CH. ANWAAR UL HAQ, JUDICIAL MEMBER.---Through these two cross appeals the taxpayer and the department both have objected to the impugned order of the learned CIT(A) dated 13-11-2007. The assessee has objected the impugned order on the following grounds:-- "(1) That the (CIT(A) was not justified in upholding the action of the T.O. Classifying the profit/mark- up on bank deposits as 'income from other sources' chargeable under section 39 as apposed to business income under section 18 of the Income Tax Ordinance, 2001 as declared by the taxpayer.
(2) That the CIT(A) reproduced the findings of the honourable ITAT which restrict the bifurcation of traders into sub-trades for the purposes of taxation and without commenting on such findings, rejected the taxpayer's stance, making the impugned order non-speaking and illegal.
(3) That in the light of above submissions, it is most humbly and respectfully prayed that the income of Rs.7,321,266 be assessed as business income chargeable under. Section 18 of the Income. Tax Ordinance, 2001.
While the department in the cross appeal has objected the impugned order on the following grounds:-- "That the learned CIT(A) was not justified in deleting the addition of obsolete stance and spares written off at Rs.29,914,107, without any cogent reason as the taxpayer failed to produce any documentary evidence regarding its actual disposal."
The taxpayer in this case is a company deriving income from manufacturing and sale of cement.
Against the original assessm ent order the taxpayer filed appeal before the learned CIT(A) who vide order dated 15-8-2005 without going into the merits of the case cancelled the assessment on the basis of the decision of the Hon'ble Lahore High Court reported as (2004) 90 Tax 81. However, as the above referred decision was reversed by the Hon'ble Supreme Court of Pakistan the department filed appeal before this Tribunal as this Tribunal vide order dated 15-5-2007 in I.T.As. Nos.7104 and 7105/LB/2005 vacated the impugned order of the learned CIT(A) and the matter was remanded back to the learned CIT(A). During the second round of appeal the learned CIT(A) has deleted the addition made of obsolete stance and spares written off. He has, however, upheld the treatment meted out by the Taxation Officer classifying profits/mark-up on bank deposits as 'income from other sources' chargeable under section 39.
Regarding the appeal filed by the department the learned D.R. Has contended that the learned CIT(A) has deleted the addition made by the Taxation Officer without any justification. He has contended that the taxpayer failed to produce any documentary evidence regarding the actual disposal certifying that the stores and spares written off are obsolete and useless for the taxpayer.
The learned D.R. Has contended that as the claim of the assessee for the year under review is pre- mature, since the ultimate fate of these obsolescence would remain obscure due to the reason that the same were not actually disposed off during the year under review, therefore, the addition has rightly been made by the taxation Officer which has been deleted by the learned COIT(A) without any justification.
On the other hand, the learned counsel representing the taxpayer has-contended that the obsolescence of stores was certified by the valuers and hence was written off in the books of accounts in the year under review i.e. 2003 by adopting accrual method of accounting regularly employed by the taxpayer which is in accordance with section 32(1) and (2) of the Income Tax Ordinance, 2001. The learned A.R. Has pointed out that the actual disposal of the obsolete stores and spares took place in the tax year 2005 against receipts which has been shown in the books of accounts recognized as income. The learned counsel has placed before us the copies of the sales tax invoices, newspaper cuttings and copies of the relevant pages of financial statements for the year ending June, 2005 wherein the amount received on account of disposal was recognized as income.
After considering the rival arguments and perusal of the orders of the officers below we have found that the Taxation Officer has made the addition in this respect for the reason that the taxpayer failed to substantiate the obsolescence due to the reason that the same were not actually disposed off and no loss is determinable at this point of time.
The Taxation Officer has observed that the claim in this respect is to be viewed when the actual disposal takes place.
After perusal of the above referred observation made by the Taxation Officer we have found that the proprietary of the expenditure has not been challenged by the Taxation Officer but he required the taxpayer to claim the expenditure on the actual disposal of the stores and spares. On the other hand, the learned counsel for the taxpayer has claimed that the deduction of expenditure in the tax year 2003 has been claimed on accrual basis of accounting regularly employed by the taxpayer.
As on behalf of the assessee evidence has been produced that the actual disposal of the obsolete stores and spares has been subsequently taken place and the receipts in this respect has also been recognized as income, which shows the fair conduct of the taxpayer in this respect. In the these circumstances of the case we find no warrant for interference in the impugned order on this issue. The appeal filed by the department is, therefore, dismissed.
Regarding the appeal filed by the assessee we have found that although the learned CIT(A) has upheld the treatment meted out by the Taxation Officer in respect of taxation of other income under section 39 of the Ordinance, 2001 without discussing in detail but we are also unable to agree with the contentions made by the learned counsel for the taxpayer as the Hon'ble Supreme Court of Pakistan in the case of Genertech Pakistan Ltd. And others v. ITAT and others reported as (2004) 90 Tax 33 (S.C. Pak.) has held that the interest of share capital squarely falls within the scope of "income from other sources" chargeable under section 39. The learned counsel representing the assessee has contended that the excess liquidity available with the taxpayer company is as a matter of prudence can be an interest appearing in a bank account and is the business income under section 18 of the Income Tax Ordinance, 2001. He has in this respect placed reliance on the decision of the Tribunal reported as 1993 PTD (Trib.) 465 wherein it has been held that "After all there can be no trade within a trade. Therefore, on the legal side also we find that the Income Tax Officer in the present case cannot be permitted to bifurcate the appellant's trade into various sub-trades for the purposes of computing the same under various heards mentioned in section 6 although for the purposes of facility of computation this media may be available to him.
The learned counsel has contended that the above referred decision of the Hon'ble Supreme Court of Pakistan is distinguishable as the taxpayer in this case has deposited in the bank the surplus cash generated from normal business activities of the taxpayer whereas in the above referred decision of the Hon'ble Supreme Court of Pakistan the interest income is from cash deposit which was the capital of the company.
The learned DR confronting the above contentions has submitted that this Tribunal in the decision reported as 2007 PTD (Trib.) 2365 has also held that the interest/profit/mark-up on bank deposits is income from other sources chargeable under section 39. We, therefore, find force in the contention made by the learned D.R. And find no warrant for interference in the impugned order of the learned CIT(A) on this issue and the appeal filed by the assessee is also dismissed.
Both the cross appeals are dismissed for the reasons as discussed above.
Sd/- (JAWAID MASOOD TAHIR BHATTI)
Judicial Member Sd/- (AMJAD IKRAM ALI)
Accountant Member AMJAD IKRAM ALI, ACCOUNTANT MEMBER).--DISSENTING NOTE:---My learned brother has agreed with the CIT(Appeal) in disposing of the following ground of appeal filed by department:- "That the learned CIT(A) was not justified in deleting the addition of obsolete stance and spares written off at Rs.29,914,107, without any cogent reason as the taxpayer failed to produce any documentary evidence regarding its actual disposal."
The brief facts are that the taxpayer which is a denationalized cement factory got its obsolete stock surveyed which led to determination of their value at Rs.2,99,14,107 which were charged as accrued expenditure by the taxpayer. Actual sale was made in tax year 2005.
3. In my opinion the term accrual is an accounting term and refers to situation wherein some right has been determined in favour of one party and liability of another party. The situation herein is that the determination of valuation did not lead to determination of right of another party. That is to say that is was a one sided affairs and not a transaction and out of scope of accrual. A parallel of this accounting practice is depreciation which is allowed by operation of law and not because the expenditure has accrued. This case is different wherein no expenditure has been incurred and the unilateral reduction in income without any statutory backing has been made by booking it as an expenditure. The A.R. Argued that section 70 conceived registered of recouped expenditure and therefore amount received as consideration of obsolete stores has been booked as income in tax year 2005. I do not agree with learned A.R. As no expenditure accrued in tax year 2003. As such addition of sale value in 2005 does not justify booking of unaccrued expenditure in tax year, 2003.
4. Pertinent to mention that the A.R. In the court admitted that term accrual could not be applied to the booking of this valuation as an expense in 2003. He however said that he had used the term accrual in absence of a better term to explain his intent. During discussion the A.R. Was asked as to why it took two years to sell the obsolete stores. To this he responded that they were not stores stocked but they were buried in mud or lying scattered which resulted in delay in disposal. This bring home another point that the stores did not become obsolete in tax year 2003 but were obsolete from the pre nationalization period. Therefore, their admissibility Income Tax year 2003 is also not justified. It also needs to be examined as to what treatment was given to this obsolete stores at the time of denationalization.
5. The addition of obsolete stores is thus liable to be maintained as per original assessment.
Sd/- (AMJAD IKRAM ALI)
ACCOUNTANT MEMBER
6. As a difference of opinion has arisen, the following questions are formulated for reference to the Hon'ble Chairperson, ATIR for appointment of third Member to resolve the difference:--
(i) Whether the obsolete stock booked as expenditure on the basis of certificate report was accrued expenditure although no corresponding right of receiving consideration from any third party had been created?
(ii) Whether the obsolete stocks expenditure has any thing whatsoever to do with section 70 of the Income Tax Ordinance when no expenditure had at all accrued and thus had not been incurred?
(iii) Whether despite the A.R.'s admission that term accrual could not be applied to obsolete stores determined by survey, my learned brother's upholding of accrual treatment is correct?
(iv) Whether the pre-nationalizing stores becoming obsolete at some unknown point of time could be charged as an expenditure for tax year 2003?
Sd/- (JAWAD MASOOD TAHIR BHATTI)
JUDICIAL MEMBER Sd/- (AMJAD IKRAM ALI)
ACCOUNTANT MEMBER 'Waqar A. Khan, FCA for Appellant.
Waqas Rasheed, DR for Respondent.
Date of hearing: 27-11-2013.
Date of Order: 9-12-2013.
CH. ANWAAR-UL-HAQ, (JUDICIAL) MEMBER).---In consequence of difference of opinion arisen between the learned Accountant Member (as he then was) Mr.Amjad Ikram Ali and the learned Judicial Member (now Chairperson of this Tribunal) Mr. Jawaid Masood Tahir Bhatti with regard to allowability of expenditure, claimed by the taxpayer, under the head "obsolete stores and spares written off" following 'questions' have been referred to me, in the capacity of a referee judge, for the resolution:--
(i) Whether the obsolete stock booked as expenditure on the basis of certificate report was accrued expenditure although no corresponding right of receiving consideration from any third party had been created?
(ii) Whether the obsolete stocks expenditure has anything whatsoever to do with section 70 of the Income Tax Ordinance when no expenditure had at all accrued and thus had not been incurred?
(iii) Whether despite the AR's admission that term accrual could not be applied to obsolete stores determined by survey, my learned bother's upholding of accrual treatment is correct?
(iv) Whether the pre-nationalizing stores becoming obsolete at some unknown point of time could be charged as an expenditure for tax year 2003?
2. Facts, in brief, which are necessary to be considered for the purposes of resolution of the present difference of opinion, are that the taxpayer in the audited financial statements for the year in appeal recognized, as expense, an amount of Rs.29,914,107 representing "obsolete stores written off" which the learned taxation officer disallowed in the amendment order dated 11-10-2004 passed under section 122(1)/(5) read with section 177 of the Income Tax Ordinance, 2001 (hereinafter 'Ordinance'). In the said amendment order, the learned taxation officer did not dispute the obsolescence of the subject stores/ spares, however, the claim was disallowed on the grounds that the stores/spares were not actually disposed of by the taxpayer during the year and thus no loss could be determined to have been actually incurred by the taxpayer that could be lawfully claimed and allowed to the taxpayer. Being dissatisfied with the treatment meted out by the taxation officer, the taxpayer preferred appeal before the learned first appellate authority who, vide impugned order dated 13-11-2007 accepted the appeal on this point and deleted the addition by observing that the claim of the taxpayer was in accordance with the method of accounting followed by the taxpayer vis-a-vis the provisions of section 70 of the Ordinance. It is this finding of the learned first appellate authority which has forced the revenue to challenge the same before this tribunal.
3. I have given earnest consideration to the submissions of the representatives of both the rival parties who have fundamentally reiterated the assertions earlier made in the entire proceedings. I have also gone through the record available before me and have keenly read the judgments proposed by the respective members of the Division Bench. The material relied upon by the parties has also been taken into account.
4. In the judgment proposed by the learned Judicial Member he has agreed with the findings of the first appellate authority and has observed as follows:-- "After perusal of the above referred observation made by the Taxation Officer we have found that the propriety of the expenditure has not been challenged by the Taxation Officer but he required the taxpayer to claim the expenditure on the actual disposal of the stores and spares. On the other hand, the learned counsel for the taxpayer has claimed that the deduction of expenditure in the tax year 2003 has been claimed on accrual basis of accounting regularly employed by the taxpayer. As on behalf of the assessee evidence has been produced that the actual disposal of the obsolete stores and spares has been subsequently taken place and the receipts in this respect has also been recognized as income, which shows the fair conduct of the taxpayer in this respect. In these circumstances of the case we find no warrant for interference in the impugned order on this issue. The appeal filed by the department is, therefore, dismissed."
5. On the hand, the learned Accountant Member (as he then was), has proposed acceptance of the departmental appeal on this issue by observing as under:-- "3. In my opinion the term accrual is an accounting term and refers to situation wherein some right has been determined in favour of one party and liability of another party. The situation herein is that the determination of valuation did not lead to determination of right of another party. That is to say that is (sic.) was a one sided affair and not a transaction and out of scope of accrual. A parallel of this accounting practice is depreciation which is allowed by operation of law and not because the expenditure has accrued. This case is different wherein no evenditure has been incurred and the unilateral reduction in income without any statutory backing has been made by booking it as an expenditure. The A.R. Argued that section 70 conceived registering of recouped expenditure and therefore amount received as consideration of obsolete stores has been booked as income in tax year 2005. 1 do not agree with learned A.R as no expenditure accrued in tax year 2003. As such addition, of sale value in 2005 does not justify booking of unaccrued expenditure in tax year 2003."
6. It is fact on record that the taxation officer, in this case, has not at all disputed the veracity of the claim on account of subject expenditure and concedes in the amendment order dated 11-10-2004 that the same was backed by a report of a qualified surveyor. The taxation never challenged the genuineness and accuracy of the said report/valuation, however, he has simply pegged the allowability of the claim with actual disposal and observed that since the subject stores/spares were not actually disposed of by the taxpayer in the year in appeal, therefore, the claim of expenditure remained inadmissible. The taxpayer, in this case, has attempted to justify the Naim on the basis of method of accounting regularly employed and in this respect placed reliance on subsection (1) and subsection (2) of section 32 of the Ordinance.
7. In my considered opinion, the answer to the proposition, involved in this appeal, is already available, in expressed terms, in the statute. Though the expenditure needs to be considered by reference to 'method of accounting regularly employed' by a taxpayer, but in this case, the relevant provisions are contained in section 35 of the Ordinance. The provisions of section 32 of the Ordinance do not directly deal with this issue. In this respect, it is imperative to note that both sections 32 and 35 are contained in Division IV of Part IV of Chapter III of the Ordinance titled -- 'Tax Accounting'. Thus, in this way, 'method of accounting' has its own relevance in the matter and hence could not be ignored rather the same is to be understood and applied in conjunction with section 35 of the Ordinance which is part and parcel of overall tax accounting pattern which the statute requires every taxpayer to follow. In this context of the scheme of law, it is now pertinent to reproduce hereunder the relevant provisions of section 35 of the Ordinance:--
35. Stock-in-trade.---(1) For the purposes of determining a person's income chargeable to tax under the head "Income from Business" for a tax year, the cost of stock-in-trade disposed of by the person in the year shall be computed in accordance with the following formula, namely: (A + B) C where -- A is the opening value of the person's stock-in-trade for the year; B is cost of stock-in-trade acquired by the person in the year; and C is the closing value of stock-in-trade for the year.
(4) The closing value of a person's stock-in-trade for a tax year be the lower of cost or net realisable value of the person's stock-in-trade on hand at the end of the year.
(7) In this section, --------------------------- "stock-in-trade" means anything produced, If we cannot live so as to be happy, let us least live so as to deserve it. manufactured, purchased, or otherwise acquired for manufacture, sale or exchange, and any materials or supplies to be consumed in the production or manufacturing process, but does not include stocks or shares; and .... [emphasis supplied] ".
8. From a plain reading of these provisions, it is clear that stores/spares constitute taxpayer's "stock-in-trade" under the law, being in the nature of consumables for production/manufacturing process. The provisions of subsection (4) of section 35 of the Ordinance compulsorily require a taxpayer to record/recognize the "stock-in-trade", available at the close of a tax year at the lower of cost or net realisable value. In other words, if the net realizable value falls short of cost of acquisition of stock-in trade, the law requires that the same is recorded at net realisable value. This legal position raises a question that in such a case where would the difference between the cost and the net realizable value be classified/recognized by a taxpayer. Of-course the difference is a loss to a taxpayer and has to be recognized in the financial statements. Accordingly, it is under these provisions of law that a taxpayer is mandated/authorized to recognize in relevant cases, as expenditure, the difference between the cost and net realizable value, which is usually denoted as "obsolete stores written off" or "provision for obsolete stores". These two nomenclatures, in other words, generally denote the recognition, as loss/expense, the difference between the cost and net realisable value, which the law clearly, unambiguously and unequivocally permits.
9. It is abundantly clear from the aforesaid provisions that disposal is absolutely irrelevant and out of context. That is so, because the provisions of law speak of closing stock-in-trade. Thus, the provision is in fact applicable to still available' and 'unsold' stock and hence the disposal has been illegally and incorrectly dragged by the taxation officer in this case. In other words, it is respect of unsold/un-disposed stock, whose net realisable value falls short of cost, that the law has provided for a deduction against income which, in this case, the taxpayer has rightfully and lawfully claimed.
Accordingly, the basis adopted by the taxation officer to deny the deduction to the taxpayer remains clearly contrary to law and is, therefore disapproved. It is in this background that the provisions of section 70 of the Ordinance, referred to by the learned counsel for the taxpayer, attain relevance, The law by virtue of these provisions ensures appropriate recoupment of expenditure as a result of sale subsequently. These provisions make sure that any subsequent recovery by a taxpayer with regard to a loss, expenditure, or deduction earlier allowed has to be included as part of income in the year in which recovery/realization occurs. Thus, the reliance of the learned counsel for taxpayer on these provisions is appropriate and fully in accordance with law.
10. Though the learned Accountant Member (as he then was) has raised certain relevant issues in the judgment proposed by him, however, he has not been able to appreciate the provisions of law in entirety, as discussed above. He has rightfully pointed out that the claim of expenditure has to has a statutory backing but he seems to have ignored the scheme embodied in section 35 of the Ordinance. Likewise, while dealing with submissions of the learned counsel for taxpayer with regard to section 70 of the Ordinance, he has observed that no expenditure accrued in tax year 2003. With all the due deference to him, I beg to differ with his views as, under the provisions of section 35 of the Ordinance, this was a legitimate expenditure in connection with which any subsequent recovery had to be dealt with under section 70 of the Ordinance, which, in this case, the taxpayer admittedly has duly complied with.
11. The upshot of this discussion is that I agree with findings recorded by the learned Judicial Member and disagree with judgment proposed by the learned Accountant Member (as he then was). The claim of expenditure on account of obsolete stores written off, for the reasons stated above, is held to be lawfully claimed by the taxpayer. The order of the first appellate authority is upheld and the departmental appeal on this point is dismissed being bereft of merit. The questions framed for my consideration and resolution of difference of opinion are answered accordingly.