' Through these cross appeals for the tax years 2003, 2004, and 2005 filed by the taxpayer and department against the impugned Order No,136 dated 20.01.2010, Order No,220 dated 13.02.2010 and Order No,70 dated 25.09.2009 have contested the findings of learned CIR(A) Peshawar on the following grounds.
Taxpayer's common grounds of appeal for tax years 2003, 2004 1.That the Commissioner can delegate power to any taxation officer, not to Deputy Commissioner (Audit), as there is no authority in the name of Deputy Commissioner (Audit) under the Income Tax Ordinance, 2001. Hence the order passed by Deputy Commissioner (Audit) is without jurisdiction and ought to be deleted.
2.That the Commissioner (Audit) can select the case of the Taxpayer under section 177(4)(d) only in addition to the provision mentioned in subsection (2) of section 177, which, has not been followed in this case, therefore, the order passed is illegal void ab initio and not sustainable in law.
3.That the Commissioner (Audit) selected the case for tax years 2003 and 2004 under consideration and according to the provision of subsection (7) of section 177 the Commissioner can select only next and following years for audit and not previous and preceding years of the taxpayer. So, the selection of tax years 2003, 2004 under section 177(4)(d) of the taxpayer is illegal and not maintainable in law.
Taxpayer's Grounds of Appeal for tax years 2005; 1.That the Commissioner shall delegate power to the Taxation Officer, not to the Deputy Commissioner of Income Tax (audit), as there is no authority in the name of Deputy Commissioner (Audit) under the Income Tax Ordinance, 2001. Hence the order passed by the Deputy Commissioner (Audit) of Income Tax is illegal, void ab initio and ought to be cancelled.
2.That the Commissioner (Audit) has selected the case of the appellant for audit under the provision of section 177(4) of the Income Tax Ordinance, 2001, without fulfilling the procedure laid down in section 177 of the Income Tax Ordinance.
3.That the words "in addition to the selection referred to in sub-section (2), the Commissioner may also select a person" used in subsection (4) are of significant importance and means that the Commissioner may select the case of person after selection is case under subsection (2) and not before that.
4. That in the present case the Commissioner has selected the case of the appellant for audit under subsection (4), without first fulfilling the conditions laid down in subsection (2) of section 177 as redundant, which is not permissible under the law, hence the selection of the tax payer for audit and as a result thereof the super structure thereon in the shape of assessment order is illegal and not maintainable in law.
5.That the marketing expenses of Rs,2,700,000/- has been added back by the assessing officer under section 21(1) of the Income Tax Ordinance, 2001 ignoring the facts that relevant amount is apparent in Bank Statements of both the payer and payee can be cross verified.
6.That in spite the fact that assessing officer as well as the CIT(A) admitted, that original vouchers were present for the purpose of verification, and that there were no specific defect/shot coming in terms of section 21(1), therefore, the add back of Rs,4,100,142/- by the assessing officer was illegal and CIT(A)'s remand back to taxation officer is against the spirit of justice as well and ought to be cancelled.
' However subsequently, learned AR of the taxpayer withdrew the grounds Nos. 3, 4, 5, 6 and 8 and redrafted these grounds as under:-- 1.That the Commissioner shall delegate power to the Taxation Officer, not to the Deputy Commissioner of Income Tax (Audit), as there is no authority in The name of Deputy Commissioner (Audit) under the Income Tax Ordinance, 2001. Hence the order passed by the Deputy Commissioner (Audit) of Income Tax is illegal, void ab initio and ought to be cancelled.
2.That the Commissioner (Audit) has selected the case of the appellant for audit under the provision of section 177(4) of the Income Tax Ordinance, 2001, without fulfilling the procedure lay down in section 177 of the Income Tax Ordinance.
3.That the words in addition to the selection referred to in subsection (2), the Commissioner may also select a person used in subsection (4) are of significant importance and means that the Commissioner may select the case of person after selection his case under subsection (2) and not before that.
' That in the present case the Commissioner has selected the case of the appellant for audit under subsection (4), without first fulfilling the conditions laid down in subsection (2) of section 177 as redundant, which is not permissible under the law, hence the selection of the tax payer for audit and as a result thereof the super structure thereon in the shape of assessment order is illegal and not maintainable in law.
5.That the marketing expenses of Rs,27,00,000/- has been added back by the assessing officer under section 21(1) of the Income Tax Ordinance, 2001 ignoring the facts that relevant amount is apparent in rank Statements of both the payers and payee can be cross-verified.
6.That in spite the fact that assessing officer as well as the CIT(A) admitted, that original vouchers were present for the purpose of verification and that there were no specific defect/short coming in terms of section 21(1), therefore, the add back of Rs,4,100,142/- by the assessing officer was illegal and CIT(A)'s remand back to taxation officer is against the spirit of justice as well and ought to be cancelled.
Department's common grounds of appeal for assessment years 2003, 2004 and 2005: 1.That the CIR(A) was not justified to delete the addition made on account of amortization to the tune of Rs,61,571,228, Rs,61,571,228/- and 23,518,992/- for assessment years 2003, 2004 and 2005 respectively.
2.While making addition under the head "amortization of land", the taxation officer recorded concrete grounds for the same, as is apparent from the assessment order.
3.That the CIR(A) on one hand, deleted the aforesaid addition and on the other hand, directed the taxation officer to correctly evaluate the claim of the taxpayer. Thus there is conflict and confusion in the verdict of the CIR(A).
4.That the taxation officer was justified in making addition under the head amortization of land as it was not allowable under the provision of section 24(11) of the Income Tax Ordinance, 2001.
2. Brief facts of the case as per record are that taxpayer/appellant is an AOP deriving income from construction and sale of shops and offices in premises known as Deans trade centre, Peshawar. For tax year 2003 taxpayer filed return declaring net income at Rs,90,04,993/-, which was revised on 30.6.2006 with a loss of (Rs,72,053,197). Similarly, for tax year 2004, return was filed declaring net income at Rs,10,817,350/-, which was later on revised and after adjustment of BF losses, accumulated loss was declared at (Rs,61,235,847/-). Likewise for tax year 2005, the return was revised and net income at Rs,24,422,113/- was declared. For all the years, the case was selected for total audit under section 177(4)(d) of the Income Tax Ordinance, 2001. During audit proceedings, the return for tax year 2004 was once again revised with a loss of (Rs,14,594,762). However, taxation officer taking into consideration the second revised return, amended the deemed assessment order under sections 122(4)/122(5) of the Ordinance and net income was assessed at Rs,46,967,526/- by making addition on account of amortization at Rs,61,571,288/-. Similar treatment was given in tax year 2004 by making addition under this account at Rs,61,571,288/- and net income was assessed at Rs,72,388,638/-. For tax year 2005, net income of taxpayer was assessed at Rs,54,741,247/- Feeling aggrieved, the taxpayer went in appeal and the learned CIR(A) deleted the addition on account of amortization in all the three years. However, it was also directed by the CIR(A) that the taxation officer should work out the correct amount as it may be less or it may be more. However, on account of addition under the head indirect expenses, the case was remanded to taxation officer with certain directions; whereas the addition on account of marketing expenses was confirmed.
3. Feeling aggrieved by the order of learned CIR(A), both the taxpayer and the department have filed these cross appeals on the foregoing grounds:--
7. We have heard the arguments of both the parties and perused the relevant orders and records made available at the time of hearing of appeals. The AR explained that under the Income Tax Ordinance depreciation is allowable on depreciable assets. The unimproved land has been excluded by the legislature from depreciable assets under section 22(15) and for the purpose of amortization from the definition of intangible assets, under section 24(11) of the Income Tax Ordinance, 2001. The depreciation on fixed assets is not only allowable under the Income Tax Ordinance but also under the international accounting standard for the reasons that the value of the assets and its useful life decreases with the passage of time. The land is the only fixed asset the value whereof instead of decrease, increases with the passage of time due to its scarcity and much more demand, therefore, neither the income tax ordinance nor the international accounting standard allows depreciation and amortization on the unimproved land retained by the taxpayer as capital asset and not as stock in trade or as allowable expenses for the purpose of determination of taxable income. The legislature wherever prohibited the allow-ability or depreciation or amortization on the land has used the word "unimproved land" which is of significance importance and need explanation for the purpose of its interpretation. The unimproved land means the land without super-structure thereon. If the property acquired is not in the shape of unimproved land the prohibited provision of the Ordinance are applicable thereto but if the property acquired is an improved land then the prohibited provisions of the Ordinance are not applicable thereto.
Assessee appeals for tax years 2003 and 2004
3. The common issue agitated in all the appeals on behalf of the taxpayer, that power could not be delegated to Deputy Commissioner and it is only Commissioner opinion which is relevant for the selection of case for audit. The issue has been settled by the larger bench of the tribunal in the case of Prime Commercial Bank v. RTO Lahore wherein it has been held that upon delegation of power any of the officer i,e, special officer, Assistant Commissioner and Deputy Commissioner can perform the function of the Commissioner. As per section 211 of the Ordinance:--
211. Power or function exercised:---(1) Where, by virtue of an order under section 210, (an Officer of Inland Revenue) exercises a power or performs a function of the Commissioner, such power or function shall be treated as having been exercised or performed by the Commissioner.
(2) The excessive of a power, or the performance of a function, of the Commissioner by (an Officer of Inland Revenue) shall not prevent the exercise of the power, or the performance of the function by the Commissioner.
' Whereas per section 210
210. Delegation.---(1) The Commissioner (subject to subsection (IA) may by an order in writing, delegate to any (Officer of Inland Revenue subordinate to the Commissioner) all or any of the powers or functions conferred upon or assigned to the Commissioner (subject to subsection (IA).) under this Ordinance other than the power of delegation.
(IA) The Commissioner shall not delegate the powers of amendment of assessment contained in subsection (5A) of section 122 to a (an officer of Inland Revenue below the rank of Additional Commissioner Inland Revenue).
(IB) The Commissioner may delegate the powers to a firm of chartered accountants (or a firm of Cost and Management Accountants) appointed by the Board, to conduct the audit of persons selected for audit under section 177. (2)An order under subsection (1) may be in respect of all or any of the persons, classes of persons or areas falling in the jurisdiction of the Commissioner.
(3)The Commissioner shall have the power to cancel, modify, alter or amend an order under subsection (1).
' While in the instant matter under appeal case was selected for audit by the Commissioner Income Tax and thereafter the Deputy Commissioner, the (Inland Revenue Officer), started proceedings, who was delegated powers by Commissioner under section 210 of the Ordinance we see no force in the argument of L/AR of the taxpayer the learned CIR(A) has rightly concluded the issue no interference on our part is warranted, hence impugned finding is confirmed and being devoid of merits tax payer appeal on this ground is rejected.
4.Regarding the addition of Rs,4,100,142 in tax year 2005 by the taxation officer, it was contended by the L/AR of the taxpayer that addition has wrongly been made. All the relevant documents have been submitted before the assessing officer, but he without any justification has made the addition. On this issue learned CIR(A) has remanded the case back to the taxation officer, though under section 129(1) the learned CIR(A) has no jurisdiction to remand the case back, but in the absence of record and evidence we are unable to give any finding on this issue. In such situation proper and fair is to remand the case back to adjudicating authority to revisit the issue in the light of evidence claimed to have been submitted at the time of adjudication, and then to decide the case in accordance to law and facts.
Assessee appeal for tax year 2005 5.Taxpayer has challenged the addition of Rs,27,00,000/- in making expenses being not routed through banking channel in accordance to provision of section 21(1) of the Income Tax Ordinance, 2001 (the Ordinance). The learned CIR(A) on examination of bank statement and other related documents found the finding of the assessing officer to be correct. Nothing new has been put forth before us to rebut the impugned, order hence it is confirmed and being without merits taxpayer appeal on this issue too is rejected.
Departmental appeals for tax years 2003, 2004 and 2005: 6.Regarding departmental appeal, common issue involved in all the years under appeal; that L/CIR(A) was not justified to delete the addition made on account of amortization to the tune of Rs,61,571,228, Rs,61571288/- and Rs,23518,992/- for tax years 2003, 2004 and 2005 respectively.
Learned DR reiterated his contention as per grounds of appeal and contended that as per section 24(11) of the Ordinance, it is not allowable on landed property, while on the other hand the L/AR stated that it is unimproved land and is actually the cost of land and which is also stock in trade and being so it is an allowable expenses. In the present matter the land has been improved, super structure over it has been built upon and it has already been sold. While he also stated that for earlier years i,e, 2001, 2002, 2002 and 2003, it has been allowed by the department under the head as commercial expediency. To support his contention the learned AR referred the following cases of law 1996 PTD 420, 1991 PTD 786.
7. In a case reported as 1991 PTD 786, on the issue of treatment of an asset as a stock in trade or capital asset held as under:-- "It is crystal clear that the surplus realized on the sale of plot by the appellant cannot be branded as an adventure in the nature of trade because the facts and circumstances discussed hereinbefore in detail and the legal position elaborated in the preceding paragraphs do not warrant such a conclusion. The sale of the plot by the appellant for special reasons has, therefore, been wrongly treated as a transaction in the nature of trade and the surplus therefore has been erroneously, assessed to tax as income from business or profession because, being a receipt of casual and non-recurring nature, it was exempt from the levy of tax in terms of clause (65) of Part I of the Second Schedule to the Ordinance."
' The Honorable Sindh High Court in its judgment reported as 2000 PTD 2407 on the issue under consideration held as under:-- "It is an admitted position that the appellant is not in the business of real estate. The consolidated plot in question was purchased in 1946 and sold nearly after 23 years. The transaction was all isolated incident. The consolidated plot and circumstances thereon was shown in the balance sheets of the appellant as a capital asset and not as stock in trade for all the past years without any dispute from the department. The circumstances in which the plot was transferred to the sister concern by acquisition of shares of the latter and withdrawal of the sanction of the shares by the controller of capital issue, thus, reversing the transaction, were also not disputed. No development work was carried out on the property. At the time of initial purchase these was no intention to trade in the property and even when the property was sold to the sister concern, he Income-tax department did not treat such transfer as an adventure in the nature of trade. In other words in 1977-78 when the sister concern had acquired the plot the Income Tax Department by not taxing such sale accepted that the original intention was not to trade in the property was as such the transaction was not an adventure in the nature of trade once that transaction was reversed the consequent sale in 1987 could not have altered the original intention of the appellant in 1964, which was not treated as an adventure in the nature of trade in 1977-78 by the Department. This would thus be a clear case of estoppels.
' The Honorable Supreme Court of the country in CIT v. Habib Bank Executors and Trustees Co. 1985 SCMR 284 has distinguished between a profits relived on sale of investments as opposed to sale of stock in trade in the present case the sale of the capital assets was admittedly not treated by the Department as a stock in trade and it could not have been. From the facts and circumstances of the matter, it was more than obvious that all the authorities fundamentally erred in assumption of jurisdiction so as to bring a surplus from the sale of a plot building as an adventure in the nature of trade. In doing so not only the Department had failed to discharge the onerous burden thrust upon it by law, the following also stood consequentially violated:-- ' Entry 50 of the Fourth Schedule of the Constitution. Section 27(2)(e)(ii) of the 1979 Ordinance: ' Central Board of Revenues Circular No,10/79, dated 1-10-1979 and hence section 8 of the 1979 Ordinance, the authoritative pronouncement of the Honourable Supreme Court in<u> C.I.T. v.
Habib Bank Executor and Trustee Co. and Julian Hoshang Dinshaw Trust v. I.T.O</u>. (cited supra).
Thus also violating Article 189 of the Constitution.
' There are a number of judgment of the upper forum on the issue under consideration citation of some of which are given herein below.
(1961) 42 ITR 197; 1975 PTD (Trib.) 6, 1988 PTD (Trib.) 354, 1989 PTD (Trib.) 460, (sic) PTD (Trib.) 191, 1989 PTD (Trib.) 233, 1989 PTD (Trib.)
150
8. In law depreciation is allowable on the capital assets and the amortization is allowable on the intangible assets not used as a stock in A trade. When an asset is used as a stock in trade by the taxpayer then the above stated provisions of depreciation or amortization are not applicable thereto and the provision of section 20(1) of the Income Tax Ordinance, which provides for deductions in computing income chargeable to tax under the head. "Income from Business" for a tax year, a deduction for any expenditure incurred by the person in the year wholly and exclusively for the purpose of business becomes applicable. Based on the above provision of law, under the doctrine of commercial expediency and commercial necessity any expenditure incurred wholly and solely for the purpose of business is deductible expense for the determination of taxable income of the taxpayer. The doctrine of "Commercial Expediency" allow for deduction of any expenditure under the accounting principle.
9.In the present case neither the land under consideration is unimproved and nor it is a capital assets but has been acquired for resale after making superstructure thereon in the shape of shops and offices and has been treated as stock in trade and for the purpose of calculation of taxable income a portion of cost thereof has been charged to direct' expenses each year. The amortization cost in the present case has not been used in the senses given in the Income Tax Ordinance, 2001, but it has been used as a nomenclature for adjustment of a part of the cost of the land over the estimated period of the project, and instead of the amortization cost any other name can be given to it in the senses it has been charged to the profit and loss account.
10.Whether the land or building is treated as stock in trade or a capital assets the taxpayer has the right to deduct the cost of the land from the sale proceeds either in one shape or in another for the determination of the business income or the capital gain respectively otherwise the taxation thereof will tantamount to tax on the proceeds of the property and not on the income from such property which is not at least the intention of the law of the land.
11.The non-acceptance of the setting off of a portion of the cost of the land to profit and loss account by the Department means that they are not accepting the land under consideration as stock in trade but a capital asset. In such situation the sale of property under consideration fall outside the powers of the Federal Legislatures to tax such a gain on the immovable property, in view of item 50 of the Fourth Schedule to 1973 Constitution, which reads as follows:--- "Taxes on the capital value of the assets, not including taxes on capital gains on immovable property."
' The taxation officer on page 7 of his order quoted that as per provision of section 21(n), any expenditure paid or payable of a capital nature is an inadmissible expense. In this respect it is to mention here that in accordance to the nature of expense for the business the cost of land is not a capital expenditure, which are explained as under; ' Capital expenditure means all those expenses incurred, which become a part of capital of the business. Capital expenditure is always been credited to the capital of the business. In this kind of business if we consider cost of land as an expense made for acquisition of asset for the business of M/s. Shahid Gul and Partners, then we should think that the same cannot be considered as an asset for the same business, and the land in nature not falls under the definition of asset for the business here in this case. Asset means, resources, tangible or intangible from which probable future economic benefit can be obtained for the business. But in this case although land remains in the name of M/s. Shahid Gul and Partners, but the right to use for the future economic benefit were transferred to the owners of the units. In fact that land i,e, as asset in kind and although remained in the name of M/s. Shahid Gul and Partners, but its future economic benefit transferred to the units holders, and cannot be considered as an asset of the business, because it has not probable future economic benefit for its business. It is quite clear from the above discussion that although in kind cost of land is a capital expenditure, but in nature expenses made for acquisition of land which could not remain as an asset for the business becomes a revenue expenditure, and can be charged in profit and loss account of the business, and section 21 is applicable hereto.
Departmental Common Ground.
12. The departmental ground for tax years 2003, 2004 and 2005 regarding deletion of Rs,615,71,228/-.
Rs,615,71,228/- and Rs,2,35,18,992/- by CIR(A) prima-facie appears to be correct, as the amortization of land is not allowable under the provisions of section 24(11) of the Income Tax Ordinance, 2001. For convenience the contents of which are reproduced as under:--- "24. Intangibles.---(1) In this section,-- "cost" in relation to an intangible, means any expenditure incurred in acquiring or creating the intangible, including any expenditure incurred in improving or renewing the intangible: ' And "Intangible" means any patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, license, intellectual property, or other like property or right, contractual rights and any expenditure that provides an advantage or benefit expenditure that provides an advantage or benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved land)."
' The taxpayer was required under the law to acquaint the department exactly with the cost of the land intangible terms reflective from the books of account and documentary evidence. This is thus mere an imagination/presumption, which is not acceptable under the prevailing law.
13. The learned AR pleaded before this Tribunal that the said land was purchased from Privatization Commission of Pakistan for a consideration of Rs,36,40,00,000/- and the said cost of land has been amortized for various years. Even if we accept the plea of the assessee that amortization be allowed as expenses as per accounting principles, even then the plea of the taxpayer stands on no legal as the property'was purchased from Privatization Commission for a consideration of Rs,36,40,00,000/- and if the amortization is taken as per 34% of saleable land/building then it should be Rs,12,37,60,000/-, out of which Rs,9,10,00,000/- was allocated during the period relevant to assessm ent year 2001-02, the balance amount for amortization should stand at Rs,3,27,60,000/- while for subsequent years 2001-2002, 2002-03 amortization has been claimed and allowed as allowable expense as the cost of land, however, it should be worked out to the extent of 34% of the land sold out for which the matter is remanded back to adjudicating authority to allow the balance cost of land at Rs,3,27,60,000/- to the subsequent years i,e, 2003, 2004 and 2005, however, while calculating the cost of land, allowed in previous years should also be taken into account.
' As result, all these appeals are disposed of as above.