MUHAMMAD JAWED ZAKARIA (JUDICIAL MEMBER).--- This appeal has been filed by the Taxpayer/ Appellate against Order No. 270/A-1 Dated 23.02.2011 passed by the learned CIT (Appeal -I), Karachi. The appellant has agitated the following grounds of appeal:--
1. That the Learned 0.T has erred in disallowing the reversal of provision for bad debts of Rs. 4.7 million. It is contended that the action of the learned T.0 is arbitrary, contrary to law and facts of the case.
2. That the learned T.O. has erred in disallowing the claim of write off of provision of bad debts of Rs.
1.4 million by observing that the same do not meet the criteria as provided under section 29 of the Ordinance. It is contended that the action of the learned T.O. is arbitrary, contrary to law and facts of the case.
3. That the learned T.O. has erred in disallowing the claim of write off of provision for obsolete store and spares of Rs. 1.9 million. It is contended that the action of the learned 0.T is arbitrary, contrary to law and facts of the case.
4. That the learned T.O. has erred in adding the interest of Rs. 771,600/- computed by him in respect of interest free loan given to the employees of the company. It is contended that the action of the learned T.O. is arbitrary, contrary to law and facts of the case. .
5. That the learned T.O. has erred in disallowing liquidated damages of Rs. 5.4 million. It is contended that the action of the learned T.O. is arbitrary, contrary to law and facts of the case.
2. Brief facts of the case as gathered from record are that the taxpayer/company incorporated as a Public Limited Company under the provisions of Companies Ordinance, 1984, engaged in the business of manufacture of industrial and medical gases, welding electrodes and marketing of medical equipment. Return for the tax year 2008 was e-filed by the taxpayer showing taxable income of Rs.616,093,703/- along with audited statements of accounts with the tax payable on such income at Rs.215,632,808/-. The case of taxpayer was selected by the DCIR for audit under section 177 of the Income Tax Ordinance, 2001 and after completion of audit proceedings the taxpayer was confronted by notice under section 122(9) of Income Tax Ordinance, 2001. After considering the reply of the taxpayer, the assessment was amended under section 122(1) of the Ordinance. Taxpayer being aggrieved with the amended order, filed appeal before the learned CIR(A), who vide his impugned order disposed of the appeal. Taxpayer again being aggrieved by the order of learned CIR(A), preferred the present appeal before this Tribunal.
3. Mr. M. Saleem Siddiqui, FCA, appeared on behalf of the taxpayer while the Department was represented by Mr. Zulfiqar Ali Memon, learned DR.
4. The learned Counsel for the taxpayer submitted that the Commissioner Inland Revenue (CIR) selected the return of the taxpayer for the Tax Year 2008 for total audit Under section 177 of the Income Tax Ordinance, 2001 (the Ordinance) and as a consequence, the Officer Inland Revenue (OIR), Unit-VI, Audit Division, Large Taxpayers Unit (LTU), Karachi concluded the audit and accordingly amended the order of the appellant (which was deemed to be finalized Under Section 120 of the Ordinance) under Section 122 of the Ordinance. Subsequently, the Commissioner Inland Revenue, Appeals-I, Karachi [CIR-(A)] upheld the decision of OIR. Number of dis allowances as well as the action of the CIR-A challenged before this Tribunal. The additions to the declared income of appellant which may be summarized as under:-- Disallowed the claim of write-off of provision for bad debts of Rs.1.4 million by observing that the same do not meet the criteria as provided under Section 29 of the Ordinance.
Disallowed the claim of write-off of provision for stores and spares of Rs.1.9 million by observing that the taxpayer has not made any effort to sell the same in the open market and realized the sale proceed of the same.
Made an addition of Rs.771,600/- on account of interest free loan given to the employees of the appellant.
Disallowed the amount of liquidity damages of Rs.5.4 million incurred by the appellant during the tax year 2008.
5. It is contended by the learned counsel for the taxpayer that the actions of the learned OIR and CIR-A is arbitrary, misconceived, without any lawful and legal justification.
6. Regarding disallowance of claim of written off of provision for bad debts of Rs. 1.4 million the learned counsel submitted that the learned OIR has erred in disallowing the write-off of provisions for bad debts of Rs.1,438,000/- by observing that the same do not meet the criteria as provided under Section 29 of the Ordinance. It is contended that the action of the learned OIR is arbitrary, contrary to the law and facts of the case.
7. He pointed out that during the year under consideration, has actually written off bad debts amounting to Rs.1,438,000/-. The same fact is evident from Note No.19 to the financial statements of the Company for the year ended 31 December, 2007. He submitted party-wise details of bad debts written off showing the name of the party, amount and the reasons of write off, he went on to submit that the same details and documentary evidences were also produced before the OIR but OIR had not paid any heed towards the same and has not rebutted the above mentioned documents. The learned counsel for taxpayer submitted that the said details which reveal that the amount of Rs.1,438,000/- is not lump sum amount being charged to the profit and loss account by appellant for the year under review and the same represents actual written off made by the appellant during the year ended 31 December, 2007. He contended that all the receivables were under dispute for so many long years and were not recovered despite of the best efforts of the taxpayer/appellant.
8. After concluding his argument on said issue, the learned counsel for taxpayer very gracefully furnished the copy of earlier decision of ATIR on the said issue for the tax years 2005 and 2009 in cross appeals No. I.T.As. Nos. 176-177/KB/2012 and I.T.As. Nos. 295-262/KB/2012 relevant quote is as under: "As regards claim of bad debts in the tax years 2005 and 2009, the quantities are though nominal neither the existence of receivable is denied from any side, yet it is quite astonishing that taxpayer is in regular transactions with all the customers. Hence we think that the claim does not fulfill all the prerequisites as mentioned in para 8 (iv) above. So the appeal of the taxpayers fail on this issue in both the tax years"
Para 8(iv): "The debt should be established as having become bad in the income year."
9. Regarding dis allowance the claim to write of provision of obsolete store spares of Rs. 1.9 million it was contended that the action of the learned OIR is arbitrary contrary the law and facts of the case. The learned counsel for taxpayer further argued that the OIR has disallowed the write off of provision for obsolete stock in trade of Rs.1,991,000/- by observing that no effort for realizing the sale value of the stock in trade by making sale in the open market have been made by the appellant. It is contended that the action of the OIR is arbitrary, contrary to law and facts of the case.
10. The AR of taxpayer urged that during the year under consideration, the taxpayer/appellant has actually written off obsolete stock in trade amounting to Rs.1,991,000/-. The same fact is evident from Note No.18 to the financial statements for the year ended 31 December 2007. He submitted that item wise details of obsolete stock in trade written off showing item, quantity and value. The same details were furnished before the OIR but he has not paid any heed towards the same. He submitted that the said details would reveal that the amount of Rs.1,991,000/- is not lump sum amount being charged to the profit and loss account by the taxpayer for the year under review.
This reflects that the above amount represents actual write off in respect of obsolete stock in trade lying useless at the ware house of the appellant for last so many years and were not in sale able condition due to leakage, wear and tear or expired, therefore, the same have been written off from the financial statements of the appellant.
11.It is further submitted that if, however, in future the above mentioned amounts written off are received by the appellant the same will be offered for tax under the applicable provisions of the Ordinance and the law has taken due care of such type of situations. The learned counsel relied on a decision reported as 1990 PTD 731 wherein the Honourable Court has held that: "Provisions of Section 25 of the repealed Ordinance takes care of such a situation viz where an amount is written off as bad debt and thus allowed as deduction under Section 23 of the repealed Ordinance, then if it is recovered subsequently it is to be treated as income from business or profession for that year".
12.He prayed that this Court may direct the OIR to allow the claim of write off on account of obsolete stock in trade as claimed by the appellant. As earlier the said issue is decided in favour of the appellant by this Tribunal.
13.He cited earlier decision of the learned ATIR on the said issue for the tax years 2005 and 2009 in cross Appeals Nos. I.T.As. Nos. 176-177/KB/2012 and IIT.As. Nos. 295-262/KB/2012, relevant quote is as under: "As far as claim of stock loss amounting to Rs. 196,000/- in the tax year 2009, we think that the claim is paltry vis-a-vis over all turnover/stock holding of the company. Therefore, the same is directed to be allowed."
14.Regarding ground obtaining to confirming the action of OIR who added the interest of Rs.
771,600/- in respect of interest free loan giving of the employees of the company, the learned counsel argued that the appellant has provided Rs.6,555,000/- to its employees as interest free transport loan. The learned OIR has estimated the interest income at the rate of 10% on such outstanding amount (wrongly considered at Rs .7,716,000/-) and added the same towards amended income. The OIR has failed to refer to any provision of the Ordinance in support of its intended action. He assumed that the OIR has shown his intention to invoke the provisions of section 108 of the Ordinance for making the addition on account of interest income by computing the interest at the rate of 10% on the outstanding amount. The provision of Section 108 of the Ordinance caters to those transactions which are incurred between associates. In the instant case, the Company has not charged any interest on loan since the same is payable on demand. Further, as per section 85(2) of the Ordinance, two persons shall not be associates solely by reason of the fact that one person is an employee of the other or both persons are employees of a third person, therefore, question of invoking the provisions of section 108 does not arise.
15.He submitted that a provisions regarding estimation of interest on interest free loan or reduced rate of interest on loan did exist for quite some time in the Income Tax Ordinance, 1979 (the repealed Ordinance). As per Subsection (7) of Section 12 of the repealed Ordinance, if an assessee had made any, loan or advance to any person on which no interest had been charged or interest had been charged at a rate less than the prescribed rate, the amount not charged or the amount equal to the interest worked out at the prescribed rate as reduced by the interest actually charged was deemed to be the income of the employee and was includable in his total income. The provision of Section 12(18) was also suspended from the assessment year 1985-86.
16.He 'urged that it is imperative here to discuss the provision of section 13 of the Ordinance. The section 13 of the Ordinance define the values of perquisites that would become the part of the salary of any employee. Therefore section 13 of the Ordinance use for computing income from salary of an employee. In the case of the appellant, who is public limited company, to which the section 13 of the Ordinance would not be applied for computing the income. Therefore, the OIR has invoked wrong section of' the Ordinance which does not give him any support to substantiate his action under the eye of law. Since there is no provision of law which discusses the status of employer for advancing loans to its employees. So only option left with the OIR to allow the amount of interest on interest free loans to be a deductible allowance instead of making it the part of the income of appellant as the Ordinance clearly avoids duplication of taxes.
17.It is further submitted that the appellant while making the tax deduction under Section 149 of the Ordinance on the salary income of the employees have included the notional interest by applying the provision of Section 13(14) of the Ordinance.
18.He stated that the closing balance of loan given to employees is Rs.6,555/- instead of the amount mentioned by him as Rs.7,716,000/- which was not the amount of loan shown as closing balance as of 31 December, 2007.
19.He prayed that earlier the said issue has been decided in favour of appellant. Hence he submitted that same may be deleted.
20.He quoted earlier decision of this ATIR on the said issue for the tax years 2005 and 2009 in cross Appeals Nos. I.T.As. Nos. 176-177/KB/ 2012 and I.T.As. Nos, 295-262/KB/2012 relevant quote is as under: "We have considered the respective arguments and have perused the order of CIR (Appeals) as well as order of DCIR and available records. We are of the view that as regards interest free loan to the employees, this Tribunal in a number of cases has held that the concession is taxable in the hands of beneficiary/employee provided the loan granted by the entity out of its retained earnings. In the instant appeal (for the tax years 2005 and 2009) we uphold the treatment meted out by IR(A) and departmental appeal fails to that extent in both the years."
21.Earlier to the order of the ATIR on the said issue, the CIR(A) vide its order No. 42 dated 30 November 2011 decided in the following manner:-- "From perusal of impugned amended order passed under section 122(5A) of the Income Tax Ordinance, 2001, it is noted that the ACIR has charged interest of Rs. 1,111,230/- on loans advanced to the employees by invoking the provisions of sections 108/109 of the Income Tax Ordinance, 2001 ignoring the appellant's AR submission that the beneficiaries, who have been allowed interest free loans have already been subjected to tax in terms of subsection (7) of section 13 of the Income Tax Ordinance, 2001. The impugned order is silent on this count. Further, the bench mark rate of interest not charged or shortly charged on the loans advanced by the appellant to its employees are liable to be taxed in the hands of employees and not to the employer. Therefore the addition made on this count is not sustainable and is hereby deleted."
22.Regarding dis allowance of which is for 5.4 million appellant has entered into a contract supply of Nitrogen and Hydrogen Gases to ICI Pakistan Limited on 02 July 1996. As per Clause 10 of the aforesaid agreement, the Company is responsible for the smooth supply of gases to its customer ICI Pakistan Limited and in case of any default the Company is responsible to pay liquidated damages at the rate of Rs.1,000,000/- per day. He contended that the taxpayer had paid the said sum to its customer in view of the fact that the supply of gas to the customer has been disturbed on the specific dates. The Company has incurred this expenditure wholly and exclusively for the purpose of business, therefore, the same has rightly been claimed as an admissible deduction against the business income of the appellant under section 20(1) of the Ordinance. He pointed out that the details of liquidated damages paid to the customer in accordance with the terms of the aforesaid agreement which comprises of reporting of shut down periods and the relevant extracts of the agreement already submitted before taxing department.
23.It is further contended the provision of section 21(g) of the Ordinance are applicable for any fine or penalty paid by the person for violation of any law or regulation. The said amount does not represent the amount paid for any breach of law. The AR also referred to a case law reported as 2012 PTD (Trib.) 1983 in support of our (sic) claim.
24.He prayed that the claim of liquidated damages to be allowed admissible deduction to the appellant or direct him to revisit the details as directed earlier by the learned ATIR.
25.He again quoted the earlier decision of the learned ATIR on the said issue for the tax years 2005 and 2009 in cross appeals No.I.T.Rs. Nos.176-177/KB of 2012 and I.T.As. Nos.295-262/KB of' 2012 relevant quote is as under:- "Another important issue of case in the appeal for tax year 2009 is the claim of liquidated damages amounting to Rs. 12.629 (M). The damages accrue due to non fulfillment of some contractual obligations. We endorse the findings of CIR(A) in this behalf to revisit the dis allowance besides directing to examine the internal evidence to ascertain the clauses, responsible factors, remedial measures adopted by the company and decision of board of director to pay this seen to the contracting party. The assessing authority has also to examine whether the transaction is at an arm's length or not. Presently, we are inclined to uphold the decision of CIR(A)."
26.Earlier to the order of the ATIR on the said issue, the CIR(A) vide its order No. 42 dated 30 November 2011 decided in the following manner:-- "From perusal of impugned amended order passed under section 122(5A) of the Income Tax Ordinance, 2001, it is noted that the ACIR has charged interest of Rs. 1,111,230/- on loans advanced to the employees by invoking the provisions of sections 108/109 of the Income Tax Ordinance, 2001 ignoring the appellant's AR submission that the beneficiaries, who have been allowed interest free loans have already been subjected to tax in terms of subsection (7) of section 13 of the Income Tax Ordinance, 2001. The impugned order is silent on this count. Further, the bench mark rate of interest not charged or shortly charged on the loans advanced by the appellant to its employees are liable to be taxed in the hands of employees and not to the employer. Therefore the addition made on this count is not sustainable and is hereby deleted."
27.The learned DR on the other hand strongly supported the order to the officer below.
28.Regarding bad debts return of it was contended by the learned DR that as the appellate as not fulfilled the requirement of section 29 of the Income Tax Ordinance, therefore, the OIR is disallowed the same. It was further contended that no efforts were made to recover the same. He in support of is contention relied on earlier judgment of Tribunal in I.T.A. No. 1399/KB/2011 Dated 14.05.2002.
29.Regarding write of slow moving spares of Rs. 99 million the learned DR submitted that in respect of the same no details of the provided by the taxpayer during the assessment proceeding therefore same were rightly disallowed by the OIR.
30.In respect of ground interest free loan provided to the employees the contention made on the basis of order of the Tribunal in the case Hong Kong Bank therefore, he contended that action of the learned OIR was quite justified as the appellant failed to provide documentary evidence to substantiate its claim.
31.We have heard the learned representatives both the parties and have perused the record of the case as well case laws.
32. In respect of dis allowance of bad debts the matter has already been decided by the Tribunal in the case 399/KB/2011 Dated 14.05.2002 in which it was held that recovery proceeding was not initiated debts could not be held to be bad as irrecoverable. Further the taxpayer has also not fulfilled the condition of section 29 of the Income Tax Ordinance, for claiming written off. The learned ATIR has held that <i>"As regards claim of bad debts in the tax years 2005 and 2009, the quantities are though nominal neither the existence of receivable is denied from any side, yet it is quite astonishing that taxpayer is in regular transactions with all the customers. Hence we think that the claim does not fulfill all the pre-requisites as mentioned in para 8 (iv) above. So the appeal of the tax;,ayer fails on this issue in both the tax years". Therefore, we have no alternate but to confirm action of the officer below dismiss the appeal of the taxpayer.
33.Regarding the claim of obsolete stock and spares for 1.9 million, the same were allowed by the Tribunal vide its order bearing No.I.T.As. Nos.176 and 177/KB/2012 and I.T.As. Nos.295 and 262/KB/2012 dated 05-11-2013, wherein it was held that <i>"As far as claim of stock loss amounting to Rs.196,000/- in the tax year 2009, we think that the claim is paltry vis-a-vis over all turnover/stock holdings of the company. Therefore, the same is directed to be allowed".
34.From perusal of above quoted extract of the Tribunal's order, it is evident that the Tribunal arrived at the conclusion by taking a lenient view. No facts or arguments have been discussed in the order. Being a petty amount as compared to turnover /stock holding for the tax year 2009, the Tribunal had allowed the amount of Rs.196,000/-. This order of the Tribunal cannot be made a precedence for claiming as a right because the Tribunal in the said judgment has totally considered the petty amount in that order for the tax year 2009, while in the instant case heavy amount of Rs.1.9 million was claimed and it cannot simply be allowed merely relying on the lenient view. The claim for this year is 1.9 million and OIR has not thrashed out properly thorough investigation/probe to ascertain the allow ability of the claim is required for arriving at proper and justifiable conclusion. We, therefore, remand back the same to the assessing officer/OIR with direction to decide the same within sixty (60) days from the receipt of this order after giving proper and adequate opportunity of being heard and after considering all the details and aspects of the case and arguments of the taxpayer and pass judicious and speaking order after application of conscious mind and also consider above discussions thereof.
35.Regarding interest free loan to the employees the controversy has been set at rest by the Tribunal vide its Judgment bearing I.T.A. No. 295/KB/2012 whereby the Tribunal considering various judgments of the Tribunal held that "We are of the view that as regards interest free loan to the employees, this Tribunal in a number of cases has held that the concession is taxable in the hands of beneficiary/employee provided the loan granted by the entity out of its retained earnings. In the instant appeal (for tax year 2005 and 2009) we uphold the treatment meted out by CIR(A) and departmental appeal fails to that extent in both the years."In this view of the matter, the addition is deleted.
36.Regarding dis allowance of liquidated damages Rs.5.4 million the issue has been remanded back by the Tribunal vide its order bearing I.T.As. Nos. 176, 177/KB/2012 and I.T.As. Nos. 295, 262/KB/2012 Dated 05.11.2013 while holding in para-16 "the claim of liquidated damages amounting to Rs.12.629(M). The damages accrue due to non fulfillment of some contractual obligations. We endorse the findings of CIR(A) in this behalf to revisit the dis allowance besides directing to examine the internal evidence to ascertain the causes, responsible factors, remedial measures adopted by the company and decision of board of director to pay this seen to the contracting party. The assessing authority has also to examine whether the transaction is at an arm's length or not. Presently, we are inclined to uphold the decision of CIR(A)." Therefore, the same is also remanded back to the DCIR with the same direction as mentioned supra.
37. Resultantly, the appeal stands disposed of as above.