' This order shall decide cross appeals, arising from Order No,21 dated 20-9-2010 relating to Tax Year 2004 and Order No,25 dated 18-5-2011 relating to Tax year 2005, both passed by Commissioner (Appeals).
' A miscellaneous application is also disposed of, which is filed by department as a consequence of Commissioner (Appeals) Order No,118/AI dated 28-12-2010. Learned DR explains that in Order No, 21 dated 29-9-2010, tax year was inadvertently noted as 2005, which infect was for Tax Year 2004. This mistake was rectified vide Order No,
118. The department through this application has only clarified that their cross appeal against Order No, 21 of the Commissioner (Appeals) relates to Tax Year 2004 and not 2005.
' The Miscellaneous application is hereby disposed of and the cross appeal by the department against Order No, 21 is treated to have been filed for Tax Year 2004.
2. While pleading taxpayer's appeals, AR has argued on the ground titled "provision for obsolete stocks" first. It is submitted that an expenses under the head "obsolete stocks" were claimed by the taxpayer in both the years. Explaining the back ground, learned AR submits that some expired pesticides were returned by the retailers/wholesalers in relevant years, which became part of 'stock in trade'. He submits that on expiry, the value of returned pesticides had reduced, therefore, at the end of both the years the value of returned pesticides was booked almost as scrap, while determining the value of stock in trade. As a consequence, a provision was created of the sustained loss in shape of expenses under P&L account.
' Department added back this expense by way of amendment in assessment under section 122 (5A) and held that the claim was against the spirit of section 34(3) of the Income Tax Ordinance, 2001. It was also noted that these stocks had neither been written off during the years under consideration nor in any subsequent year. This treatment was challenged before Commissioner (Appeals), who upheld the order by Taxation Officer, Relevant part, as read by AR, from order of Commissioner (Appeals) is reproduced:- "The rival arguments have been considered. Facts of the case are distinguishable from the case in which honourable ATIR had allowed the expenses claimed on account of obsolete stock. In the judgment vide I.T.A. No, 2164/LB/2006 dated 28-11-2007 honourable ATIR has allowed the claim for the reasons that stocks had been written off whereas in the instant case only provisions has been created and the stocks have neither been written off during the year under reference nor in the subsequent year. The disallowance made by the Addl. CIR/Taxation Officer is upheld."
A.R argues that reliance by Taxation Officer on section 34(3) was misplaced. He submits that valuation of stock was made under section 35(4) of the Income Tax Ordinance, 2001, which envisages closing value of stock-in-trade at the end of the year. Under this subsection, the closing value could either be 'lower of cost' or 'net releasable value' of the available stock. In present case, the obsolete stock was valued at "net releasable value" and the difference in shape of loss, was claimed as expense.
4. DR has vehemently opposed the arguments made by AR and submits that the provision for obsolete stocks could not have been allowed unless the obsolete stock was written off. He has referred to a judgment by this Tribunal in I.T.A. No, 2164/LB of 2006 to contend that such provision could only be allowed if obsolete stock was actually written off. He submits that for this reason the Commissioner (Appeals) upheld the treatment given by the Taxation Officer.
5. Heard both the parties and relevant record perused, along with judgment relied upon by the Commissioner (Appeals). It is noticed that in judgment by this Tribunal (I.T.A. No, 2164/LB/2006), the head of the expenses was noted as "STOCK AND SPARES WRITTEN OFF". It cannot be ruled out that in that case the Taxpayer had actually written off stock and spares, yet the ratio of the judgment, as we have ascertained, was based on subsection (4) of section 35, which allows the taxpayer to value its closing stock-in-trade either at "the lower of cost" or "net releasable value". The condition of writing off the obsolete stock could not be found as a prerequisite in any provision of law. The DR was specifically asked to point out from law, whether writing off the obsolete stock was a precondition. His emphasis remained that in that case of Nestle Pakistan Ltd. Lahore, the stock and spares were actually written off. We disagree with his submissions and are of the opinion that writing off is not a precondition under law. In our view, the obsolete stock could not be booked at Zero value because it might gain some price if it was disposed of even as scrap. The law has very carefully taken care of the situation, where such stocks are sold. If the same are sold at higher price from the one at which it was booked, the difference is taxed as gain. It is also observed that section 34(5) insures, under mercantile system, that D after three years if an allowed deduction of an expenditure is not paid, the same shall be treated as income. In our opinion the stress of department that obsolete stock should have been written off is not in consonance with the provisions of law. Orders of both the authorities below on this issue are annulled. The expenses claimed by the taxpayer are allowed, for both the years.
6. The second ground of the taxpayer relates to "exchange gain". Only grievance is that this issue was not adjudicated in so many words by Commissioner (Appeals). DR in reply submits that this issue has been decided implicitly along with the issue of 'gain on sale of scrap' and 'fixed assets', which was decided against the department. He has also apprised that department has challenged this issue along with other issues of same nature.
7. Arguing department appeal, DR has pressed only Ground No, 6 out of 7 relating to Tax Year 2004.
He explains that on rest of the grounds taxpayer's version/stance has been accepted by the department in Tax Year 2005. Therefore, these grounds are not being pressed. Arguing Ground No, 6, DR submits that about 1% of taxpayer's business falls in Final Tax Regime (FTR) and rest falls under Normal Tax Regime (NTR). The issue under consideration arose from gain on sale of scrap and fixed assets. The exchange gain is also decided by Commissioner (Appeals) at Pages 13 to 15 of his order. DR submits that Commissioner (Appeals) was not justified to allocate the income/gain from above said sources between the Final and Normal Tax Regimes. He argued that an income on which no withholding tax was charged, the same could not have been offered for taxation in FTR.
' AR in reply submits that the issue has not been presented in proper perspective. He explains that gain out of sale of scrap and fixed assets was re-comment of the depreciation allowed to taxpayer in other years. The scrap and fixed assets were used in the business of both the Regimes. He submits that no tax could be charged on gain out of the above three sources, which relates to the portion of income from FTR. DR in reply, submits that by allowing this gain the prohibition contained under the subsection (2) of section 169 shall be offended, which envisaged that no depreciation or expense etc. Shall be allowed under FTR.
8. Heard both the parties. Record perused. The gain in question undisputedly arises as a consequence of depreciation allowed over the years. By availing this allowance, the taxpayer implicitly agreed that allowance of depreciation would, if result into a gain on sale of particular assets, be taxed as gain. In present case the assets in question were used for both business regimes i,e, PTR and NTR. But the fact that depreciation was actually allowed cannot be over looked. The gain in question is a result of allowed depreciation, which in our opinion should not be left un-taxed for the reason that under FTR no gain could have been taxed. In our considered view, if this gain is left untaxed, it shall violate the provisions of section 169(2), which expressly prohibits allowance of any depreciation or expenses under PTR.
' At this stage AR submits that at the time of allowance of depreciation the same was apportioned between PTR and NTR, however, the gain in question reflecting in the books is gross, wherein the depreciation not actually allowed is also accounted for. DR could not deny this fact. The Taxation Officer is directed to tax the gain only to the extent of actual payment/ allowance of depreciation by taxpayer.
' So far exchange gain is concerned, we are in agreement with the discussion and reasoning of Commissioner (Appeals) that it should be prorated between FTR and PTR.