS 2003 AND 2004 ' The department made addition treating concessionary loans as excess perquisites under section 21(k) of 'the Ordinance. Learned Commissioner (Appeals) deleted addition in the light of decision of this Tribunal in 2006 PTD (Trib.) 356. The AR submitted that this issue has also been decided favourably by honourable Sindh High Court in ITR No,90 of 1983 dated 12-1-2007 as under:- "It is clear that only those perquisites and benefits will fall within the ambit of this section for the provision of which the taxpayer has incurred any expense under clause (ix) or clause (xv) of subsection (2) of section 10 of the Income Tax Act, 1922 and the effect of this section is that such expenditure which has been incurred on the provisions of perquisite or other benefits in excess of thirty percent of the salaries of employees, shall be disallowed under these clauses and since it is an admitted fact that no such expenditure has been incurred, therefore in our view, the provision of section 10(4) (d) are not applicable to the deemed interest computed by the Income Tax Officer on the basis of difference between bank rate and rate of interest on which such loans were provided to the taxpayer."
The learned DR argued that in Income Tax Ordinance, 1979 no parallel IV provision was available, but in Income Tax Ordinance, 2001, section 13(7) brings such loans within the purview of taxation.
' We have considered arguments of both sides and above case-law. The argument of DR is not valid as section 13(7) deals with income in the hands of employees whereas here the issue is treatment of concessional loans in the hands of the employers. The Bank did not claim any expenses hence issue of disallowance could not arise and this aspect was comprehensively decided by this Tribunal in 2006 PTD (Trib.) 356 and by the honourable Sindh High Court in I.T.R.
No,90 of 1983. By following these judgments, we decide the issue in favour of taxpayer and dismiss departmental appeal.
(15) AMORTIZATION OF INTANGIBLES - 2003 TO 2008 The bank claimed amortization of computer software in two years. The Additional Commissioner adopted life as 5 years. The learned Commissioner (Appeals) restricted the amortization to three years. The learned AR argued that section 24(3) uses the terms "normal useful life in whole years".
According to him, in the present world technological advances are so fast that even such a program becomes outdated within one year. The learned DR supported the order of Additional Commissioner and argued that the intangible asset was rightly amortization to ten years.
' We have considered the argument of both sides. We are persuaded to agree with the learned AR that in the present world technological advances are very fact. Amortization of computer software in five years is unjust. Commissioner (Appeals) has restricted it to three years which is reasonable.
We, therefore, confirm the orders of learned Commissioner (Appeals) for these years.
16.50% DISALALOWANCE OF DEPRECIATION ON VEHICLES USED BY DIRECTORS AND EXECUTIVES TAX YEARS 2003 TO 2007 17.50% DISALLOWANCE OF TRAVELLING & MOTOR VEHICLE EXPENSES ON VEHICLES USED BY DIRECTORS AND EXECUTIVES - TAX YEARS 2003 TO 2007 The department disallowed 50% depreciation and travelling and motor vehicle expenses on vehicles used by directors and Executives for their personal use on the ground vehicles to that extent were not used for derived income of business. Learned Commissioner (Appeals) in the light of judgment of this Tribunal in I.T.As. Nos.36 to 38/LB of 2003 dated 25-10-2003 and I.T.As. Nos. 23 to 25/LB of 2003 dated 13-12-2003 accepted appeals for tax years 2003 and 2004 and reduced the disallowance for tax years 2005 to 2007. The learned AR submitted that this issue has also been decided in favour of the banks in 2005 PTD (Trib.) 2041 and recently in 2013 PTD (Trib.) 246.
' The learned DR argued that honourable Sindh High Court in 1984 PTD 4 had disapproved finding of Tribunal that depreciation is to be allowed irrespective of extent of use of the vehicle.
' We have examined above case-law. In the case relied by learned DR, the facts were that vehicle was used by the taxpayer itself for its personal use whereas in the present case, vehicles were provided to the employees. Case relied by learned DR is distinguishable from present case. In this case vehicles were provided to employees in terms and condition of the service. If vehicle were used by the employees partly for their personal use, addition could have been made in employees' cases under Income Tax Rules and not in taxpayer's case. Accordingly, by following earlier judgments, we decide the issue in favour taxpayer and order deletion of these additions.
(18) BRANCH RENOVATION/IMPROVEMENT OF LEASED-HOLD PREMISES - TAX YEARS 2003, 2005 TO 2008 ' The bank incurred expenses for publicity of opening of new branches. The department disallowed this expense treating them as capital in nature. The learned Commissioner (Appeals) deleted this addition for tax year 2003. However, his successor upheld addition for tax years 2005 to 2008.
' The learned DR while supporting order of department argued that this expense is capital in nature and has rightly been disallowed. The learned AR argued that these expenses were incurred on branches where buildings are not owned by the Bank. He submitted that this controversy stood already resolved by this Tribunal in ITA No,93/LB of 2001 dated 14-6-2002.
' We have examined the arguments and case-law. We are persuaded to agree with the learned AR that expenses incurred on renovation and improvements of properties not owned by the bank are revenue in nature. By following our earlier judgment, we decide the issue in favour of the bank and against the department.
(19) DIMINUTION IN VALUE OF INVESTMENT - TAX YEARS 2006 TO 2008 ' The taxpayer claim is that these provisions were made as per prudential Regulations of State Bank of Pakistan which override Income Tax law vide section 91A read with section 35 of Banking Companies Ordinance, 1962 and sections 46B and 54A of State Bank of Pakistan Act, 1956. The learned AR argued that the Prudential Regulations are issued by the State Bank of Pakistan pursuance of powers vested in it under a special law. Sections 46B and 54A of State Bank of Pakistan Act, -1956. He further argued that a cumulative reading of above sections shows that they override any conflicting provision of the Income Tax Ordinance, 1979. The banks are bound to prepare their accounts according to International Accounting Standards and Regulations issued by the State Bank. These accounts represent their regularly employed method of accounting as envisaged in section 32 of the repealed Ordinance. The department could not reject this method.
The department did not show any flow in this method of account. According to him, there is no prohibition in income tax law not to record closing stock at lower of cost or market price. The learned AR also pointed out that this issue has been decided by full bench of this Tribunal in 2010 PTD (Trib.) 679. The learned AR also argued that department in another case of a bank for tax year 2010 has Allowed impairment loss.
' The learned DR argued that this issue was decided in favour of the department in the following cases:--
(i) 2006 PTD 354, (ii) 2002 PTD 925, (iii) (2000) 81 TAX 265, (iv) (2002) 85 TAX 245, (v) ITA No,3819/LB/1997 dated 7-12-1999 and (vi) ITA No,400/LB/2000 dated 10-12-2001 ' We have examined the arguments of both sides and also perused case-law cited by them. We are not persuaded to agree with the learned AR that provisions referred by him from the State Bank of Pakistan Act vis-a-vis Companies Ordinance, 1962 are of any help to the taxpayer. This issue has been dealt in detail in our judgment in 2006 PTD (Trib.) 356. As regards judgment of Full bench of this Tribunal in 2010 PTD (Trib.) 679, that was passed with reference to Fourth Schedule to the repealed Ordinance and is distinguishable and would become relevant in the case of banks with effect from tax year 2009 when the principle of scheduler assessment under the Seventh Schedule would apply as held by this Tribunal in 2012 PTD (Trib.) 1055. The addition is upheld with the direction that the department must allow impairment loss, if any, at the time of actual sale as held in 2013 PTD (Trib.) 246.
(20) TAXATION OF COMPENSATION ON DELAYED REFUND-- TAX YEAR 2008 ' Compensation on delayed refund was taxed by the department on the ground that such receipts are revenue in nature. Learned Commissioner (Appeals) confirmed taxation by relying on judgment of honourable Supreme Court of Pakistan in Model Town Society Ltd. v ITAT 2006 PTD 2456 (S.C. Pak.).
' The learned DR supported the order of Taxation Officer and argued that this is revenue receipt and has rightly been taxed. The learned AR argued that this issue has already been decided in favour of bank by this Tribunal vide order in 2006 PTD 1800 (Trib.). He further argued that decision of honourable Supreme Court referred by the officers below is distinguishable for the following reason:--
(i) In the said case, no injury to capital asset was caused whereas in bank's case profit yielding apparatus of taxpayer was sterilized; and
(ii) In the, bank's case, there was unlawful possession of money by department but there was no such action in the case relied upon by the Taxation Officer.
' He further argued that compensation on delayed refund has become taxable after insertion of clause (cc) in subsection (1) of section 39 by Finance Act, 2012, meaning by that the same was not taxable earlier as amendment in law is prospective.
' We have examined the judgment reported as 2006 PTD 1800 (Trib.) wherein this issue has been decided in favour of a bank and the case relied upon by the department Model Town Society Ltd. v.
ITAT 2006 PTD 2456 (S.C. Pak.). The brief facts of case decided by the honourable Supreme Court are that in the year 1975-1976 certain property of Model. Town Society (assessee) was acquired under the Land Acquisition Act No,1 of 1894, for the establishment of housing scheme known as "Model Town Extension Scheme" and the possession of the land so acquired was taken over by the Lahore Development Authority (LDA). The LDA agreed to pay a total sum of Rs,7,32,38,280 to Model Town Society out of which Rs,32,38,280 was to be paid immediately on completion and execution of the agreement and the remaining amount of Rs,7,00,00,000 was payable in installments. Since the LDA failed to pay instalments in time, it paid interest to Model Town Society for delayed payment as per agreement. The argument of Model Town Society was that interest received by it on account of delayed payments of compensation for the acquired land, formed part of the sale price and thus, remained a capital receipt not liable to tax, and that till the transfer of title, irrespective of the delivery possession, all sums received by it were to be treated as compensation, forming part of the price of land. The honourable Supreme Court rejected the plea with the following findings:-- "No provision of law or principle of accounting was quoted either before us or before the High Court that the nature of payment capital or revenue, must remain the same both in the hands of the payer as well as the receiver. It has been correctly held by the forums below that the interest received on account of delayed payment did not form part of the sale price and could not be treated as a capital receipt. It could not be treated as a compensation for the land acquired. In our view whatever was received over and above the actual price of land, settled between the'parties, on account of delayed payments, was not part of the sale price. It was in fact compensation for not receiving the sale price in time because the Society was deprived of the use and enjoyment of the sale price for the said period. Furthermore the payment of interest was avoidable by paying the remaining sale price in lump sum, at any time after the execution of the agreement. In CIT Bengal Muffassil v. Burdhan Kuti Wards Estate (1960) 2 Tax (Suppel-1), relied upon by the High Court it was held that compensation paid to the assessee for delivery of possession of land to the Government, under a lease agreement, was a revenue and not a capital receipt. The other argument that till actual transfer of title all the sums received by the appellants, are to be treated as compensation and part of the price of land, has also no force. This aspect has been competently dealt with by the High Court, in the impugned judgment. The possession was taken over by the L.D.A. It was correctly held by High Court that the agreement, dated 6-2-1980 reached between the L.D.A. And the assessee, registered with the Sub-Registrar, Lahore on 14-2-1980, by itself, can be treated as a document-effecting transfer of property. It was acted upon long ago as a transfer document because thereafter, the said land was treated and used, without any objection from the appellant side, as a property belonging to L.D.A, which distributed the same to the allotees, conferred proprietary rights on them who thereafter made constructions on the said land and the housing scheme stood completed. The nature of receipt is determinable by its character in the hands of the receiver and the source from which the payment is received has no relevance to the question in hand. Similarly, its nature in the hands of payer has no relevance. It need not be the same both in the hands of the payer as well as the receiver. As far as the payer is concerned, the amount in question may be paid wholly or partly out of capital, whereas the receiver may be receiving the same as an income, as, in the present case, on the sale price settled or paid. The issue was exhaustively dealt with by the Supreme Court of India in Commissioner of Income Tax, West Bengal-II v. Kamal Behari Lal Singh (and others cases) (supra) (relevant para. Reproduced above) and we are also of the same view. Therefore, the payments received by the appellants, on account of delayed payments of the sale price, which was settled between the parties, were not part of the sale price and were liable to tax".
[underlined by us for emphasis] ' The above case is distinguishable as interest on delayed payments relates to a contractual liability and sale of land settled or paid, whereas in the present case payment by way of compensation relates to a violation of a statutory provision. In Model Town Society Ltd. v. ITAT 2006 PTD 2456 (S.C. Pak.), the issue was not related to violation of any provision of Income Tax Law by the Department. In the case in hand, the department by not paying established refund violated the provisions of section 170 and thus compensation as envisaged under section 171 became due. The legislature has made compensation on delayed refund a taxable receipt by insertion of clause
(cc) in subsection (1) of section 39 through Finance Act, 2012 with prospective effect. Obviously, the Legislature was aware of ratio of Model Town Society Ltd. v. ITAT 2006 PTD 2456 (S.C. Pak.) and if compensation on delayed refund was covered therein there would have been no need to provide its taxation by amending the law prospectively. This confirms the correctness of position taken in (2006 PTD 1800 (Trib.) by this Tribunal. Obviously it was not taxable in earlier years otherwise the amendment in law would have been by way of an Explanation having retrospective effect. There is D.Nothing in section 39(1)(cc) suggesting that- amendment in law is retrospective even by necessary intendment, if not by explicit wording "shall deem to always to be so" which is always desired for any retroactive amendment.
' In view of above, it is obvious that compensation on delayed refund is taxable from tax year 2013 onwards. Keeping in view this legal position, following our earlier judgment in 2006 PTD 1800 (Trib.) and taking into account amendment made in the law by the legislature explicity from tax year 2013 onwards, the issue is decided in favour Of the taxpayer and against the department. ,
(21) COMPENSATION ON DELAYED REFUND - TAX YEARS 2003 TO 2005 ' Facts of the case are that assessments completed under section 120 of the Ordinance were subsequently amended under section 122 of the Ordinance. In appeal, the amendment was disapproved. After receipt of appeal effect order, the bank applied for compensation of delayed refunds for the following period:--
(i) For the period during which order under section 120 prevailed
(ii) For the period starting from three months after the receipt of appeal order by Commissioner (Appeals) till- the time refunds were adjusted.
' The department allowed compensation for the period starting from three months after the receipt of appellate order but rejected the claim for the period during which order under section 120(1) was in field. In appeal, Commissioner (Appeals) allowed compensation for the period after 135 days of date of filing of return till the issuance of notice under section 122. Cross appeals have been filed.
' The learned AR argued that learned Commissioner (Appeals) erred in holding that:--
(i) Refund becomes due after 45 days of filing of return instead of date of filing of return.
(ii) After issuance, of notice under section 122 the deemed order under section 120 does not remain in field.
(iii) Refund is due from the date of second revision of return for tax year 2003 till the third revision ignoring that refund due as a result of original and first revised returns was also in field before second revision of return.
' He submitted that this issue has already been decided by this Tribunal in 2010 PTD (Trib.) 519, wherein it has been held that for the purpose of section 171(1) of the Ordinance, the refund becomes due on the date of order treated to have been made under section 120(1) of the Ordinance. He further submitted that Larger Bench of this Tribunal has held in 2010 PTD (Trib.) 2602 that deemed order under section 120 remains in field till amendment is made under section 122. Mere issuance of show-cause notice does not exclude the return from the ambit of section 120(1) of the Ordinance.
We have examined the arguments of both sides and case-law. This issue has already been adjudicated by this Triubnal in favour of Taxpayers in 2010 PTD (Trib.) 519 wherein it has been held that for the purpose of section 171(1) of the Ordinance, the refund becomes due on the date of order treated to have been made under section 120(1) of the Ordinance. We also agree with the argument of learned AR that mere issuance of show-cause notice does not exclude the return from the ambit of section 120(1) of the Ordinance. Deemed order under section 120 remains in field till amendment is made under section 122 as held by this Tribunal in 2010 PTD (Trib.) 2602. In view of above, the issue is decided in term of decision of this Tribunal in 2010 PTD (Trib.) 519 and 2010 PTD (Trib.) 2602 and it is directed that compensation should be allowed treating the refund due on the date of filing of original return. Refund due as a result of order under section 120(1) shall continue to be due till amendment is made. Compensation will be computed after three months from the day the refund in due as provided in subsection (1) of section 171 of the Ordinance.