These appeals have been filed by the taxpayer/appellant against the orders of CIR(A) vide Nos, 12/13 and 13/14 dated 28-3-2013 for the tax years 2010 and 2011. The appeals have been filed on the following grounds.
I.T.A. No, 282/KB 2013 Tax Year 2010
2. The CIR Appeals erred in maintain the order passed by the Deputy Commissioner Inland Revenue, Audit Units 3 and 4, Zone-II, Large Taxpayers Unit, Karachi (DCIR) levying minimum tax under section 113 of the Ordinance, which was erroneous and illegal on following jurisdiction grounds:-- (a)the determination of levy of minimum tax in impugned case requires interpretation of relevant provisions of law, and being contentious matter, it falls outside the limited scope of rectification of assessment under section 221 of the Ordinance; and (b)the CIR-Appeals erred in reaching to the conclusion that reasonable opportunity was provided to the appellant during the assessment proceedings. It is submitted that such conclusion is against the facts of the case, particularly for the reason that the CIR-Appeals in its own order has deliberated on various facts which were not examined by the DCIR.
(3) Without prejudice to ground of Appeal No,2 above, the CIR Appeals order in confirming levy of minimum tax was also erroneous on merits as the appellant has declared gross loss before depreciation and other inadmissible expenses of Rs,16,372,631 thus by virtue of provisions of subsection(1) of section 113, the appellant was not liable to pay minimum tax.
(4.1) Without prejudice to ground of Appeals Nos,2 to 3 above and without conceding to the legal and factual position pleaded in ground of Appeal No,3 above, [that the appellant is not liable to pay minimum tax by virtue of provisions to subsection (1) of section 113], the CIR-Appeals erred in maintaining the action of the DCIR in not considering the gross margin of the appellant of Rs,304,611,231 as its 'turnover' for the purposes of computing minimum tax liability (if minimum tax is applicable on the appellant for arguments sake).
(4.2) The CIR-Appeals erred in reaching to the conclusion that appellant turnover are gross receipts on the basis of the following erroneous assumptions:
(i) Risks and rewards in the goods rests with the appellant; and
(ii) The benefit or loss due to price fluctuation or downward revision would be of the appellant.
(5) Without prejudice to ground of Appeals Nos,2 to 4 above, the CIR-Appeals erred in accepting the findings of the DCIR that on page 4 of the rectified order that the appellant has made false and misleading statement in the return of income (declaring gross loss) whereas audited accounts show gross profit. It is reiterated that the appellant has filed return of income as per law by properly disclosing all the relevant facts and interpreted the law in its own opinion, thus not made any false and misleading statement.
I.T.A. No, 284/KB 2013 Tax Year 2011
(2) The CIR Appeals erred in maintain the order passed by the Deputy Commissioner Inland Revenue, Audit Unit 3 and 4, Zone-II, Large Taxpayers Unit, Karachi (DCIR) levying minimum tax under section 113 of the Ordinance, which was erroneous and illegal on following jurisdiction grounds: (a)the determination of levy of minimum tax in impugned case requires interpretation of relevant provisions of law, and being contentious matter, it falls outside the limited scope of rectification of assessment under section 221 of the Ordinance; and (b)the CIR-Appeals erred in reaching to the conclusion that reasonable opportunity was provided to the appellant during the assessment proceedings. It is submitted that such conclusion is against the facts of the case, particularly for the reason that the CIR-Appeals in its own order has deliberated on various facts which were not examined by the DCIR.
(3) Without prejudice to ground of Appeal No,2 above, the CIR Appeals order in confirming levy of minimum tax was also erroneous on merits as the appellant has declared gross loss before depreciation and other inadmissible expenses of Rs,17,878,918, thus by virtue of provisions of subsection (1) of section 113, the appellant was not liable to pay minimum tax.
(4.1) Without prejudice to ground of Appeals Nos,2 to 3 above, the CIR-Appeals erred in maintaining the order of the DCIT wherein the DCIR had levied Surcharge under section 4A of the Ordinance (on the minimum tax liability) by misinterpreting the law that once a specific provision under section 113 of the Ordinance deems an amount equal to 1 per cent (which in the appellants case is 0.2 percent) of the 'turnover' as 'minimum tax', then the same cannot be subject to further tax in the form of Surcharge.
(4.2) Without prejudice to the ground No,4.1 above, the CIR-Appeals though accepted the fact that surcharge was levied by the DCIR without confronting the issue to the appellant under section 221(2) but still erred in maintain the order of the DCIR wherein Surcharge was levied under section 4A of the Ordinance.
(5.1) Without prejudice to ground of Appeals Nos,2 to 4 above, and without conceding to the legal and factual position pleaded in ground of Appeal No,3 above,[that the appellant is not liable to pay minimum tax by virtue of provisions to subsection (1) of section 1131, the CIR-Appeals erred in maintain the action of the DCIR in not considering the gross margin' of the appellant of Rs,347,188,747 as its 'turnover' for the purposes of computing minimum tax liability if minimum tax is applicable on the appellant for arguments sake).
(5.2.) The CIR-Appeals erred in reaching to the conclusion that appellant turnover is gross receipts on the basis of the following erroneous assumptions:
(i) risks and rewards in the goods rests with the appellant, and
(ii) the benefit or loss due to price fluctuation or downward revision would be of the appellant.
6. Without prejudice to ground of Appeals Nos,2 to 5 above, the CIR-Appeals erred in accepting the findings of the DCIR that on page 4 of the rectified order that the appellant has made false and misleading statement in the return of income (declaring gross loss) whereas audited account show 'gross profit'. It is reiterated that the appellant has filed return of income as per law by properly disclosing all the relevant facts and interpreted the law in its own opinion, thus not made any false and misleading statement.
7. Brief facts of the case are that the appellant is engaged in the business of Pharmaceutical products as well as warehousing activities. Following is the brief of accounting results declared for both the tax years under these appeals; I.T.A. No, 282/KB of 2013 (Tax Year 2010) Sales Revenue 4,888,755,025 Less: Sales Return 10,737,026 Sales Tax 1,465,551 Discount 9,551,650 21,754,227 Net Sales 4,867,000,798 Less:Cost of goods Sold (This only includes purchases and other direct expenses 4,562,389,567 Gross Profit:- 304,611,231 Less: Indirect Expenses Distribution Expenses 238,852,927 Administrative Expenses92,649,150 Financial charged, 3,066,895 Other charges 3,221,481 Total Indirect expenses 337,790,453 Add: Inadmissible expenses 15,567,759 Less: Admissible expenses 17,297,476 Allowable expenses:- 336,060,736 Net Loss:- (31,449 505 I.T.A. No, 282/KB of 2013 (Tax Year 2010) Sales Revenue 5,648,398,966 Less:Sales Return 30,930,565 Sales Tax 8,249,234 Discount 11,913,542 51,093,341 Net Sales Less:Cost of goods Sold (This only includes purchases and other direct expenses 5,250,116,878 Gross Profit:- 347,188,747 Less:Indirect Expenses Distribution Expenses 281,533,043 Administrative Expenses89,149,032 Financial charged, 3,493,148 Other charges 5,426,582 Total Indirect expenses 379,601,805 Add:Inadmissible expenses 15,352,434 Less:Admissible expenses 12,164,605 Allowable expenses:-- 382,789,634 Net Loss:-- (35,600,887)
As evident above, the appellant declared gross profit as per accounts of more than Rs, 300 million which is also disclosed in the return of income. Thus the appellant declared gross profit as against the net loss declared in return of income as well as in the accounts. After examining the deemed assessm ents some errors were found by the officer and a show cause notice under section 221 of the, Income Tax Ordinance, 2001 was issued to the Taxpayer. In response to the notice the appellant submitted his reply through AR Messrs A.F. Furgus on Chartered Accountant and was found partly satisfactory but the said reply on account of non application of section 113 due to gross loss the reply was found incorrect. Therefore, order under section 221 of the Income Tax Ordinance, 2001 was passed by the DCIR to charge tax under section 113 on declared net turnover in both the years under appeal. For the sake of brevity the main issues common in both the years are as under; (i)Applicability of section 221 to raise demand under section 113 on turnover of the taxpayer.
(ii)What would be the gross profit before depreciation and inadmissible expenses to avail the exemption from section 113 of the Income Tax Ordinance, 2001?
(iii)Tax payer's plea that instead of turnover, his margin of profit as reduced by the cost of sales be considered for the purpose of levy of minimum tax under section 113.
(iv) Charge of tax under section 4A based on minimum tax under section 113 (for tax year 2011 only).
3. The taxpayer filed appeal before the Commissioner (IR) (Appeal-III), who vide his orders who rejected the appeals on all material areas. Therefore, unsatisfactory of the order of the CIR(A) the taxpayer came to this forum against the impugned orders passed by the two officers below for redressel of his grievances.
4. On the date of hearing, Mr. Asif Haroon, FCA appeared on behalf of the Appellant/Taxpayer and Mr. Ghulam Murtaza Khoro, Additional Commissioner attended on behalf of the Respondent/ Department.
5. Mr. Asif Haroon, FCA of the appellant contended that the impugned order of Learned CIR(A) and the order of DCIR are illegal, ultravires, void and without any justification. He submitted that the DCIR erred in levying minimum tax without considering the facts that the appellant had declared gross loss before depreciation and other inadmissible therefore provisions of section 113 were not attracted. He further submitted that as per proviso to subsection (1) of section 113, subsection (1) shall not apply in the case of a company which has declared 'gross loss' before depreciation and other inadmissible expenses under the ordinance.
6. The AR contended that the term 'loss' wherever appearing in the Ordinance requires. that loss has to be computed as per the provisions of the Ordinance and not the loss as per the profit and loss accounts. The Fourth schedule and the seventh schedule to the Income Tax Ordinance specifically and expressly referred to the profit and gains as per accounts therefore, loss as described in proviso to section 113 cannot be construed as accounting gross loss. He further submitted the term gross loss is not defined in the ordinance, therefore, as per the general understanding it means the gross loss as per the computation of income i,e, the accounting profit and loss adjusted by allowable deduction and inadmissible expenses is to be considered for the above purpose.
7. AR further stated that if the law would have intended 'not to consider selling and administrative expenses or financial expenses then there should have been express enabling provision , to the effect. Therefore, the action of the two officers below is against the law and is illegal and prayed that the impugned orders of the authorities below be vacated.
8. DR on the other hand supported the orders of the DCIR & CIR (A). He argued that the 'DCIR had rightly acted in accordance with law. Despite relief given to the taxpayer the CIR(A), department has not come in appeal. He reiterated upon the detailed findings of CIR(A) on all the relevant issues.
9. Rival parties have been heard and the case record examined. We are of the view that in grounds Nos, 1 and 2 for the tax year 2010, the taxpayer has raised the objection against invoking of section 221 of Income Tax Ordinance, 2001 and levying of minimum tax under section 113 of Income Tax Ordinance, 2001 on the ground that it was not patent mistake apparent from the record rather levy of the same involved interpretation of provisions of law; hence was beyond the scope of rectification.
10.We have perused order of DCIR and CIR (Appeals-III) Karachi and also heard arguments of AR of taxpayer and DR of the department Mr. Ghulam Murtaza Khuro. The learned DR also argued that it is a issue or legal mistake apparent from records but stretched longer at the option of the taxpayer. He further explained that if law was not properly applied by the taxpayer which was its statutory responsibility towards State, then remedial action was necessary to be taken. "Where law had provided a thing to be done in a particular manner then it ought to be done in that manner (PLD 1999 Lahore 446)"; and no one could be judge of his own cause.
11. We are of the calculated view that failure of application of any provision of law falls under the purview of rectification. Scope of rectification cannot be limited to arithmetical error and any mistake of law which is glaring and floating on the surface can be rectified. Taxpayer cannot take refuge to avoid application of law merely complicating or protracting the legal issue. Neither documents were called nor fishing enquiries were .made prior to the impugned orders under section 221. The accounting records accompanying the return were consulted to apply the relevant legal provisions. Hence in our view, the departmental action to invoke the provisions of section 221 of the Income Tax Ordinance, 2001 was the correct treatment. The findings of CIR(A) on the issue in reference to case-laws relied upon by the taxpayer are endorsed in both the years. Consequently, the appeals on this issue fail in both the years.
12. In ground No,3 for the tax year 2010 and No, 3 for the tax year 2011 the taxpayer has taken the position that in view of proviso to section 113(1) of the Income Tax Ordinance, 2001, minimum tax could not have been, levied as taxpayer did declare loss of Rs,21.7 (M) in the e-filed return of income. AR of taxpayer argued that gross loss for the purpose of the proviso ibid was not defined in the Income Tax Ordinance, 2001. We have heard arguments of both the AR and DR and also perused the findings of CIR(A). As per our understanding gross profit and net profit are segregated and earlier two stages of profit. Same is the case with loss. The entire economic activity during a specific period is delineated through a standard form presentation and necessarily make any of the following sequence depending upon the relative weight of the value put in it.
Head Amount in Rs, Gross Income ------------- Less Direct Expenses--------------- Gross Profit or loss--------------- Indirect Expenses------------------ Net Loss profit or loss ------------------ - 13.A standard form classification of various heads of expenses and their respective placement not only possess the strength of IAS, GAAP, IFRS but Companies Ordinance, Income Tax Ordinance and other Enactments of state led compliance Institutions relying on financial statements.
14. When we talk of gross profit, it means gross income as reduced by all the expenses to acquire, produce, procure, convert, manufacture, import or even the input of human services or machine hours. After producing and possessing (including constructive possession), its further delivery for the purpose of earning would involve indirect expenses. So the base line to identify an expenses as direct or indirect would be that all expenses would be direct till a product is capable of selling and all indirect expenses would be incurred for the purpose of selling till the product reaches the consumer or buyer. To our understanding, the same principle is applied to distinguish and charge carriage inward (direct) carriage outward (indirect), wages (direct), salaries (indirect), import expenses (direct), Export freight (indirect), depreciation on production machines (direct), depreciation on selling machines (fork lift) (indirect) and so on.
15. The proviso to section 113(1) is concessional in nature and takes into account the cases of hardship i,e, suffering from losses and accordingly grants exemption from minimum tax liability.
Now gross loss means loss in business at earlier stage; Before depreciation means that depreciation (direct) will further increase the loss and inadmissible expenses to be ignored out- rightly. So if business sustains loss at earlier stage, subsequent additions in the shape of depreciation (direct) or others indirect expense would further increase the losses and net loss be a higher amount. So we consider the concession for entities who suffer from gross loss (earlier stage) than net loss (later stage). This is not the case of present taxpayer as it did not sustain loss at earlier stage.
16. In the instant case, taxpayer is a trader and as such not involved in any manufacturing activity.
So the expense of depreciation would be indirect in his case. On the contrary, it claims depreciation as a direct expense. If the interpretation of tax payer to avail the exemption from section 113 is followed an amazing account presentation emerges which reads as under repudiating the meanings of word "gross" mentioned in the Ordinance at many places to denote/target the quantum.
HEAD YEAR 2010 YEAR 2011 Net Sales RevenueRs, 4,867 (M) Rs, 5,597(M)
Cost of sales Less all expenses Rs, 4,562 (M) Rs, 5,250 (M)
(Indirect) Rs, 337 (M) Rs, 379 (M)
Other admissible Exp.Rs, 17 (M) Rs, 12 (M)
Gross Loss. a Rs, 49 (M) b Rs, 44(M)
Before Depreciation (tax)x Rs, 8(M) y Rs, 7(M)
Inadmissible Exp.
For the purpose of TaxationRs, 15 (M) Rs, 15(M)
Net Loss Rs, 57 (M) Rs, 51 (M) (a+ x) (b+y)
17. The learned AR wanted that his indirect expense be adjusted to arrive at gross loss as marked above. Practically, he pleaded that gross loss will absorb all sort of expenses except the two expenses i,e, depreciation and inadmissible expenses. Since inadmissible expenses would not be worth consideration or legal sanction behind the claim, further deduction of depreciation would instantly work out the net loss or loss sustained from the entire business operation. Had this been the purpose, then instead of "gross loss", "net loss" or "loss" would have been expressed in the statute. To us, the term gross refers to the total amount received as result of some activity whereas net refers to the amount left over after all deductions are made. Once net value is attained, nothing further is subtracted. The net value is not allowed to be made lower.
18.We may refer to standards as financial statements are prepared in accordance with the approved accounting standard as applicable in Pakistan which include International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board as or notified under the Companies Ordinance, 1984. Format of IAS 1 ordains 3 stages of calculating profit and income for the presentation of financial statement:--
(i) Gross Profit/Gross Loss i,e, revenue less direction expenses.
(ii) Operational profit i,e, profit before financial expenses.
(iii)Net profit before taxation i,e, less all expenses except to be charged tax.
Accounts are not made for the purposes of taxation only. There are other direct indirect and connected stakeholders to whom the taxpayer owes the duty of cafe and skill besides complete and correct reporting.
19. Another difference of opinion between the two authorities below and the taxpayer had been Accounting gross profit or taxation gross profit. We are of the opinion that in some areas, taxpayer adjusts his gross profit and net profits in the context of legal admissibility's or inadmissibility. This is usually done by submitting an adjustment sheet which is read with the original accounts. In other words, the adjustment sheet is a bridge between accounting version and taxable income. This also ensures the sustenance of accounting presentation as per standard for the use of other concerned parties besides flexing it for the purpose of taxation. We hold that in order to apply the law both the declaration would be worth consideration. However, in the instant case there is no material difference between accounting gross profit/tax gross profit or accounting net loss/tax net loss. So any further discussion at this stage would not be relevant. However, we are fully agreed with the treatment meted out by the CIR(A) on this in his orders for both the years.
20. (Trading or Commission) We have examined the orders of authorities below meticulously and heard the argument of both AR of the taxpayer and DR of the department. We are of the opinion that the business of the taxpayer is of trading nature involving purchase and sale of the pharmaceutical products with all risks and rewards vested in the taxpayer that is the main criteria to differentiate between an agent and independent business entity. The declaration of debtors/creditors/ inventory etc. fortify the findings of two officers below that taxpayer is a trader and not a commission agent. Therefore, for the purpose of levy of minimum tax, turnover of the taxpayer should be the same as is defined vide section 113(3) of the Income Tax Ordinance, 2001.
21.In the instant case turnover has not be worked out by the assessing officer. He just relied on what was declared in S. No, 160 of the prescribed return. Therefore, the ground of appeal before CIR(A)IL and this Tribunal that gross profit (difference between net sales and cost of sales) be considered for the purpose levy of tax under section 113 merits rejection. The department has just to the taxpayer by allowing 80% relief from the minimum tax rate of 1% in the light of S.R.O.
No,69(I)/2010 dated 3-2-2010. Here we endorse the detailed findings of CIR(A)-in this behalf in both the tax years under appeal.
22.Lastly we also endorse the findings of CIR(A) on various case laws cited by the taxpayer and thoroughly discussed in the body of order. No exception can be taken.
23.Since the levy under section 113 is being upheld, we further endorse the charge of Tax under section 4K for the year 2011. No exception can be taken in this context and the appeal fails on this ground as well.
24.Appeals of the taxpayer fail on all grounds.