' Through this order we will dispose of cross appeals filed by the taxpayer and the department against the decision of learned CIR(Appeals) vide Orders Nos.249,250 and 251 dated 5-5-2011 for tax years 2007, 2008 and 2009. The grounds of appeals filed by the taxpayer being identical except for amount in all the tax years, therefore grounds as example for tax year 2007 are reproduced as below:- "(i) That the learned Commissioner Inland Revenue (Appeals) is bad in law and on facts.
(ii) That the learned CIR(Appeals) grievously erred in holding that the 0,M, No,5010-M(IT)/80 dated 23rd August, 1980 cannot overrule the express provisions of Income Tax Ordinance, 2001 whereas the fact remains that the said O.M. Has binding force on the Income Tax Department being Government functionary, which has been clearly violated by the Department.
(iii) That the learned CIR(Appeals) grievously erred in upholding the action of the ACIR in not adjusting the profit on bank deposits amounting to Rs,37,453,389 in the brought forward business losses by holding that this profit on bank deposits is assessable under section 39 as Income from other sources, whereas your appellant had earned income by depositing surplus business funds which were not specifically invested to earn income different from the business, and that the case of the appellant is fully supported by the judgment of the Hon'ble Income Tax Appellate Tribunal being I.T.A. No,8652 of 1971-72 dated 25-7-1973 and the judgment reported as 1988 PTD (Trib.) 369.
(iv) Without prejudice to the submissions made in Ground No, (3) above it is submitted that the learned CIR (Appeals) grievously erred in directing to adjust interest paid on borrowed capital against interest earned on banks deposits in case the same has not been allowed against business income.
(v) That the learned CIR(Appeals) grievously erred in maintaining the disallowance of Provision for slow moving stores, spares and loose tools amounting to Rs,1,526,966 allegedly for not providing necessary details to ACIR whereas the fact remains that it was duly explained in reply to the query raised by ACIR that the expenses claimed under this head are not "provisions" but the same are actually paid expenses and are fully supported by documentary evidence which the ACIR did not call for and examine.
(vi) That the reliefs prayed for in Grounds Nos. (1) to (5) above be allowed to the appellant."
2. The grounds of appeal filed by the department (being identical for all the tax years) are reproduced as example for tax year 2007 as below:--
(a) That the order passed by the learned CIR(Appeals-I), Karachi is bad in law and on facts of the case.
(b) That the learned C.I.R (Appeals-I), Karachi has erred in directing to ascertain factual position regarding claim of interest expense and also erred in directing to allow such expenses to the extent of utilization of borrowed amount in earning interest income.
(c) That the learned C.I.R (Appeals-I), Karachi has erred in directing to allow interest on borrowed capital against interest income as it was against the full bench judgment of the learned Appellate Tribunal Inland Revenue reported as 1999 PTD (Trib.) 708.
(d) That the learned C.I.R (Appeals-I), Karachi has erred in directing the department to follow a consistent practice on the issue of exchange losses.
(e) Without prejudice to Grounds Nos. 2 and 3 above, the CIR(A) has erred in remanding back the issues to the OIR whereas he has no such powers under the Income Tax Ordinance, 2001.
(f) The appellant craves leave to add, amend or alter any of the grounds on or before the final hearing of appeal.
3. On the date of hearing the taxpayer was represented by Mr. Muhammad Hassan Alam, Advocate while the Department was represented by Mr. Azhar Erum Memon, DR. LTU.
4. Brief facts of the case as transpired from the record are that in all the tax years the Additional Commissioner Inland Revenue initiated action under section 122(5A) and after affording opportunity of being heard amended assessment orders making certain additions. The taxpayer feeling aggrieved went in appeal before learned CIR(Appeals) who adjudicated the issues in his appellate orders mentioned above. Being dissatisfied with the orders of learned CIR(Appeals), both the taxpayer and the department have now come in appeal before this forum. The grounds filed by the taxpayer and the department and decision taken by learned CIR(Appeals) and our findings are discussed below:--
5. TAXPAYER'S GROUND NO.Ii "That the learned CIR(Appeals) grievously erred in holding that the O.M. No,5010-M(IT)/80 dated 23rd August, 1980 cannot Overrule the express provisions of Income Tax Ordinance, 2001 whereas the fact remains that the said O.M. Has binding force on the Income Tax Department being Government functionary, which has been clearly violated by the Department."
' The learned counsel for the taxpayer contended before this forum that the order of the Commissioner Inland Revenue is bad in law and on facts of the case. It was contended that the learned CIR(Appeals) erred in holding that O.M. No,5010-M (IT)/18 dated 23rd August, 1980 cannot overrule express provision of Income Tax Ordinance, 2001 whereas the fact is that the said 0.M has binding on the functionaries of Income Tax Department. It was further contended that proper opportunity of being heard was not afforded to the taxpayer while making above addition. The learned DR, however, supported the order of the learned CIR (Appeals) and contended that O.M cannot override the mandatory provisions of the Income Tax Ordinance, 2001.
' The learned CIR(Appeals) vide his impugned order has adjudicated the issue as under:-- "The above arguments are considered and case record is perused. It is revealed that the appellant did not raise this objection at the time of amendment proceedings nor any reference to same was made by the AR in the replies filed before the TO. As such the appellant can't raise this objection now. Even otherwise this O.M. Says that the assessment should be made with the approval of the Commissioner after giving assesses an indication of proposed additions to be made. Now, the examination of file reveals that the CIR (Audit-I), LTU, vide its letter dated CIR/Audit-1/LTU/09-10/658 dated 23-12-2010 has duly approved initiation of action under section 122(5A) in this case and had in fact issued directions to rely on the judgment of Honourable Supreme Court in Messrs AES Pak Gen. On the issues involved. It is also pertinent to note that even the appellant did not make any request to CBR/FBR for intervention, but preferred to respond to the amendment proceedings by filing details/evidences. Further, this particular plea has also not been specifically raised in the grounds of appeal filed by the appellant for all the impugned tax years. It is also noted that there is no bar in the Income Tax Ordinance, 2001 prohibiting the assessing officer against taking action under section 122(5A) in the case of the appellant. An O.M.
Can't overrule the express provisions of Income Tax Ordinance, 2001; notwithstanding the fact that the O.M. Being relied was issued in 1980 which was during the currency of Income Tax Ordinance, 1979 and which now stands repealed by the present Income Tax Ordinance, 2001. Another contention of the A.R. Of not allowing proper opportunity of being heard is contradictory to facts as the AR in the arguments admitted that notice under section 122(9) was issued by the ACIR so the appellant cannot claim that proper opportunity was not provided. So the O.M's requirement of confronting the proposed additions stood fulfilled by the ACIR. In view of above discussion the legal objection raised in these grounds/arguments are rejected being unjustified in these circumstances ."
OUR FINDINGS:--- ' We have heard the arguments of the rival parties and have perused the case record and have gone through the order of the learned CIR(Appeals) on the issue. We agree with the findings of the learned CIR(Appeals) on the issue. The contention of the learned counsel that proper opportunity of being heard was not afforded to the taxpayer is not relevant on ground that the taxpayer itself has admitted that notice under section 122(9) of the Income Tax Ordinance, 2001 was issued to the taxpayer. This itself was an opportunity of being heard provided to the taxpayer.
' The Income Tax Ordinance, 2001 has overriding effects on other laws. Section 3 of the Ordinance stipulates as under:- "Section 3.---Ordinance to override other laws.---The provisions of this Ordinance shall apply notwithstanding anything to the contrary contained in any other law for the time being in force."
' While making an amended assessment, the learned CIR(Audit) had approved initiation of action under section 122(5A) in the case of the taxpayer and had issued direction to rely on the judgment of Hon'ble Supreme Court of Pakistan in the case of Messrs AES Pak Gen. The findings of the learned CIR(Appeals) have also force that O.M being relied was issued in 1980 which was during the currency of Income Tax Ordinance, 1979 which now stands repealed by present Income Tax Ordinance, 2001. Even otherwise the Hon'ble Superior Judicial Fora have ordained that CBR/FBR cannot intervene in quasi judicial functions of the assessing officer. So far the objection of the learned counsel for the taxpayer regarding referring the case to CBR/FBR is concerned, this objection has also no force is according to the terms of O.M, it was the taxpayer who was supposed to make a request to refer his case to FBR which it did not. In view of the facts we see no reason to interfere with the findings of the learned CIR(Appeals) on the issue which are accordingly upheld and appeals filed by the taxpayer is rejected.
6. TAXPAYER'S GROUND NO.Iii "(iii) That the learned CIR(Appeals) grievously erred in upholding the action of the ACIR in not adjusting the profit on bank deposits amounting to Rs,37,453,389 in the brought forward business losses by holding that this profit on bank deposits is assessable under section 39 as Income from other sources, whereas your appellant had earned income by depositing surplus business funds which were not specifically invested to earn income different from the business, and that the case of the appellant is fully supported by the judgment of the Hon'ble Income Tax Appellate Tribunal being I.T.A. No,8652 of 1971-1972 dated 25-7-1973 and the judgment reported as 1988 PTD (Trib.)
369."
' The learned counsel for the taxpayer contended before this forum that the order passed by the learned Additional Commissioner under section 122(5A) was bad in law and on facts of the case. It was contended that the learned Additional Commissioner Inland Revenue was not justified to refuse adjustment of profit on bank deposits in the brought forward business losses on the ground that profit, of bank D deposit is assessable under section 39 whereas the interest on bank deposit was business income of the taxpayer on the surplus funds deposited by the taxpayer in the bank.
The AR contended that both the orders of the learned Additional Commissioner and learned Commissioner (Appeals) are, therefore, bad in law and on facts, which may be vacated.
The' learned DR, however, supported the orders of the Additional Commissioner Inland Revenue and of learned CIR(Appeals) and contended that profit on bank deposits is separately assessable under section 39 and therefore, cannot be adjusted in the brought forward business losses of the taxpayer.
' The learned CIR(Appeals) vide his impugned order adjudicated upon the issues as under:- "It is noted that the AR of the appellant has submitted the similar arguments before the Additional Commissioner during the proceedings of ACIR has very elaborately discussed the contention of the appellant before rejecting the same and drawing adverse inference. I am convinced with the contention of the AC that the appellant's claim that surplus money was deposited with the banks and interest received therefrom should be treated as income from the business as surplus funds were also derived from the business cannot be acceptable in view of fact that the business income is assessable under section 18 whereas interest income has been classified as other income and assessable under section 39 of the Income Tax Ordinance, 2001. The law does not distinguish the interest earned from the deposit of surplus funds or through borrowing funds.. It simply provides five heads of income for the purpose of the imposition of tax and computation of total income. Profit on debt has been specifically included under the head of income from other source for which rate of tax has also been separately provided in the first Schedule. Moreover, the appellant itself separately declared the interest income as other income in Account No, 34 of the audited account it means the appellant itself recognizes the interest income separate, distinct and different from the business income assessable under section 18. Interest income as per law is not income from business but from other sources; except in case of banks leasing companies DFI etc. And the taxpayers whose business is to derive interest income. The taxpayer does not fall in any of these exceptions provided in sections 18(2), (3) or (4). And when the law itself treats interest income as income from other source it has to be treated accordingly. When a law provides that a thing should be done in a particular manner it has to be done in that particular manner. The reliance placed by the appellant on the judgment of the learned Tribunal had thoroughly been discussed and distinguished by the DCIR in the impugned orders and I agree with the reasons given by the DCIR for rejecting the appellants plea on this point. Then the DCIR has relied upon latest judgment on the issue. Therefore, findings given by the ACIR in the impugned orders are fully justified in the light of the clear provisions of law. The action of ACIR to the extent of assessing interest income under section 39 of the Income Tax Ordinance, 2001 is justified. Reliance is placed in the recent judgment of the Hon'ble Supreme Court of Pakistan reported as 2010 PTD 1809 in this regard. Some of other judgments being relied here are as under:-- HON'BLE SUPREME COURT
(i) 2004 PTD 2255 = 90 Tax 33 (SCP)The interest income earned by the Taxpayer out of the shares capital deposited in the bank by the company engaged in power generation product after post production activity, was held as income from "income from other sources".
Decision of Hon'ble Sindh High Court in this regard in favour of Taxpayer declaring the said interest income as part of the profits covered under clause (176) of 2nd Schedule, was disapproved and held that the interest income qualified the "income from other sources" as per section 80B(2) (b).
(ii) 5 Tax 262 = 1962 PTD 415 in the case of CIT v. Liquidator Khullna Bager Hat Railway Co.
HON'BLE SINDH HIGH COURT
(i) 2010 PTD 1397 (S.H.C.) The interest income earned by the Taxpayer on surplus money deposited in the bank account held not to be "income from business" rather "income from other sources"
The Hon'ble Sindh High Court in a recent judgment decided on 9-3-2010 in the case of CIT v. Messrs Dewan Textile Mills Ltd. Has held that the interest income is to be taxed as "income from other sources". The reopening of the assessment under section 65 by the department was confirmed on this issue. {{TABLE}}
(i) 2000 PTD 363 Also held the decision in favour of (Hon'ble Sindh High the treatment under reference. Court)
' In view of above discussion, it is held that interest income has rightly been subjected to tax under section 39 of the Income Tax Ordinance, 2001, The action of the Taxation Officer is confirmed on this issue.
' Regarding adjustment of brought forward losses against the interest income earned of the tax year earned by the appellant for all the impugned years it is held that the law on the issue is very clear and unambiguous which says that only brought forward losses under business heads are to be allowed and adjusted against the income chargeable under the head income from the business. Hence, this contention of the appellant is also not accepted being contrary to the provisions of law."
OUR FINDINGS: - ' We have heard to the arguments of the both rival parties and have perused the case record and have also gone through the impugned order of learned CIR (Appeals). We tend to agree with the findings of the learned CIR(Appeals). The business income is assessable under section 18 whereas the profit on debt is assessable under section 39 of the Income Tax Ordinance, 2001. The taxpayer itself has declared the interest income as other income in statement of accounts vides entry No,34.
The Honourable Higher Judicial Fora have ordained that when law provides things are to be done in a particular manner it has to be done in that particular manner therefore, contention of the learned DR that profit on debt is assessable under section 18 of the Income Tax Ordinance, 2001 has great force. We agree with the distinction made in ease laws presented by taxpayer by the learned Additional Commissioner in the impugned orders. The learned CIR(Appeals) has also placed reliance on the judgment of the Hon'ble Supreme Court of Pakistan reported as 2010 PTD 1809 and some other cases. Resultantly we agree that brought forward business losses cannot be adjusted against the interest income earned by the taxpayer which is separately assessed under section 18 of the Income Tax Ordinance, 2001. Respectively following the judgments cited, we do not see any reason to interfere with the impugned order of learned CIR(Appeals) which is accordingly upheld and appeal filed by the taxpayer on the issue is hereby dismissed.
7. TAXPAYER'S GROUND NO.Iv "(iv) Without prejudice to the submissions made in Ground No,(iii) above it is submitted that the learned CIR (Appeals) grievously erred in directing to adjust interest paid on borrowed capital against interest earned on banks deposits in case the same has not been allowed against business income."
DEPARTMENTAL GROUNDS NOS.b, c & e.
(b) That the learned CIR(Appeals-I), Karachi has erred in directing to ascertain factual position regarding claim of interest expense and also erred in directing to allow such expenses to the extent of utilization of borrowed amount in earning interest income.
(c) That the learned CIR(Appeals-I), Karachi has erred in directing to allow interest on borrowed capital against interest income as it was against the full bench judgment of the learned Appellate Tribunal Inland Revenue reported as 1999 PTD (Trib) 708.
(e) Without prejudice to Grounds Nos. 2 and 3 above, the CIR(A) has erred in remanding back the issues to the OIR whereas he has no such powers under the Income Tax Ordinance, 2001 ' The learned CIR (A) vide his impugned order adjudicated upon the issue as under:-- "The AR has taken the alternate plea on this point and has said that taxing of gross amount of profit on bank deposits by the ACIR without setting off the interest paid on borrowed capital invested in these interest earning bank deposits and part of administrative expenses such as salaries etc. Is not justified. This contention has to be considered in view of the provision of section 40 of the Income Tax Ordinance, 2001 which provides deductions in computing income chargeable under the head "income from other sources". Subsection (1) says that for a tax year a deduction shall be allowed for any expenditure paid by the person in the year to the extent to which the expenditure is paid in deriving income chargeable to tax under that head. Apparently, the appellant has paid the interest on that portion of borrowed funds which was deposited by it in interest earning bank deposits. The ACIR is, therefore, directed to verify from the record that whether this proportionate interest expense incurred on interest earning deposits has been claimed and allowed against business income or not. After ascertaining the factual position the proportionate interest expenses may be allowed against the interest/profit on debt earned by the appellant on bank deposit to the extent of utilization of borrowed amount in earning interest income therefrom. Nonetheless it has to be ensured that no double deductions are allowed to the appellant on this count."
The learned counsel for the taxpayer contended before this forum that the Additional Commissioner was not justified in subjecting to tax gross amount of bank deposits without setting off the interest paid on borrowed capital invested in the bank on which profit was earned and also in not allowing part of the expenses which were incurred on earning the profit. The learned DR, however, supported the order of the Additional Commissioner and learned CIR(Appeals) on the issue.
OUR FINDNGS:-- ' We have heard rival arguments of both the rival parties, learned CIR(A). Our findings are as under.
Perusal of the findings of learned CIR(Appeals) would reveal that he has referred back the issue to the assessing officer concerned to verify from the record that whether proportionate expenses incurred on interest earning on banks deposits have been claimed and allowed against business income or not. It has further been 'directed that that after ascertaining the certain factual position, the proportionate interest expenses may be allowed against interest/profit on debt earned by the appellant on bank deposits to the extent of utilization of borrowed amount in earning interest income therefrom. The assessing officer has been directed to ensure that no double deduction are allowed to the appellant on this account. The department in the grounds of appeal has referred to judgment of the Hon'ble Appellate Tribunal reported as 1999 PTD (Trib.) 708. We have gone through the decision of the Hon'ble Tribunal. Hon'ble Tribunal in its judgment has drawn distinction between "interest on investment" and "interest on deposit". It has been decided that expenditure incurred on account of interest on borrowed capital was not to be deducted under section 31(1)(b) of the Income Tax Ordinance, 1979 from interest earned on deposit of funds in bank assessable as income from other sources under section 30 of the Income Tax Ordinance, 1979. It would be appropriate to reproduce the relevant Head Notes of the above judgment as under:- "(h) Income Tax Ordinance (XXXI of 1979)- ' ---Ss. 31(1 )(b) & 23 (1)(vii)---Deduction---Interest expenditure--Admissibility---Principles--- Amounts borrowed for the purpose of business and not wholly and exclusively for the purpose of earning income from other sources i,e, interest---Expenditure incurred on account of interest on such borrowed capital is admissible as expenditure under S.23(1)(vii) of the Income Tax Ordinance, 1979 and not as expenditure laid out or expendied wholly and exclusively for the purpose of earning interest income as admissible under S.31(1)(b) of the Income Tax Ordinance, 1979.
(i) Income Tax Ordinance (XXXI of 1979)--- ' ---Ss. 30 & 31(1)(b)---Deduction---Borrowed capital---Expenditure incurred on account of interest---Admissibility--- Expenditure incurred on account of interest on borrowed capital was not to be deduced under S.31(1)(b) of the Income Tax Ordinance,. 1979 from interest earned on deposit of funds in Bank assessable as income from other sources under S.30 of the Income Tax Ordinance, 1979."
Apart from above facts, the fact remains that the taxpayer in the grounds of appeal for all the three years filed before learned CIR(A) and this forum has contended that the appellant had earned income by depositing surplus business funds (underlined for emphasis) in the bank. This indicates that if at all interest expenses was to be allowed, it was supposed to be allowed on borrowed capital whereas admittedly the taxpayer has the surplus business funds on which he has earned interest income and therefore, setting of any interest expenditure against such interest income earned will not be justified. We, therefore, hold that interest expenditure against the above interest income earned is not allowable and therefore, we vacate the order of the learned CIR(A) on the issue. This finding will also cater to objection of the department that learned CIR(A) cannot remand back the case to the Assessing Officer for re-adjudication.
8. TAXPAYER'S GROUND NO.v "That the learned CIR(Appeals) grievously erred in maintaining the disallowance of Provision for slow moving stores, spares and loose tools amounting to Rs,1,526,966 allegedly for not providing necessary details to ACIR whereas the fact remains that it was duly explained in reply to the query raised by ACIR that the expenses claimed under this head are not "provisions" but the same are actually paid expenses and are fully supported by documentary evidence which the ACIR did not call for and examine."
' The learned CIR(A) in his impugned order has adjudicated upon the issue as under:-- "It appears that the ACIR has not considered the contention of the appellant that the deductions claimed under the head "provision for slow moving stores" were not "provisions" but the same are actually paid expenses. The AR says that only caption was wrongly given in accounts as slow moving stores provision and in fact these related to actually paid expenses of stationery items, photocopy expenses, repair and maintenance of different items and other consumable items.
However, no corroborating evidence for this claim. Even otherwise it simply defies logic that actually paid expenses were booked as provision. The contention of the appellant has also been examined with reference to record and observed that as per relevant accounts notes of the audited accounts of the relevant years to find that the appellant has itself categorized these claims as provision. Even if it represents actual expenditure, necessary details should have been provided. But no such details made available. So the AR has not been able to discharge his onus in this regard on the balance of probabilities as mentioned in section 136. In these circumstances the impugned addition is maintained."
The learned counsel for the taxpayer contended before this forum that the learned CIR(Appeals) has erred maintaining the disallowance of provision for slow moving stores, spares loose tools as it was not provision and complete details of expenses were provided to the department. The learned DR, however, supported order of the learned CIR (Appeals) and contended that it was provision and provision cannot be allowed as expenditure under the Income Tax Ordinance. 2001.
' We have heard to rival arguments of both the parties, have perused the case record and have gone through the order of the learned CIR(Appeals). The controversy is not difficult to resolve whether the taxpayer has made a provision for the expenditure or the expenses incurred are actual. The taxpayer claims that details were filed with the Department but learned CIR(Appeals) has made observation that no details were filed.
Under the circumstances and in order to meet the ends of justice we set aside the issue and remand back the case to the Taxation Officer to resolve the controversy and proceed as per law after affording reasonable opportunity of being heard to the taxpayer.
9. DEPARTMENTAL GROUND NO.4 "(d) That the learned C.I.R (Appeals-I), Karachi has erred in directing the department to follow a consistent practice on the issue of exchange losses."
' The learned CIR(A) in his impugned order has adjudicated upon the issue as under:-- "The most important argument of A.R. In this regard is that the appellant in the past claimed exchange gain which was worked out on the same basis as the exchange loss worked out for the years under appeal and that these amounts were offered and were subjected to tax as such i,e, on notional basis. The ACIR is directed to examine this particular contention of the appellant from relevant assessment orders (other than the deemed assessment orders) and if this particular contention is found correct then consistency demands that the department should follow a consistent practice on this issue in these years also as per its past conscious treatment on this point."
The learned counsel for the taxpayer contended before this forum that in the past exchange gain/loss were worked out on notional basis and assessed accordingly by the department whereas the treatment given for the year under consideration is deviation from past practice. The learned DR, however, contended that the exchange gain/loss was rightly assessed on actual basis.
OUR FINDINGS: - ' We have heard to arguments of the rival parties, have perused the case record and have also gone through the order of learned CIR(A). We agree with contention of the learned CIR(A) that consistency should be followed in assessment of exchange gain/loss in the case of the taxpayer.
We, therefore set aside order of the learned CIR(A) on the issue and remand back the case to the assessing officer to ascertain the factual past practice on the issue in the case and proceed as per law after affording reasonable opportunity of being heard to the taxpayer.
10. All the appeals are disposed of in the manner as indicated above. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.