MUHAMMAD JAWED ZAKARIA (JUDICIAL MEMBER).---The titled appeal has been filed by the Taxpayer against Order No.102/A-1 dated 4-11-2013 passed by the learned CIR(A). The appellant has agitated the following grounds of appeals:--
1. The order of the Commissioner Inland Revenue (Appeals) [hereafter referred to as CIR(A)] is bad in law and on facts of the case.
2. The CIR(A) has erred in maintaining the action of the Deputy Commissioner Inland Revenue IDCIR], misinterpreting section 67 of the Ordinance and thereby wrongly allocating finance cost of the dividend income by an incorrect application of section 67 of the Ordinance.
3. The CIR(A) has erred in not correctly applying the provisions of section 124A of the Ordinance in respect of binding nature of the order of this Honorable Tribunal ignoring the change in the character of the company on account of the Scheme of Reconstruction of Reconstitution of Business under sections 284 to 287 of the Company Ordinance,. 1981.
4. The CIR(A) has erred in maintaining the action of the DCIR holding that interest income is not chargeable to tax under the head 'Income from Business'.
5. The CIR(A) has erred in maintaining the levy of surcharge under section 4A of the Ordinance.
6. Your appellant craves leave to add, to amend or alter any of the above grounds of appeal.
2. Succinctly, the facts of the case are that the Taxpayer (hereinafter referred to as the 'appellant') is a public listed company incorporated in Pakistan under the Companies Ordinance, 1984 and its shares are quoted on Karachi, Lahore, and Islamabad Stock Exchanges. The principal activity of the company, consequent to demerger, is to manage investments in subsidiary companies and joint ventures engaged in purchasing and marketing of fertilizers, PVC resin manufacturing and marketing, control and automation, food, energy, exploration and chemical terminal and storage business. The return of income for tax year, 2011 was e-filed on 21-11-2011. The case of the taxpayer was selected for audit by the Federal Board of. Revenue by exercising powers vested under the provision of section 214C of the Income Tax Ordinance, 2011 through parametric computer ballot.
The taxpayer was also informed by the Commissioner Inland Revenue, Zone-I, Karachi through office letter No.CIR/Z-I/LTU/2012-13/1434 dated 5-3-2013. The parameters for selection of case were communicated to taxpayer through letter No. DC/AU-01/Z-I/I.Tax/2012 dated 17-3-2013. After issuing show-cause notice under section 122(9) read with section 122(1)/(5), dated 22-8-2013 and examination of reply of the appellant/details/explanation/ information on certain issues, the DCIR amended the assessm ent under section 122(1)/(5) of the Income Tax Ordinance by allocating the finance cost against dividend income under section 67 of the Income Tax Ordinance, 2001 and so also allocated the expenses against interest . income. Being aggrieved from the order of the DCIR the appellant preferred an appeal before the CIR (A) who vide order mentioned supra confirmed the treatment meted by the DCIR. Hence, the instant appeal before this Tribunal by the taxpayer.
3. At the very outset, the learned AR of appellant has assailed the order of the learned CIR(A) by agitating the confirmation of the order of the DCIR on the issue of allocation of expenses under section 67 of the Income Tax Ordinance, 2001 to dividend income. His main emphasis is with regard to tax year 2011 where a structural change was occurred in the composition for appellant's own case as it has changed its role from manufacturing entity to holding company and being holding company look after financial affairs of subsidiaries Messrs Engro Fertilizer, Engro Food, Engro Power and Engro Eximp (Pvt.) Ltd. Since the role of the appellant has changed thus previous case-law in appellant's case on this issue is no more applicable and the officer has incorrectly applied the ratio of Tribunal's decision in appellant's own case while passing the impugned order.
The learned counsel further argued that since, the role of the appellant has changed from manufacturing entity to holding company whereby the appellant has to take strategic decisions for the benefit of group of companies including holding company as well as subsidiaries and thus would be in a better bargaining position to get borrowing from banks at lesser rate for further lending to subsidiaries and thus earned profit on debt on the difference between bank borrowing and further lending to subsidiaries. This profit on debt earned by the appellant under the changed environment would be his business income and is to be taxed under section 18 as income from business. Whereas, the OIR/DCIR has treated the income from profit on debt as income from other sources taxable under section 39.
4. The learned A.R. of the appellant however, argued that no expenses were allocated for the earning of income from profit on debt. He again reiterated that the changed circumstances demand reconsideration for allocation of expenses for the earning of profit on debt. He has particularly pointed out that in the previous year surplus funds were deposited in banks for the earning of profit on debts whereas now the appellant being holding company is fully engaged in negotiation and taking crucial business decisions for placement of funds, therefore, for the earning of profit on debt, some reasonable expenses should have also been allocated. The learned AR of the taxpayer vociferously contended that CIR(A) has grossly erred in giving following finding, worded as under:-- "I have perused the order and also written submission of the appellant and noted that this changed circumstances definitely asked for expenses to be allocated for the earning of profit on debt as some administrative expenses were incurred for the earning of profit on debt. The appeal is therefore allowed and the officer is directed to allow expenses in the light of section 40 of Income Tax Ordinance, 2001 for earning of income under section 39."
5. It was further vehemently argued by the learned counsel for the appellant that exempt dividend income has accrued on the investments which were made in 1997 and 2005. No fresh investment was made during the period under review. The company therefore had not allocated finance cost against dividend income. However, specific cost of Rs.102.317 million was related to capital gain on mutual funds was allocated in the return. However, in the impugned order the entire interest expense of Rs 260.450 million has been incorrectly considered "common expenditure" and apportioned by the DCIR although mainly related to the "Engro Rupiya Certificates" launched by the Company in October 2010. This was mainly for the purpose of giving subordinate loans to the group companies.
6. The learned D.R. on the other hand, strongly supported the impugned orders of the officers below. The learned Departmental Representative contended that financial cost has been allocated against the dividend income by misapplication of section 67 of the Ordinance, 2001. It has further been vehemently argued that as per the decision in taxpayer's own case the Honorable ATIR in ITA No. 144/K13/2010 dated 1-7-2010 for the tax year, 2008 has directed to follow its decision in ITA No. 259/KB of 2010. The Honorable ATIR in ITA No. 260/KB/2010 dated 1-7-2010 for tax year, 2008 has confirmed the allocation with following observations:-- "25. While we generally agree with the treatment adopted by the department and upheld by the learned CIR(A), we are of the view that on the balance of reasonableness and regard of the nature and size of the underlying activities, apportionment of the administrative expenses on the basis of turnover would be harsh and unrealistic. Therefore, we uphold the apportionment of the financial expenses on the basis of turnover while direct the Additional Commissioner to re- examine the quantum of involvement of the administrative machinery in earning income from dividend and investment that has led to the apportionment under reference here."
7. The learned D.R. further argued that the contention of the learned counsel that in subsequent tax year, 2012, the taxpayer has itself allocated administrative/other operating expenses/financial charges against taxable dividend.
8. The learned D.R. vehemently contended that NTR receipts also include Dividend Income on the basis of which administrative/other operating expenses/financial charges has been allocated and then Dividend Income has been excluded for separate consideration. The exempt receipts declared during tax year, 2012 comprises of following:- Inter Corporate Dividend (Exempt)
1,388,019 Capital Gain Engro Foods (Exempt)
371,781 Total Exempt 1,759,800
9. The learned D.R. submitted that it is also relevant to mention that as per computation (T.Y. 2012), the taxpayer has included dividend income from Messrs Engro Vopak (Joint Venture) amounting to Rs.540,000,000 under NTR receipts against which financial charges as well administrative/operating expenses have been allocated, but in respect of inter-corporate dividend (Group Companies) the taxpayer has different view and no financial expenses apportioned to the same receipts i.e. Dividend. He urged that the law does not permit to blow hot and cold in the same breath as has been held in the cases reported as 1986 PTD (Trib.) 105, 1989, PTD (Trib.) 318, 2000 PTD (HC Lah) 478, 2009 PTD (Trib.) 1990, etc. Thus, by allocating expenses against dividend income, the taxpayer has itself approved department's action in allocating financial expenses against dividend income.
10. The learned D.R. argued that as regards the pleading and arguments of the AR of taxpayer so far as the change in the character of the company on account of the scheme of reconstruction of business under sections 284 to 287 of the Company Ordinance, 1981 and incorrectly applied provision of section 124A of the Income Tax Ordinance, 2001 and upholding of order of DCIR by CIR(A) on the issue of taxing interest income under section 39 and directidn to allow administrative expenses these contentions of the taxpayer are not on facts as well as per record for the following reasons:--
1. The taxpayer's contention that it has issued (Engro Rupiya Certificate) which is a Term Finance Certificate, thus its qualify as banking company/financial institution. The ground taken by the taxpayer is not sustainable in the eyes of law, because Terms Finance Certificate have also been issued by other corporate entities like Messrs KESC, Messrs Pakistan Refinery Ltd and M/s. Pakistan Mobile Communications Limited, but status of these company has not been changed as that of banking company or a financial institution.
2. The taxpayer company itself formerly known as Messrs Engro Chemical also issued TFCs in the year 2002, hence there is no new facts.
3. The de-merger of and change in the corporate structure was effective from January 1, 2010 (pg.21 of Annual Report 2009 (column 1 last para).
4. The report does not show that lending and borrowing was intended to be the business of re- structured company.
5. The annual report for 2012 shows the following amounts of "Advances, deposits and prepayments" (Rs. in million)
20122011 2010 2009 2008 2007 1,0242,2562,4741,372 1,156 1,078 This 'does not show any significant change. Hence there is no change in the business structure after the de-merger.
6. The value of "Property, Plant and equipment is shown as under for these years (Rs. in million)
2012 2011 2010 2009 2008 2007 132,4 135,0 129,0 110,5 58,2 23,4 87 92 88 04 93 78 This again negates the arguments related to the change in nature of business.
1. The objects clause of the "Memorandum of Association" of the company also does not give money lending as one of the principal objectives of the company which include multifarious objects listed from S. Nos.1 to 35.
2. Section 5(b) and (c) of the Banking Companies Ordinance, 1962 read as under: "5(b)- banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwi.se, and withdrawable by cheque, draft, or otherwise; "(c)- banking company means any company which transacts the business of banking in Pakistan and includes their branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan."
Section 27(1) of the Companies Ordinance reads as under:--
27. Licensing of banking companies.---(1) No individual or association or body of individuals, not being a company, shall carry on banking business in Pakistan and, save as hereinafter provided, no company shall carry on banking business in Pakistan unless it hold a licence issued in that behalf by the State Bank; and any such licence may be issued subject to such conditions as the State Bank may think fit to impose.
If the appellant is engaged in money lending and borrowing, this is done in contravention of law, as stated above.
Section 2(18) of the Companies Ordinance reads as under:-- "(18)"holding company" means a holding company as defined in section 3", Section 3 of the Ordinance reads as under:-- "3. Meaning of "subsidiary" and "holding company".--(1) For purposes of this Ordinance, a company or body corporate shall be deemed to be a subsidiary of another if::-- That other company or body corporate directly or indirectly controls, beneficially owns or hold more than fifty percent of its voting securities or other wise has power to elect and appoint more than fifty percent of its directions; or
1. The first mentioned company or body corporate is a subsidiary of any company or body corporate which is that other's subsidiary:
2. Provided that where a central depository holds more than fifty percent of the voting securities of a company, such company shall not be deemed to be a subsidiary of the central depository save where such voting securities are held beneficially by the central depository in its own behalf
(2) For the purpose of this Ordinance, a company shall be deemed to be another's holding company if but only if that other is its subsidiary."
3. The section nowhere mentions that providing of loans is part of business of holding company.
4. Since the appellant taken the plea that there is change in nature of business and hence the previous case-law was not applicable to its in the changed circumstances, the onus of proof was upon the appellant and not upon the department. EM Oil Mills case reported as 2011 PTD (HC Kar.)
2708 is was relied.
11. It is further vehemently contended by the learned D.R. that the issue of taxing interest income has already been decided by the Honorable ATIR in taxpayer's own case in I.T.A. No. 144/KB/2010 dated 1-7-2010 for the tax year, 2008 whereby at Page-6 of the said order the Honorable ATIR has observed/directed as under:-- "....Regarding earning on the deposit of those funds we find that it being "Income from Other sources" will get taxed as a separate block and cannot be let to be let off against the financial expenses which do not relate to the head of income." The Genetech case 2004 PTD (SC) 2255, the AES Pakgen (Pvt.) in C.Ps. Nos. 221.1-L and 2212-L of 2005 (SC) (unreported), Liquidator Khulna Bagerhat Railway Company 1962 PTD (SC) 415, and Khairul Hayat Amin and Company 2000 PTD (H.C. Kar.) 363 are relevant, wherein the principle that payment of interest on borrowed capital cannot be set off against interest income has been upheld.
12. Lastly, the learned D.R. submitted that the order of the learned CIR(A) applying provision of section 124A of the Income Tax Ordinance, 2011 in respect of decided issued by the Honorable ATIR suffered from no legal infirmity and calls for no further action.
13. We have heard the marathon arguments of both the representatives and have also gone through the impugned orders of the officers below as well as record of the case and case-laws cited before this bench.
14. The cardinal issue involved in this appeal revolves around the change of character, nature and source of the business of the appellant from manufacturing company to holding company. The learned counsel for the appellant lays emphasis on the issue of allocation of expenses against dividend income by incorrect application of section 67 of the Income Tax Ordinance, 2001. The relevant extract from the order of the learned CIR (A) confirming the action of the DCIR is reproduced hereunder:-- "I have considered the submission of the appellant and also perused the order. The officer has correctly relied upon the learned Tribunal's full bench decision reported as 1999 PTD 780 (Trib.) and appellant's own history in the tax year, 2008 where the Honourable. Tribunal in I.T.A. No. 144/K13/2010 dated 1-10-2010 has given the decision in the favour of the department and against the appellant that the income from profit on debt was taxable under section 39 of the Income Tax Ordinance, 2001. It is not out of place to mention here that the specific provision under the law as contained in section 18(2) also put embargo to consider profit on debt as business income unless the person's business is to earn income from the profit on debt. Since, money is not stock-in-trade of the appellant as the appellant is not involved in money lending business like financial institution hence, the action taken by the officer in the light of decision of the full bench of learned Tribunal and also appellant's own history cited supra which too is binding upon me under section 124(A) of the Income Tax Ordinance, 2001 in the light of full bench decision of the learned Tribunal in appellant's own case I.T.A. No. 329/KB/2012 dated 20-4-2013, therefore, the appeal on this ground is rejected".
"The decision of the learned Tribunal in appellant's own case is binding upon me under section 124(A) of Income Tax Ordinance, 2001 in the light of full bench decision of the learned Tribunal in appellant's own case in I.T.A. No. 329/KB/2012 dated 20-5-2013, I have no alternate but to follow the same. It is not an issue that during the year no new investment was made for which dividend was earned but the point is that the financial expenses which were incurred also relates to the previous investment in the shares from where dividend income was earned by the appellant.
Since, the appellant has established appellate history for allocation of expenses on turnover basis, therefore, by respectfully following the decision of learned Tribunal's order in appellant's own history no further deviation could be made unless the said Tribunal's order is reversed by the High Courts. The action taken in this regard is hereby confirmed."
15. There is change in the character and nature of operations of the entity and thus the main source of income for the appellant needs to be considered which neither the Deputy Commissioner Inland Revenue [DCIR] nor the Commissioner Inland Revenue (Appeals I) has appreciated. The position of the appellant company after demerger of its fertilizers business and the principal activities of the appellant which as per Note 1.1 of the Financial Statements for the year ended December 31, 2010. It is further observed by us that the company (formerly, Engro Chemicals Limited), is a public listed company incorporated in Pakistan under the Companies Ordinance, 1984 and its shares are quoted on Karachi, Lahore and Islamabad stock exchanges of Pakistan. The principal activity of the Company, consequent to demerger (Note 1.2 of the accounts), is to manage the investments in subsidiary companies and joint ventures, engaged in fertilizers, PVC resin manufacturing and marketing, control and automation, food, energy, exploration and chemical terminal and storage businesses. From this year, the main activity/business of the appellant for the period under review is only related to the management of investments in the various group companies as well as arranging of finances which is an activity in accordance with clause 3(19) of the Memorandum of Association which reflect the affairs of the company.
16.From perusal of the impugned order of the DCIR, we have found that in paragraph 1 on page 5 of the impugned order DCIR/OIR/CIR has accepted that the taxpayer derives income from profit on debt. The relevant extract from his order is reproduced as under:-- "The reference to section 18(2) is irrelevant because taxpayer's major activities are to manage investments in subsidiary companies and joint ventures who engaged in purchasing and marketing of fertilizers, and to make investments in joint ventures/other entities engaged in chemical terminal and storage, PVC Resin manufacturing and marketing, control and automation, and food and energy businesses. Thus it is correct to say that taxpayer's business is to derive income on profit on debt." (underlying is ours for emphasis )
17.From perusal of the above extract from the order of the DICR/OIR/CIR it is manifest that he has admitted the fact that the taxpayer is deriving income from profit on debt which is its main business for the particular year which is in question. However, it has been incorrectly held to be "assessable under income from other sources" as against appellant's claim that it is an income under the head "Income from Business" for the reason that:-- Since the position of change in operations, nature, character, source and the main activity of the role as Holding Company is accepted, then the action in concluding that the "Income from other sources" as residuary clause is not warranted as section 18(2) clearly prescribes as under: "Section 18. Income from business-(1)
S.18(2) Any profit on debt derived by a Person where the person's business is to derive such income shall be chargeable to tax under the head "Income from Business" and not under the head "Income from Other Sources". (Underlying is ours for emphasising)
18.From perusal of above subsection (2) of section 18 would prevail which deals with the business income derives by a person. It may be noted that this is main section if main source of income falls under section 18(2) then section 39 dealing with other source of income attains the character of residuary. However, the CIR(A) has made restrictive approach by observing that since, money is not stock-in-trade of the appellant is not involved in money lending business like financial institution. The CIR(A) has restricted the profit on debt only for financial institution. This is incorrect and restrictively construed. In arriving this conclusion, he may be apparently, as it seems that he has taken the refuge from section 151 which reads as under:-- "151-Profit on debt.---(1) Where-
(a) person pays yield on an account, deposit or a certificate under the National Saving Scheme or Post Office Savings Account;
(b) banking company [or] financial institution pays and profit on a debt, being an account or deposit maintained with the company or institution;
(c) the Federal Government, a Provincial Government or a [Local Government] pays to any person profit on any security [other than that referred on in clause (a) issued by such Government or authority; or
(d) a banking company, a financial institution, a company referred to in sub-clauses (i) and (ii) of clause (b)] of subsection (2) of section 80, or a finance society pays and profit on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower and a banking company or a development finance institution) to any person other than financial institution.] the payer of the profit shall deduct tax at the rate specified in Division I of Part III of the First Schedule form the gross amount of the yield or profit paid as reduced by the amount of Zakat, if any, paid by the recipient under the Zakat and Ushr Ordinance, 1980 (XVII of 1980), at the time the profit is paid to the recipient.
(2) This section shall not apply to any profit on debt that is subject to subsection (2) of section 152.
(3) Tax deducted under this section shall be a final tax on the profit on debt arising to a taxpayer other than a company. (emphasis supplied)
19. However, the learned CIR(A) has failed to take cognizant of subsection (3) which in unequivocal terms lays down that this section will operate as final tax regime to financial institutions who are fall other than the company meaning thereby the profit on debt would not fall under the final tax regime in case of the appellant being deriving income from normal business of profit on debt.
However, as observed by us in the preceding para that the DCIR has admitted that the "person" has been defined under subsection (46) of section 2 of the Income Tax Ordinance, 2001 as under:-- "(42) "Person" means a person as defined in section 80."
And in section 80 of the Income Tax Ordinance, 2001 the person is defined as under:- "80. Person.---(1) The following shall be treated as persons for the purposes of this Ordinance, namely:--
(a) An Individual:
(b) a company or association of persons incorporated, formed, organized or established in Pakistan or elsewhere;
(c) the Federal Government, a foreign government, a political sub-division of a foreign government, or public international organization.
(2) For the purposes of this Ordinance-
(a) "association of persons" includes a firm, a Hindu undivided family, any artificial juridical person and any body of persons formed under a foreign law, but does not include a company;
(b) company" means?
(i) a company as defined in the Companies Ordinance, 1984
(ii) a body corporate formed by or under any law in force in Pakistan;
(iii) a modaraba;
(iv) a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies;
(v) a trust, a co-operative society or a finance society [or any other society established or constituted by or under any law for the time being in force;]
(vi) a foreign association, whether incorporated or not, which the [Board] has, by general or special order, declared to be a company for the purposes of this Ordinance;
(vii) a Provincial Government ;
(viii) a Local Government in Pakistan;
(ix) a small company as defined in section.
(c) "firm" means the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all;
(d) "trust" means an obligation annexed to the ownership of property and arising out of the confidence reposed in and accepted by the owner, or declared and accepted by the owner for the benefit of another, or of another and the owner, and includes a unit trust; and
(e) "unit trust" means any trust under which beneficial interests are divided into units such that the entitlements of the beneficiaries to income or capital are determined by the number of units held.
20. A bare reading of the above quoted section shows that it has wider amplitude and used in broad sense. Further perusal reveals that the Taxpayer incorporated under the Companies Ordinance, 1984 falls under the category of "person" such as [company]. Therefore, approach of the learned CIR (A) excluding the taxpayer is not conceivable.
21. Now, we discuss the legislation on profit on debt. Under section 18(2) "Profit on debt" is chargeable to tax under the head 'Income from business' where the person's main business is to derive such income i.e. interest income/Profit on debt has been defined in section 2(46) of the Income Tax Ordinance, 2001 which is reproduced as under:--
(46) "profit on a debt" whether payable or receivable, means:-
(a) any profit, yield, interest, discount, premium or other amount, owing under a debt, other than a return of capital; or
(b) any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a credit facility which has not been utilized."
22. The other income defined under section 39 of the Income Tax Ordinance, 2001 is as under:- "39. Income from other sources.---(1) Income of every kind received by a person in a tax year, if it is not included in any other head, other than income exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head "Income from Other Sources", including the following namely:-
(a) Dividend;
(b) royalty;
(c) profit on debt;
(cc) additional payment on delayed refund under any tax law;
(d) ground rent;
(e) rent from the sub-lease of land or a building;
(f) income from the lease of any building together with plant or machinery;
(g) income from provision of amenities, utilities or any other service connected with renting of building;
(h) any annuity or pension;
(i) any prize bond, or winnings from a raffle, lottery, prize on winning a quiz, prize offered by companies for promotion of sale or cross-word puzzle;
(j) any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources;
(k) the fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property; and
(l) any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof.
(m) any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules, 2005;
23. The heads of income has been defined under section 11 of the Income Tax Ordinance, 2001 the same is reproduced as under:-- "11. Heads of income.---(1) For the purposes of the imposition of tax and the computation of total income, all income shall be classified under the following heads, namely:-- Salary; Income from Property; Income from Business; Capital Gains; and Income from Other Sources.
(2) Subject to this Ordinance, the income of a person under a head of income for a tax year shall be the total of the amounts derived by the person in that year that are chargeable to tax under the head as reduced by the total deductions, if any, allowed under this Ordinance to the person for the year under that head.
(3) Subject to this Ordinance, where the total deductions allowed under this Ordinance to a person for a tax year under a head of income exceed the total of the amounts derived by the person in that year that are chargeable to tax under that head, the person shall be treated as sustaining a loss for that head for that year of an amount equal to the excess.
(4) A loss for a head of income for a tax year shall be dealt with in accordance with Part VIII of this Chapter.
(5) The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign- source income.
(6)The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan- source income."
24. After careful examination of the above referred sections relating to heads of income and income from other sources, we have to observe that the "HEADS OF INCOME" is not the same as "SOURCES OF INCOME". For the same head of income, there can be more than one source of income. By "source" is not the "head of income" but the specific source from which a particular income arose. The source of income is relevant for determining first whether it is assessable or not, and if it is not exempt or immune from tax, the next step is to decide under which head of income it has to be assessed and relevant provisions of law are attracted. The various heads under section 11 of the Income Tax Ordinance, 2001 and the provisions of the Ordinance applicable to each of such heads of income, are mutually exclusive. Section 39 of the Income Tax Ordinance, 2001 contains provisions about the residuary head viz. "Income from other sources" and it does not come into operation until the preceding heads (a), (b), (c) and (d) mentioned in section 11 are excluded.
Where, an income can appropriately fall under section 18 as business income or any other specific head of income, no resort can be made to section 39 [income from other sources]. The words, "if it is not chargeable to income-tax under any of the heads of specified in section 11, items (a) to (e) in section 39 refer to income and not to a head of income. Section 39, therefore, deals with income which is not included under any of the preceding heads. Section 39 is residuary head of income. If an income is chargeable to tax and is not covered under other heads of income, its head of income shall be "income from other source". It is an undisputed principle that a source of income cannot be brought under the residuary head if it comes under any of the specific heads. The officers below could not have overlooked that principle it did not say that an income liable to be included in the total income is chargeable to tax as income under the residuary head if it not chargeable under the specific head under which it normally falls. The income of the appellant being profit on debt as enumerated above, is covered under the head income from business, therefore, other residuary section would not come to play.
25.Looking from this back ground we are of the view that it is not open either to the Revenue or to the taxpayer to claim that an income which clearly falls under one head should be dealt with under a different head for the purpose of this Ordinance. For determining under which head an income will fall, its commercial character is a relevant factor. Time or method and particularly "Source of Income" and nature business of the taxpayer is relevant consideration. This is decided from the nature/source of the income by applying practical notions and not by reference to treatment by the taxpayer in his books of account. An income wrongly included by the DCIR/OIR/CIR/Assessing Officer under one head can be taken out from that head, and included under the correct head, in appeal proceedings.
26.We have also examined the corresponding section 15 of the Repealed Income Tax Ordinance, 1979. A perusal of section 15 of the Income Tax Ordinance, 1979 shows that, the sole criterion to classify the income under section 15, in ordinary course, is the source and/or the nature of activity and conduct wherefrom and/or whereby the particular J income is being generated. As long as the sources can be factually found, circumstances seldom have any bearing on the characteristic of income. Ref; [CIT, Karachi v. Gelcaps (Pvt.) Ltd. Karachi 2009 PTD 331 [Kar.H.C.]. The judgment quoted by the officer reported as 1999 PTD 708 distinguishable is not applicable, inter alia among others as this relates the Repealed Ordinance, where there was no concept of a holding company, nor were any fiscal benefits were made available for formation of group companies under the Ordinance. The CIR(A) on page 4 of the Appellate order gave the remarks as under:-- "Since, money is not stock-in-trade of the appellant as the appellant is not involved in money lending business like financial institution...."
27. These remark of the CIR(A) needs clarification on account of the following:--
(A) 'Profit on debt' is not a 'Business income' for the Banking Companies only. The provision is being restrictively construed. The provision does not restrict such application. Hence, it is applicable to any person undertaking such lending business.
(B) This relates to the tax year, 2008, the finding in I.T.A. No. 260/KB/2010 dated July 1, 2010 is as under:-- "we are of the view that on the balance of reasonableness and regard to the nature and size of the underlying activities, apportionment of the administrative expenses on the basis of turnover would be harsh and unrealistic. Therefore, we uphold the apportionment of the financial expense on the basis of turnover while direct the Additional Commissioner to re-examine the quantum of involvement of the administrative machinery in earning income from dividend and investment that has led to the apportionment under reference here. Accordingly impugned order of the CIR(A) is annulled and the case is remanded back to the Additional Commissioner on the issue for de novo proceedings after affording reasonable opportunity of being heard to the Taxpayer."
28.after demerger and since the principal activities of the appellant company are different thus section 124A is not applicable for the reason that in tax year, 2008 [Financial year ended December 31, 2007], the principal activity was as under: Note 1 to the Financial Statements: "Engro Chemicals Pakistan Limited (the Company) is a public listed company in Pakistan under Companies Ordinance, 1984 and its shares are quoted on Karachi, Lahore and Islamabad stock exchanges of Pakistan. The principal activity of the Company is manufacturing, purchasing and marketing of fertilizers. The Company also has investments in joint ventures/ other entities engaged in chemical terminal storage, PVC resin manufacturing and marketing, control and automation, food and energy business." Income from business.- (1)
29.While for the tax year, 2009 accepted facts are that it also needs to be appreciated that in the tax year, 2009, the Deputy Commissioner in the order under section 124 dated May 22, 2013, after the matter being remanded back by the CIR(A), had concluded that no financial charges were allocable against the dividend income on the premise that no new investment was made during the year as was also verified from the audited financial statements. We are also of the considered opinion that the learned officers below have totally failed to appreciate the changed circumstances happened in the year under consideration whereby the status of the appellant has been changed from manufacturing to holding company. The learned officers below has taken into account and placed reliance on the order of the Tribunal bearing No. 144/KB of 2010 dated 1-7-2010 in taxpayer's own case for the previous year when the status of the appellant was that of the manufacturing company. However, for the year under consideration, the status of the appellant has been changed from the manufacturing to holding company, therefore, the reliance on the previous order of the Tribunal seems to be unjustified and not relevant for the purpose of deciding the issue and is not binding in nature as discussed by us hereinabove.
30. However, it may be reiterated that a previous decision of an Income Tax Authority will not be a bar in the following case:-- i. Where the earlier decision is clearly open to some objection: If it is a decision which is not reached after proper enquiry: and ii. If fresh evidence having a material bearing on the point decided in the previous decision is available. iii. If it is a decision as could not reasonably have been reached on the material before the authority.
31. We are also of the considered opinion that the res-judicata does not apply in income tax proceedings. It has been held by us as well as by the superior courts that each year revolved around its own facts and circumstances of the case. Each year has separate and independent unit of assessm ent, facts, circumstances, status mode, method, character, transaction, nature and activity of source and decisions be given considering the taxpayer's history for the year under consideration. The assessm ent proceedings under the Income Tax Ordinance, during an assessm ent year cannot operate as res judicata and thus every assessment has to be finalized on its own merits independent of the previous year assessment. The doctrine of res judicata does not strictly apply to income tax cases. The previous decisions or findings can be reopened if fresh facts come to light which on investigation would lead to a conclusion different from that of his predecessor. CIT, Central Zone B, Karachi v. Farrokh Chemical Industries [(1992) 65 Tax 239 (S.C.
Pak) = 1992 PTD 523]. It is now well settled that principles of res judicata cannot be applied to the cases on assessm ents under the taxing law in the same manner as it is applied in civil proceeding [CIT v. Waheeduzzamanj [(1965) 11 TAX 296 (S.C. Pak) = PLD 1965 SC 171]. The Bombay High Court held in Seth Ram Nath Daga v. CIT (1971), 82 ITR 287) that the question of res judicata need not detain us long, as there is a plethora of decisions holding that the income tax authority is not a court and the decision of an income tax authority in a prior year does not operate as res judicata in the assessm ent proceedings of the subsequent years. In Kaniram Ganpat Raj v. CIT (1941) 9 ITR
(332) ] the Patna High Court held that the Income Tax Officer is not bound by rule of res judicata or estoppel and he can reopen the assessment if fresh facts came to light which on investigation would entitle the officer to come to a conclusion different from that of his predecessor. Similarly, in Tejmal Bhojraj (1941) 22 ITR 208 (Nag) it has been held that the principle of res judicata or estoppel by record has no application and the previous finding or decision has not been arrived at after due enquiry, or the said decision is arbitrary or fresh facts come to light. In view of this, if the taxpayer in a subsequent year is able to satisfy the income tax authority that the previous finding is not correct either because it was not arrived at after due enquiry or because it is arbitrary or if the taxpayer has put before the income tax authority fresh facts/fresh light to the facts from which a different conclusion can be arrived at, then in that case the income tax authority would be justified in arriving at a different conclusion than what was arrived at in the previous proceedings.
32. From the survey of judicial decision the following points may emerge:-- Since the OIR/DCIR/CIR is not a court, the doctrine of res judicata or estoppled by record does not apply to his decisions; a finding or decision of the income tax authorities in one year may be departed from in a subsequent year. In IR v. Sneath [17 TC 149, 163 (CA)] Hanworth MR said, 'The assessm ent is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made. No doubt, a decision reached in one year would be a cogent factor in the determination of a similar point in a following year, but I cannot think that it is to be treated as an estoppel binding upon the same party for all years., The facts of impugned orders of the authorities below have no binding effect against or in favour of the taxpayer in a subsequent year, though they are relevant, (if facts, circumstances, mode, method, transaction, character, nature, source and status are the same and there is no change and the same orders laid down correct application of law and facts) the same in some cases may even constitute cogent evidence. If the department wrongly arrived at a certain finding in a past year and the taxpayer accepted it, or if the department failed to protest against a wrong departure that can give the taxpayer no claim to have the mistake repeated in a subsequent year in his favour. Conversely, the taxpayer may discover that in past year he had paid tax on an erroneous basis or had returned an income which was not assessable as income at all; such practice would not prevent him in any later year from making a return on a correct basis. Lord Atkin said in Absalom v. Talbot [26 TC 166, 192 (HL)] 'The practice of the taxpayer, acquiescing in the claim of the Inland Revenue, is of little value, when the practice is sought to be put upon a legal footing. Similarly, the department may depart from its existing practice and change its opinion, e.g. regarding the taxability of certain classes of income, and may raise inconsistent contentions in successive cases of different taxpayers. In making an assessment for a particular year it is competent to the department to hold that the taxpayer began dealing in shares in an earlier year although in the assessm ent for such earlier year the taxpayer might have been held to be an investor. However, the above view has beep qualified in some cases by saying that though the DCIR/OIR/CIR is not bound by the rule of res judicata or estoppel by record. The DCIR/OIR/CIR can amend or further amend a question previously decided if fresh facts come to light which on investigation would entitle the OIR to come to a conclusion different from the one previously reached, or if the earlier decision had been rendered without taking into consideration material evidence. In the absence such circumstances, an OIR cannot arbitrarily depart from the finding reached after due inquiry by his predecessor in office, simply on the ground that the succeeding officer does not agree with the preceding officer's finding. Where a fundamental aspect pervading through different assessm ent years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be appropriate to allow the position to be changed in a subsequent year. A third view of the matter taken in some case, which rests on the principle of justice, is that the department should not depart from its earlier decision where such departure would result in injustice to the taxpayer.
33. In view of the above section 124A of the Ordinance, 2001 is not applicable for this particular year in dispute where source is totally changed and the profit on debt being the business income of the appellant falls within the parameters of section 18(2) of the Income Tax Ordinance, 2001. In this view of the above recourse we are of the considered opinion that under section 18(2) "Profit on debt" is chargeable to tax under the head 'Income from business' where the person's main business is to derive such income i.e. interest income/ profit on, debt.
34. From the above discussion we have no scintilla of doubt in our mind that the officers below were not justified in placing reliance on the previous year judgment of the Tribunal in appellant's own case which pertained to altogether different situation and different source of income when the appellant enjoyed income from manufacturing. However, the status of the appellant company changed from manufacturing to holding company which fact was not appreciated by the officers below. We also opined that the learned officers below have totally failed to appreciate the changed circumstances and altogether difference scenario happened as contended by the counsel of taxpayer in the year under consideration whose character, nature and source have been changed. In these circumstances, with the consent and agreement of both the contesting parties, we deem it appropriate to remand the case back to the DCIR to consider afresh the nature, mode, method of the appellant's business source and so also decide the following points after providing reasonable opportunity of being heard to the appellant:-
(i) Under section 18(2) "Profit on debt" is chargeable tax under the head 'Income from business' where the person's main source from business is to derive such income i.e. interest income.
(ii) Whether 'Profit on debt' is not a 'Business income' for the Banking Companies only and the provision is being restrictively construed? Is the provision restricted such application and it is applicable to any person undertaking such lending business being "Company"?
(iii) Whether taxpayer's character, nature and source of deriving income has been changed and the taxpayer company has become holding company for this particular year as also admittedly observed and categorically finding given by DCIR on page 5 of order of under section 122(1)/(5) of the Income Tax Ordinance, 2001 [REF: Page 5 Penultimate para (1)] "Thus it is correct to say that taxpayer's business is to derive income on profit on debt.?"
35. Before parting from this judgment, we may add that the Assessing Officer/OIR/DCIR must always remember that particularly OIR/DCIR and generally even a Judge, who makes no mistake is yet to be born. As Justice Cardoze observed: "....spirit of self- research and self-reproach must come at moments to the man who finds himself summoned to the duty of shaping the progress of law". It is well settled from the chain of cantana of cases that where there is a specific head for the income in question and a specific section providing for the head, this residuary section cannot be called in aid. As the Privy Council laid down in CIT v. Basantrai Takhat Singh [1 ITR 197], the residuary head 'does not come into operation until the preceding heads are excluded'. Two propositions were laid down by the House of Lords in Salisbury House Estate Ltd. v. Fry [15 TC 266] which are equally applicable under this Ordinance, 2001 and which have been reaffirmed by the Supreme Court in Nalinikant Mody v. Narayan Row. [61 ITR 428] one may also refer 273 ITR 1, AIR 2005 SC 796, 283 ITR 432.
(i) The residuary head [income from other sources] of income can be resorted to only if none of the specific heads is applicable to the income in question.
(ii) If a certain item of income is taxable under one of the specific heads, the charge under that head exhausts the taxability of the income, and no part of such income can be brought to charge again under the residuary head.
36. The Hon'ble Supreme Court has again reiterated that it is well settled that an amount can be assessed under the head "Income from other sources" only if it cannot be brought within one or the other of the specific head of charge under Section 11 of Income Tax Ordinance, 2001. The Assessing Officer/OIR/DCIR must also realise that no human mind is so comprehensive that it can take in all aspects of the problem at one time. In fiscal matters factual arguments often clarify the issues and AO/OIR/DCIR must have intellectual humility to realise that he might have something to learn even from the junior-most counsel/ representative. He must be prepared to receive light from whatever source it come. When AO/OIR is passing/deciding assessment, naturally his own ipsi dixit is not sufficient. He must give convincing reasons and tangible concrete material for his Orders. He should be free from targeted mind. He is also expected to administer justice with an even hand. He is expected to pass speaking, judicial and judicious order with due application of conscious mind after thoroughly analysing the facts of the taxpayer giving adequate and sufficient opportunity of being heard. Lifeless repetition of a mechanical routine assessments without application of conscious and judicious mind of OIR is not expected as enshrined in the constitution or in the judge-made-law.
37. In the back drop of the above case, the orders of the officers below are vacated and the case is remanded back to the DCIR for de novo proceeding as directed in the foregoing paragraphs.
38. The appeal stands disposed of as above.