M. JAWED ZAKARIA, JUDICIAL MEMBER ---Through this order . we dispose of above-titled appeals filed by the appellant against the irhpugned appellate orders No 251-Q (Tax Year 2009). 252-0 (Tax Year 2010) 253-0 (Tax , Year 2012) and 54-Q (T ax Year 2013) all dated 18.1.2016 passed by the learned CIR (Appeals Quetta)
2. Following are the grounds of appeal filed for each year in respect of appeals filed by the appellant Saindak Metal Limited of Quetta (hereinafter refers to as SML).-- Grounds of Appeal No. 434/KB/2016 (T ax Year 2009)
That the order passed by Commissioner Inland Revenue (Appeals). Queta (here inafter "CIRA"). Appellate Order No. 251-0. dated January 18, 2016 (hereinafter -impugned Order") is bad in law and on facts and is liable to be annulled
(2) That the learned CIRA erred in upholding the amended assessment orders passed under Sections 122(1)/221 of the Income Tax Ordinance. 2001 (hereinafter -Ordinance) by the Assistant Commissioner Inland Revenue Zone- I, RTO Quetta (hereinafter "ACIR' )
(3) That the learned CIRA erred in not following the binding precedent of this Tribunal set in the appellant's appeal in respect of Tax Year 2006 on identical questions of law and fii,cts which are the subject-matter of the instant appeal in respect of a dif ferent tax year (4) That the learned CIR - Appeals erred in not appreciating the fact that the Additional Commissioner IR passing the amendment order under Section 122(5A) lacked the legal authority to proceed and pass the order under Section 122(5A) of the Income Tax Ordinance, 2001.
(5) That the learned CIRA erred in not following the binding precedent of this Tribunal set in the appellant s appeal in respect of Tax Year 2006 on identical questions of law and facts which are the subject-matter of the instant appeal in respect of a dif ferent tax year
(6) That the learned CIRA erred in upholding the action of the CIR for 'treating 'annual rent from MRDL' Resources Development Company (Pvt.) Limited (hereinafter --MRDL") as 'income from other source assessable under Section 39 of the Ordinance instead of income from business and not chargeable to tax as the same had already been taxed under the final taxation regime.
(7) That the learned CIRA erred in uphold ing the action of the CIR for treating annual rent from MRDL' as income from other sources' assessable under Section 39 of the .Ordinance instead of income from business
(8) That the learned URA and the ACIR have misinterpreted the terms of the Lease Contract dated November 30..
2001 between the appellant and China Metallurgical Construction (Group) Corporation of China The findings reached by both are contrary to the express terms of the lease contract and the facts -Iney have also erred in perusing the audited accounts of the appellant (9) That the learned CIRA erred in not deciding/failed to apply an independent application of mind to the appellant's claim of depreciation of Rs. 73,97,34,778/-.
(10) That the learned CIRA erred in upholding the action of the ACIR for disallowing an amount of pre- commencement expenditure claimed as losses brought forward from earlier years The appellant has been denied relief too which it is legally entitled.
(11) The appellant craves leaves to add, amend, alter , withdraw or substitute any grounds of appeal.
Grounds of Appeal No. 436/KB/2016 (T ax Year 201 1)
(1) That the order passed by the Commis sioner Inland Revenue (Appeals). Quetta, (hereinafter "CIRA") Appellate Order No. 253-Q, dated January 18, 2016 (hereinafter "Impugned Order") is bad in law and on facts and is liable to be annulled.
(2) That the learned CIRA erred upholding the amended assessment orders passed under Section 122(5A) of the Income Tax Ordinance 2001 (hereinafter "Ordinance") passed by the Additional Commissioner Inland Revenue Zone-I, R TO, Quetta (hereinafter ACIR").
(3) That the notice under Section 122(5A) of Income Tax Ordinance, 2001, dated October 15, 2014 allowing only THREE working days for compliance was in clear violation of FBR binding instructions contained in C.N. 7(2) DT- 14/94, dated 1.2.1994 and clearly shows the bias and mala fide of the ACIR and thus depriving right of Fair Trial as provided under Article 10A-of the Constitution of Pakistan. The Order u/S. 122(5A) of the Ordinance is not sustainable in law- and the same requires to be annulled.
(4) That the CiR - Appealt erred in not appreciating the fact that the Additiona l Commissioner IR passing the amendment order under Section .122(5A) lacked the legal authority to proceed and pass the order under Section 122(5A) of the Income Tax Ordinance, 2001.
(5) That the learned CIRA erred in not following the binding precedent of this Tribunal set in the appellant's appeal- in respect of Tax Year, 2006 on identical questions of law and facts which are the subject-matter of the instant appeal in respect of a dif ferent tax year .
(6) That the learned CIRA erred in upholding the action of the CIR for treating 'annual rent from MCC Resources Development Company (Pvt.) Limited (hereinafter "MRDL"). as 'income from other source' assessable under Section 39 of the Ordinance instead of income from business and not chargeable to tax as the same had already been -taxed under the final taxation regime.
(7) That the learned CIRA erred in upholding the action of the CIR for treating 'annual rent from MRDL' as 'income from other sources' assessable under Section 39 of the Ordinance. instead of income from business.
(8) That the learned CIRA and the - ACIR have misinterpreted the terms of the Lease Contract dated November 30, 2001, between the appellant and China Metallurgical Construction (Group) Corp oration of China. The findings reached by both are contrary to the express terms of the lease contract and the facts. They have also erred in perusing the audited accounts of the appellant.
(9) That the learned CIRA erred in not deciding/failed to apply an independent application of mind to the appellant's claim of depreciation of Rs. 60,21,58,277/-.
(10) That the learned CIRA erred in not allowing the amount of losses brought forward from earlier years. The appellant has been denied relief to which it is legally entitled.
(11) The appellant craves leaves to add, amend, alter , withdraw or substitute any grounds of appeal.
Grounds of Appeal No. 437/KB/2016 (T ax Year 2012)
(1) That the order passed by Commissioner Inland Revenue (Appeals), Quetta (hereinafter "CIRA"), Appellate Order No. 54-Q, dated January 18, 2016. (hereinafter ''Impugned Order"). is bad in law and on facts and is liable to be annulled.
(2) That the learned CIRA erred in upholding the amended assessment orders passed under Section 122(5A) of the Income Tax Ordinance, 2001 (hereinafter "Ordinance") passed ,by the Additional Commissioner Inland Revenue) Zone-I, R TO, Quetta (hereinafter "ACIR").
(3) That the notice issued under Section 122(5A) of Income Tax Ordinance, 2001 dated October 15. 2014 allowing only THREE working days for compliance was in clear violation of 'FBR binding instructions contained in C.No. 7(2)DT -14/94 dated 1.2.1994 and clearly shows the bias and mala fide of the ACIR and thus depriving right of Fair Trial as provided under Article 10A of the Constitution of Pakistan. The Order u/S. 122(5A) of the Ordinance is not sustainable in law and the same requires to be annulled.
(4) That the CIR-Appeals erred in not appreciating the fact that the Additional Commissioner IR passing the amendment order under Section 122(5A) lacked the legal authority to proceed and pass the order under Section 122(5A) of the Income Tax Ordinance, 2001.
(5) That the learned CIR erred in not following the binding precedent of this Tribunal set in the appellant's appeal in respect of lax Year 2006 on identical questions of law and facts which are the suoject-matter of the instant appeal in respect of a dif ferent tax year .
(6) That the learned CIRA erred in uphold ing the action of the ACIR for treating 'profit share from MCC Resources Development Company (Pvt.) Limited (MRDL)' as 'income from other source' assessable under Section 39 of the Ordinance instead of income from busine ss and not chargeable to tax as the same had already been taxed under the final taxation regime.
(7) That the learned CIRA erred in upholding the action of the CIR for treating 'annual rent from MRDL' as 'income from other source', assessable under Section 39 of the Ordinancp instead of income from business.
(8) That the learned CIRA and the ACIR have' misinterpreted the terms of the Lease Contract dated November 30: 2001. between the appellant and China Metallurgical Construction (Group) Corporation of China. The findings reached by both are contrary to the express terms of the lease contract and the facts. They have also erred in perusing the audited accounts of the appellant.
(9) That the learned CIRA erred in not deciding/failed to apply an independent application of mind to the appellant's claim of depreciation of Rs. 54,37,78,180,
(10) That the learned CIRA erred in not allowing the amount of losses brought forward from earlier years. The appellant has been denied relief too which it is legally entitled.
(11) The appellant craves leave to add. amend, alter , withdraw or substitute any grounds of appeal.
3. The above grounds can be grouped as follows for the sake of brevity and to highlight the repetition.
During the course of hearing A.R. of the Taxpayer furnished a chart showing appeal grounds taken in tax years which is reproduced below:-- M/s.Saindak Metals Limited Appeals No. IT A 432, 433, 434, 435, 436, 437/KB/2016Tax Years Description of Grounds 2009 2010 2012 2013
1. That the order passed by Commissioner Inland Revenue--(Appeals), Quetta (hereinafter "CIRA"), Appellate Order? ? ? ?
No. (249-Q, 2007) -- (250- Q), 2008) -- (251-Q, 2009) -- (252-Q, 2010) -- (253- Q, 2012) & (54-Q, 2013)
(hereinafter "Impugned Order") is bad in law and on facts and is liable to be annulled.
2. That the learned C IRA erred in upholding the amended assessment orders passed under Section 122(5A) of the Income Tax Ordinance, 2001 (hereinafter "Ordinance") passed by the Additional Commissioner Inland Revenue) Zone-I, RTO,Quetta (hereinafter 'ACIR").? ? ?
3.That the learned CIRA erred in not appreciating the fact that passing retifiction order under section 221(1) of the Ordinance by which was also passed by CIR under section 221(1) of the Ordinance.N/A N/A N/A N/A
4. That the N/A CIR- Appeals erred in not appreciating the fact that the Additional Commissioner IR passing the amendment order under Section 122(5A)
6cked the legal authority to proceed and pass the order under Section 122(5A) of the Income Tax Ordinance, 2001.N/A ? ? ?
5. That the notice issued under Section 122(5A) of Income Tax Ordinance,2001 dated October 15, 2014 allowing onaly THREE workingN/A ? ? ? days for compliance was in clear violation of FBR binding instructions contained in C.No. 7(2)DT - 14/94.dated 1.2.1994 and clearly shows the bais and mala fide of the ACIR and thus depriving right of of Fair Trial as provided under Article 10A of the Constitution ofakistan. The Order u/S. 122(5A) of the Ordinance is not sustainable in law and the same requires to be annulled.
6. That the learned CIRA erred in not Following the binding precedent of this Tribunal set in the appellant's appeal in respect of Tax Year 2006 on identical questions of law and facts which are the subject-matter of the instant appeal in respect of a, dif ferent tax year .? ? ? ?
7. CIRA erred in upholding the action of the ACIR for treating 'profit share from MCC Resources Development Company (Pvt.) Limited (MRDL)' as 'income from other source' assessable under Section 39 of The Ordinance instead of income from business and not chargeable to tax as the same had already been taxed under the final taxation regime.? ? ? ?
8. That the learned CIRA erred in upholding the action of the CIR for treating 'annual rent from MRDL' as 'income from other source' assessable? ? ? ? under Section 39 of the Ordinance instead of income from business.
9. That the learned CIRA and the ACIR have misinterpreted the terms of the Lease Contract dated November ,30,2001, between., the appellant and China Metallurgical Construction Group)
Corporation of China. The findings _reached by both are contrary to the express terms of the lease contract and the facts. They have also erred in perusing the audited accounts of the appellant.? ? ? ?
10. That the learned 1 CIRA erred in not deciding/failed to apply an independent application of mind to the " appellant's claim of tax depreciation.? ? ? ?
11. That the learned CIRA erred in not allowing the amount of losses brought forward from earlier years.
The Appellant has been denied relief too which it is legally entitled.? ? ? ?
12. That the learned CIRA erred in upholding the action of the ACIR for Disallowing the amount of pre-commencement expenditure claimed as losses brought forward from earlier years. The appellant has been denied relief too which it is legally entitled.? ? ? ?
13. That the learned CIRA erred in upholding the action of the ACIR for including an amount of Rs.
1,17,53,426 which pertains? to -accrued mark-up on receivable" into the total amount of taxable income.
14. That the learned CIRA erred in upholding the action of the ACIR for including an amount of Rs.
1,17,53,426 which pertains to " accorued mark-up on receivable" into the total amount of taxable income.?
15. The appellant craves leave to add, amend, alter , withdraw or substitute any grounds of appeal.? ? ? ?
4. Above grounds are common in four years and directly related to the matter of taxability of 'income of appellant consisting of lease rentals and share in the after tax profits of lessee named as production rent' which the tax department considers as falling under the income head 'income from other source' of Section 39 of the Income Tax Ordinance, 2001. Whereas, the appellant contends the same to be chargeable to tax under the head 'income from business" of Section 18 of the Ordinance so as to claim more expenses/set off of losses/pre-commencement expense etc.
5. Brief facts of the case are that the tax-payer is an unlisted Public Comp any and wholly owned by the Government of Pakistan. The project of Saindak was carried out for. exploiting, mining and metallurgical processing of various metals and minerals at Saindak. Though the project was conceived way back in 1976, however , in 1996, it was completed for trail production, with the assistance of China Metallurgical Construction (Group) Corporation
(MCC) plaint installation and other infras tructure was completed in January , 1996 after trail production. Later , a pooled arrangement was devised and the project was leased out by virtue of an agreement dated November 30, 2001 between the appellant company and MCC who had been formed 100% owned company MCC Resources Development Company (Pvt.) Limited (refers to as MRDL) to take care of operation whereas the appellant who has to take charge of monitoring the overall performance of the project as a stakeholder , its further development and overall going concern. Therefore, the appellant has been remotely involved in the project and performance of the set up to ensure his share of profits. The lease arrangement is for ten years span. The current lease-term is to expire in the year 2017. A copy of the lease agreement was filed during the course of hearing as well as by the CIR(A).
6. The important feature of lease agreement is that SML is entitled to claim annual rent of US $ 5.00,00C fcr allowing MRDL to use building and project infrastructure, plant and machineries. Whereas, MRDL is allowed to claim interest and certain other claims for further putting financing in the project. Apart from above-stated priority claims. both the entities (MRDL and SML) are to share 50% of after tax profit of MRDL meaning out of actual results from Saindak project. Such 50% share of SML has been given the nomenclature of `production rent' in the lease agreement: the nomenclature used in the agreement in respect of 50% share income out of retained earnings/after tax profit of lessee. It is important to note that appellant has right to ,claim 50% share of profit as production rent which is varying, unguaranteed and subject to adjustment of losses of any year of MRDL operations. An abstract of Profit and Loss Account of MRDL for the year 2006 was filed during the course of hearing. As per profit and loss accounts it is conspicuous that amount shown in the line item 'Production rent of Saindak Metal Limited' of US $ 3,03,48,932 is equivalent to MRDL profit after tax of the same amount of US $ 3,03,48,932.
7. The key issue is that the taxpayer intends to avail the benefit of losses (including tax deprecation) which has been allowed from tax year 2002 through tax year 2006 because as per accountin g record SML had huge losses running into bullions of rupees besides seeking further relief of `pre-commence ment expenditure which is also claimable in terms of Section 25 of the Ordinance. Earlier , the assessing officer has allowed sum of Rs.
4.50.62.000 of pre-commencement expenditure out of total claim of Rs. 22,53,10,000 and has deferred pre- commencement expenditure of the balance amount of Rs. 18,02 48,000 for allow ability in the following years.
Following is the detail of losses claimed and in ultimate dispute as provided in the assessment and appeal records:-- Tax Year Business loss (EX.T ax depreciation)Tax depreciationTotal Rs.
Upto 2005 13.81,91,64..560 2,62 02.22 069 16.43,93 86 629 2006 28,12,29,188 1,06,33,74,651 1,34,46,03,839 Total 14,10,03,93,748 3,68.35,96.720 17,78.30,;;;,478
8. A factual review of the Notes provided by the Tax Department reveals that must,), focus is given to distinguish the case-laws given by the appellant in the appeal decision of the tax year 2006. It is stated that the decisions are misquoted as well as wrongly relied by the Tribunal. Opportunity of being heard was not given in the hearing of Tribunal. It is also asserted that law given on the matter of 'classifying any income under Section 39 of the Income from Other Source is more specified and deals with changeability of tax when leasing rights or exploitation of mining is given. Besides that it is also stated that levy of Workers Welfare Fund (WWF) is also one of the issue in all the year. The A.R. of the taxpayer however in the write-up/rebuttal has clarified that the Commissioner Inland Revenue Appeals has deleted the WWF levy in all the years citing reasons that the entity is Government owned and is not subjected to levy of WWF .
Now reverting to the various facets of appeals, the following are the summary of the appellant's arguments:
9. The A.R. of the taxpayer argued that in the tax assessment until tax year 2005, the Tax Department has all along accepted the appellant's contention that annual rent and production rent earned under the lease agreement is income from business assessable under Section 18 of the Income Tax Ordinance, 2001. The Company has been allowed business losses and tax depreciation claims.
10. The learned A.R. opined that it is conspicuous that the orders mention that appellant's income emanating from leasing from plant and share of profit from MRDS is assessable respectively under Sections 22 and 39 under the head of business income and income from other sources of the Ordinance. However , no conscious efforts were made to re-compute income in terms of Section 39 of the Ordinance and the declared versions of income as computed in the return income by the appellant was accepted. In the amended assessment of tax year 2007 effect of previous years' losses. was ignored till the tax year 2005 citing reasons that the same is not apparent from the return filed, however loss of Rs. 1,27,72.98.867 relating to the tax year 2006 has been allowed to the extent of Rs.
84,32,18,284 leaving balance of Rs. 43,40,80,583 to be carried forward. Similarly in the tax year 2008 the leftover balance of loss of Rs. 43.40,80,583 out of brought forward loss of tax year 2006 has been allowed. This very fact suggests that the so-called amendment in both the years was made on the perspective that the appellant has mix of income from business and income from other source and that the precise reason adjustment of loss relating to the tax year 2006 was allowed and claim of loss in the prior years was denied merely that the same could not be verified from the returns filed for these years.
11. Business income or Income from other sources A.R. vehemently submitted that appeals on the matter of whether SML has business income or income from other source should be decided based on the decision already made by the ATIR in the decision given in the tax year 2006 wherein on page 32 of the Order it is held and quoted from order as under-- "On factual plane also we find that the arguments of the learned A.R. have lot of force. Yield on exploiting of commercial assets is "Income from Busin ess" under Section 18 of the Income Tax Ordinance,' 2001 and it is not necessary that the same should be carried out by that person himself. In case of the appellant the terms of the lease contract made it clear that in substa nce it is a business collaboration arrangement whereby the lessee pays the lessor what is called 'annual rent' in the contract for exploration and extraction of minerals and use of the mine and its extraction infrastructure. In addition, the lessee. pays .the lessor 50% of the profit earned by the lessee. The lessor is entitled under the lease contract lessor is entitled to monitor progress of the project and its operation and production, get regular statements of production/disposal and other reports and access to books, etc. Both the income streams mentioned. above are clearly Income From Business u/S. 18 of the Income Tax Ordinance, 2001 and this is as per the previous history of the case, "
12. Moreover , the Tax Department is in reference before the Baluchistan High Court.
13. Legality of proceedings under the garb under Section 122(5A)
A.R. submitted that proceedings in the assessments were initiated by seeking books of accounts and accompanying records when in such' Proceedings it is presumed knowledge of matters of erroneous and prejudicial nature. Thus the assessing officer was not expected to make a fishing and roving enquiry to make proceedings a lawful proceeding. Amendment of assessment of the tax year 2006 was maligned because of such illegality and there are other reported decisions on this count. Moreover , in the tax year 2006, the matter of pre- commencement expenditure was reviewed and claim in this regard was agreed to be allowed in piece-meal. Such claim and those as could be quantified in the following years, could not come into consideration because of core issue of classification of income.
14. It has been contended by the learned D.R. that law relating to income- from other source in India is different and that is given in Income Tax Ordinan ce, 2001 is more specific. It was also argued that case-laws relied from Indian jurisdiction are not relevant. It is also viewed that earning income for granting mining rights. is specifically falling, under the income head of 'income from other source' and hence in the presence of specified law i.e. u/S. 39 and no' interpretation is required.
With due respect, it is submitted that Section 39 'income from other source is a residuary section and is applicable when other income head is not applicable. The ATIR has already viewed that appellant falls under business income hence it needs not be see alternate of other income.
The case-laws came under review also includes case-law decided in Pakistan of - C/T Muhammad Allah Bux (1977 PTD 13) which is not overruled. Further notwithstanding the fact that Indian decisions are bound on their own law yet the fact is that all the decisions are competing of application of either of income source of business income or other income. In other words, whether the source referred is business income or it should fall under the residuary source.
It needs to be appreciated that income from other source contains income from interest or profit on debt, whereas the income of banks mainly comprise from interest or profit on debt and .yet they are assessed under the business income. This is so when someone is entirely in a particular activity then it becomes its business income. It has always a debt that dealing in immovable property is outside the scope of taxation law or this is a venture in the nature of trade and overwhelming view has been that it is nature of trade and chargeable to tax though before the amendment of the term capital asset by the Finance Act. 2012 immovable property was not defined in capital assets purposefully for keeping gains on its dealing outside the scope of the tax law .
Income from allowing exploiting mining rights in the given case cannot become income from other source of SML as it has incurred substantial losses for making the project to become a viable project. The appellant has not been assured for a guaranteed income from lease of project to MRDL, it has equal risk of making loss in the project and it has assumed to plough back its surplus for the development and continuation of the project. All these facts clearly reveal that it is not merely a leasing arrangement. rather it is a joint collaboration, an implied arrangement which are prevalent in a partnership and if conc ept of business income is ignored then it will be seen extorting income of the company in the name of taxes. Heavy burden of double taxation is a serious challenge of project going concern.
It is submitted that the ATIR has already held that income earned by SML under the agreement is business income and hence such income does not need to be looked into in the residuary Section 39 e 'income from other source as it disentitle your appellant to claim huge losses as it had incurred during the initial phase of the project.
As stated earlier , actual income of the Company is its share from MRDL income, which is already affected application of presumptive and final taxation and hence the same cannot be hit again and taxes should not be charged again treating the same as income from other source.
15. We have carefully considered the rival arguments of the parties, write-up given for assistance of this Tribunal, lease agreements, case-law as mentioned in the appeal orders and assessment record Our findings on the matters are as follows:
16. We are of the opinion that ACIR embarked upon proceedings u/S. 122(51A) considering the returned version erroneous and prejudicial to the interest of revenue. We find that no fishing enquiry was made by him prior to commencement Of action under the said section. Hence, in the context of decision recently decided by this Bench vide ITAs No. 181 to 185/KB/201 1, ITAs No. 893 and 1051/KB/201 1,, ITA No. 1096/KB/2015 (M/s. Meezan Bank Ltd., Karachi Vs. CIR Zone-IV , LTU, Karachi), ITAs No. 237, 148 and 337/KB/2014 (M/s. Jaffar Brother Pvt. Ltd., Karachi Vs. CIR Zone-IV , LTU, Karachi) and ITA No. 357/KB/2014 (M/s. Ncvartis Pharma Pakistan Ltd.. Karachi Vs. CIR Zone-IV . LTU. Karachi) dated 6.2.2016. we uphold the action of ACIR and appeal of the taxpayer fails on this count.
17. The taxpayer has referred to the following observations of this Tribunal vide ITA No. 474/KB/2014, dated 23.10.2014 and stated that the issue stands decided and settled in favour of him. Department has filed reference against the said order of the Tribunal.
18. On the contrary we find that appeal was decided in favour of taxpayer on the legal issue of limitation as per last para of the referred order of this Tribunal.
As we have annulled the order on legal plane, we are not giving detail finding on this and other factual issues although the same have been any income from the hire or lease of tangible movable property argued and arguments have been summarized above.
This has already attained finality in the case of CIR, RTO, Rawalpindi Vs. Major General (R) Dr. C.M. Anwar . etc. dated 3.9.201 1 and by this Tribunal reported as 2013-107-T ax-141 (Trib. IsIbd), 2013-108-T ax-185 (Trib.), 2014- 109-T ax-127 (Trib.), 2015-1 11-Tax-104 (Trib.) and 2015-1 11-Tax-209. The presence of some remarks on the dispute of head of income are obiter dictum [mere observations] and or arguments of the A.R. which bears no binding affect. After narrating the diverse claims of classification of income, we decide the issue in the present order by elaborating conceptual difference between the two types of incomes. Theoretically we agree to the earlier remarks (obiter dictum ) of this Tribunal that one business concern can generate business income for two separate and distinct entities provided both the entities fully and equally participate in the process of decision making. We produce the relevant provisions of laws and examine where the income of taxpayer fits in.
Section 18: Income from business. --.(1) The following incomes of a person for a tax year, other than income exempt from tax under this Ordinance, shall be chargeable to tax under the head "Income from Business":--
(a) the profits and gains of any business carried on by a person at any time in the year:
(b) any income derived by any trade. professional or similar association from the sale of goods or provision of services of its members.
(c) any income from the hire or lease of tangible movable property .
(d) the fair market value of any benefit or perquisite, whether convertible into mone y or not, derived by a person in the course of, or by virtue of, a past. present. or prospective business relationship.
[Explanation --' For the purposes of this clause.. it is declared that the word 'benefit ' includes any benefit derived by way of waiver of profit on debt or the debt itself under the State Bank of Pakistan Banking Policy Department's Circular No. 29 of 2002 or in any other scheme issued by the State Bank of Pakistan.
(e) any management fee derived by a management company (including a modaraba [management company]).
(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".
[(3) Where a lessor . being a scheduled bank or an investment bank or a development finance institution or a modaraba or a leasing company has leased out any asset, .whether owned by it or not, to another person, any amount paid or payable by the said person in connection with the lease of said asset shall be treated as the income of the said lessor and shall be chargeable to tax under the head "Income from Business".] [(4) Any amount received by a banking company or a non-banking finance company . where such amount represents distribution by a mutual fund [or a Private Equity and Venture Capital Fund] out of its income from profit on debt, shall be chargeable to tax under the head "Income from Business" and not under the head "Income from Other Sources".] Section 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:
(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; [(fa) income from 'provision of amenities utilities or any other service connected with renting of building;]
(g) any annuity or pension;
(h) 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;
(i) any other amount received as considerat ion for the provision, use or exploitation of property , including from the grant of a right to explore for; or exploit, natural resources;
(j) 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
(k) 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.
(I) any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules. 2005.
(2) Where a person receives an amount referred to in clause (k) of sub-section (1) the amount shall be chargeable to tax under the head 'Income from Other Sources" in the tax year in which it was received and the following nine tax years in equal proportion.
(3) Subject to sub-section (4), any amount received as a loan, advance. deposit [for issuance of shares] or gift by a person in [a tax year] from another perso n (not being a banking company or financ ial institution) otherwise than by a crossed drawn on a bank or through a banking channel from a person holding a National Tax Number [ ] shall be treated as income chargeable to tax under the head "Income from Other Sources" for the tax year in which it was received.
(4) Sub-section:(3) shall not apply to advance payment for the sale of goods or supply of, services.
(4A) Where --.
(a) any profit on debt derived from investment in National Savings Deposit Certificates including Defence Savings Certificate paid to a person in arrears or the amount received includes profit chargeable to tax in the tax year or years preceding the tax year in which it is received; and
(b) as a result the person is chargeable at higher rate of tax than would have been applicable if the profit had been pair; to the person in the tax year to which it relates, the person may, by notice in writing to the Commissioner , elect for the profit to be taxed at the rate of tax that would have rein applicable if the profit hail been paid to the person in the tax year to which it relates.] (4B) An election under sub-section (4A) shall be made by the due date for furnishing the person's return of income for the tax year in which the amount was received or by such later date as the Commissioner may allow by an order in writing.]
(5) This section shall not apply to any income received by a pressing in a tax year that is chargeable to tax under any other head of income or subject to tax under Section 5, 6 or 7.
19. Irrespective of conflicting claims of classification, we have analyzed the nature receipt of taxpayer being governed by the agreement between lessor and lessee. Some prominent issues are:-- The two entities MRDS and SML are distinct, separate and independent of each other . Both the entities are separately taxable under the law depending upon respective nature of income. SML has no strategic, functional or operational role to play in the business set up and decision making.
SML to get fixed amount of annual lease in consideration of immovable tangible assets handed over to lessee. That in the accounts of lessee, the lease rentals were claimed as expense.
Let this portion of income be termed as Fixed Income.
SML to get fixed amount in pursuance of agreement. The IInd part of income of SML is variable depending upon after tax profits of lessee (MRDS).
That portion of income is divisible between lessor and lessee after payment of taxes on the business income of lessee whether assessable under normal law or P .T.R. besides other legal encumbrances.
All sort of expenses sustained in the business operation are claimable and allowable in the hands of lessee (MRDS) except depreciation which is legally allowable to title holders (SML).
Leasing is not regular business of taxpayer .
SML stopped doing business on its own altogether . The assets/property , ceased to have the character of business or commercial assets for SML; and become Capital Assets for SML. Thus, when SML exploited the said assets as owner . The fixed and variable income, the said income received. therefrom assumed the character of "income from other sources".
The terms of agreement between SML and MRDS empower SML to monitor and inspect working of MRDS.
This is to enable SML to monitor profi tability being a stakeholder . Otherwise there are no traces of actual business participation or possession of business premises with SML or involvement in business activity .
20. In the context of above-stated facts, role of taxpayer is noticeably dormant and non-active. So in the spirit of various kinds of income described u/S. 39 where any non-active and un-operational role still yield income. Basically these are assets and their capacity to bring financial benefits to its owner . In the instant case we consider income of SML as "passive income" arising from one source in two streams i.e. lease rental and %age of after tax profits in which he did not materially participate. Any business concern doing business categorized u/S. 39 wholly and exclusively would definitely not fit in the above analogy . In this scenario and from one source, only one entity who is operating business is earning business income assessable u/S. 18. Business participation of SML is negligible or meaningless. The income of SML is contingent upon the business operation of MRDS For the sake of arguments. if MRDS leaves the project. SML would cease to earn unless the business is leased out to any other entity or SML runs the business itself.
21. In the light of this analogy , the lease income of SML (fixed + variable) squa rely fit in Section 39 and more specifically sub-sections (f), (fa) & (i) o) Section 39 of the Income Tax Ordinance, 2001. Accordingly , the taxpayer would be entitled to expenses allowable to him, u/S. 40 of the Income Tax Ordinance, 2001.
22. Our view is further strengthened from the following judgments: 2004 PTD 735 (FCC. Kar .) ---Ss. 22 and 30---Income from lease of Flour Mills---Assessing Officer assessed such ircome as income from other sources under S. 30(2)(d) of Income Tax Ordinance. 1979---Appellate Authority took the view that such income was to be assessed as business income under S. 22 of The Ordinance---T ribunal upheld the Order-in-Original---Pleas of assesses was that although Mills were leased out, assessee continued to use wheat quotas, telephones, employed Chowkidars and pay taxes of Mills like property tax, etc.---V alidity---Letting of building was inseparable from letting of plants, machinery , godowns, machinery rooms of Flour Mills---Such plea was of no relevance to controversy involved---High Court dismissed the appeal. In this case the Hon'ble High Court, Sindh has held that:- In these two appeals question of law that needs to be considered is: 'Whether in the facts and circumstances of the case the learned. Income Tax Tribunal was right in holding that the income from lease of entire mill including plant, machinery and factory building and land, godown machinery room was to be computed under the head 'income from other source' and not from 'income from business ?'
Section 22 lays down the types of income which will be income from business or profession i.e. profits and gains of any business or profession carried on. or deemed to be carried on by the assesse e at any time during the income year. income derived by any trade, profession and similar association from specific services performed for its members and, value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of a profession. By the explanation, the speculative transactions have been made distinct and separate business from any other business carried on by the assessee. On the other hand Section 30 appears to be a residuary provision which provides that income of every kind which may be included in the total income of an assessee under this 'Ordinance shall be chargeable under the head income tax and other sources if it is not included in his total income Linder any other head sub-section (2) specific some of such income chargeable under the head of income from other sources namely dividend, interest, royalties and fees for technical services, ground rent, income from the letting of machinery , plant or furniture belonging to the assessee and also of buildings belonging to him if the letting of the building is inseparable from the letting of the said machinery , plant or furniture and, any income to which sub-section (12) of Section 12 or Section 13 applies.
"The appellant which is a limited company is the owner of a certain building constructed on Plot No. 7 on the Church Gate Reclamation in Bombay which it had fitted up with furniture and fixtur es for being run as a hotel. By a lease dated August 30, 1949, the appellant let out the building fully equipped and furnished to one Voyantizis for a term of six years certain from December 9, 1946, for running of hotel and for certa in other ancillary purposes. The lease provided for a monthly rent of Rs, 5,950 for the building and a hire of Rs. 5,000 for the furniture and fixtures.
The question in this appeal is how the income received as rent and hire is to be assessed, that is under which section of the Income Tax Act 1922, is it assessable? The appellants contends that the entire income should be assessed under Section 10 as the income of a business or. in the alternative. the income should be assessed under Section 12 as income from a residu ary source, that is, a source not specifie d in the preceding Sections 7 to 11, with the allowances respectively specified in sub-sections (3) and (4) of that section." After examining the provisions of the Income Tax Act. 1922 and the case-law . the Court observed at page 362 as follows.-- "Sub-section (4) of Section 12 must, therefore, be applicable When machinery , plant, or furniture are inseparably let alongwith the building by the owner . If sub-section (4) of Section 12 is to have any effect and it is the duty of the Court so to construe every oars of a statute that it has effect it must be held that the income arising from the setting of a building in the circumstances mentioned in it is an income coming within the residuary head. If a person cannot be assessed under Section 12 in respect of the rent of a building owned by him, sub-section (4) will become redundant there will be no case in which the allowances mentioned by it can be granted in computing actual income from a building. An interpretation producing such a result is not natural. We must, ' therefore, hold that when a building and plant. machinery or furniture are inseparably let. the Act contemplates the rent from the building as a residuary head of income."
After examining the clauses of the lease, the Court further observed at page 365:- "We therefore. think that the clauses in the lease on which the respondent relies do not indicate that the letting of the building was separate from the letting of the furniture and fixtures. We think that the lease satisfies all the conditions for the applicability of Section 12(4) and is covered by it."
Now Section 12(4) of the Income Tax Act considered by the Indian Supreme Court in the above-cited case is similar in wording to that the Section 30(2)(d) of the Ordinance The only difference is that the assessee will be entitled while in the Ordinance the provision for allowances is separately made in Section 31(1)(c). This difference in the wording of the provision of the. Act and Ordinance is not material in consequential which arise after the application of provision for assessment is identified.
Apart from the judgment of the Indian Supreme Court (supra) which we find to be applicable to the two appeals in hand and supporting the case of the Department. we also find that the leases in the present two appeals satisfies all conditions for the applicability of Section 30(2)(d) of the Ordinance as admittedly letting of the building is inseparable from the letting of plants, machineries, godowns, machinery room, etc. of the appellants flour mills. The arguments of the learned counsel for the appellants regarding wheat quota use of telephones, employment of Chowkidars and payment of taxes are of no relevance to the controversy in these two appeals.
Therefore, the question raised in the two appeals and quoted above is answered in affirmative. Resultantly , the two appeals are dismissed. 2015 PTD (T rib.) 2375 = (2014) 1 10 Tax 282 (T rib.) ---S. 15---Heads of income--Sole criterion to classify income under S. 15 of Income Tax Ordinance. 1979 was source of nature of activity and conduct where from or whereby particular income was being generated---As long as sources could be factually found, circumstances seldom had any bearing on characteristic of income.
Where an assssee carrying on busine ss of distribution of computer products . had decided to transfer the distribution to another company and derive commission from such sales with Memorandum of Association permitting such activity within its fold, commission income could be treated as income from other sources. [DCIT v F X Info Technologies P Ltd. (201 1) 10 ITR (T rib) 250 (Del)].
The assessee was in the business of running a hotel; it had leased it out for 33 years with a right of renewal for a period of another 33 yews. The question arose whether the lease income could be assessed as business income or income from other sources. The High Court upheld the concurrent findings of the appellate authority and the Tribunal that the lease income was assessable as income from other sources. [East West Hotels Ltd. v. DC1T (2009) 3.09 ITR 149 (Kar .)].
Where a cinema building was given on lease alongwith furniture, fixtures: and articles, the income was held assessable under the residuary head as income from other sources. [CIT v. Kanhere (DL) (1973) 92 ITR 353 (Born )]. Where the assessee received income from the lease of a hospital alongwith its equipment, the High Court following its earlier decision in CIT v. Chennai Properties and Investments Ltd. [(2004) 266 ITR 685 (Mad.)] held that the lease income was in the nature of income from other sources so that assessee's claim for set off the carried forward of business losses against the lease income could not be conceded [Onent Hospital Ltd. v. DCIT (2009) 315 ITR 422 (Mad.)].
Income from grant of mining rights, as income from other sources [In re. Jyoti Prasad Singh be (1921) 1 ITC 103 (Pat.); Shiva Prasad Singh v. CIT (1925) 2 ITC 57 (Pat.); Raja Bahadur Kamakshya Narain Singh v. C/T (1943) 11 ITR 513 (PC); CIT v. Raja Sri Kalyarii Prasad Deo (1945)) 13 ITR 17 (Pat.); Cossimbazar Raj Words Estate v. CIT (1946) 14 ITR 571 (Cal.); East India Prospecting Syndicate v . CEPT (1951) 19 ITR 571 (Cal.)].
Compensation received for use of business asset as income from other sources [CIT. v. Sathappa Chettiar (1951)
20 ITR 393, 398 (Mad.)], or for deprivatio n of usufruct of land [Gobardhandas Jagannath v. CIT (1955) 27 ITR 225 (Pat.)].
Gratuitous periodical payments received by a member of the family from the company in which the family was having substantial interest as income from other sources [Smt. Dhirajben R. Amin v. CIT (1968) 70 ITR. 194 (Guj.).
Also see, H.H. Maharani Shri V ijayakuverba Saheb of Morvi v . CIT (1963) 49 ITR 594, 604-5 (Born)].
Income arising from the lease of a factory as income from other sources [juggilal-Kamlapat, Bankers v. CIT (1975)
101 ITR 40 (All)].
Income from letting out the cinema theatre, as income from other sources [MX. Dar v. CIT (1982) 138 ITR 801 (All)]..
Income received after discontinuance of business as income from other sources [CIT v. Gaya Sugar Mills Ltd.
(1986) 160 ITR 933 (Pat.)].
Income from letting out printing machine ry and distillery plant as income from other sources [Dharak Ltd. v CIT (1987)163 ITR 734 (Kam.)] Income from letting out thefoundary to the assessee's subsidiary ,held assessable as other source income because assessee was not doing any business during the relevant period as income from other sources [V. Ramkrishnan Sons Ltd. v . CIT (1998) 148 CTR (Mad.) 383, 386 = (1992) 235 ITR 457, 460 (Mad.)].
Part of the composite income was held to be from other sources as income frorb other sources [CIT v. Jyotsna Rani Saha (1999.) 239 ITR 916, .918 (Cal.)].
Receipt of service charges from tenants apart from rent, held to be assessed as other source income as income from other sources [T arapore & Co. v . CIT (2003) 259 ITR 389, 390-91 (Mad.)]. The income derived out of the lease of property and furniture as in the instan t case could be considered as income from other sources. [Orient Hospital Ltd. v: Deputy CIT (2009) 315 ITR 422 (Mad.)]. A building built for cinema theater has by way of necessity to be equipped with furniture, fixtures, plant, machinery , etc., required for exhibition of films. Income by way of rent for hiring out the build ing alongwith machinery , etc., is assessable under Section 56 as income from other sources [CIT v. D.L. Kanhere (1973) 92 ITR 535 (Born.)]. Where factory sheds equipped with electrical installations were let out, it was, on facts, held that Section 56(2)(iii) was attracted as income from other sources [CIT v. Ajmera Industries P . Ltd. (1976) 103 ITR 245 (Cal.)].
23. On the matters of grounds regarding "That the learned C1RA erred in upholding the action of the ACIR for including an amount- of Rs. 19,01,55,000 which pertains to "interest" into the total amount of taxable income" and "That the learned CIRA erred in upholding the action of the ACIR for including .an amount of Rs. 1,17,53,426 which pertains to "accrued mark-up on receivab le" into the total amount of taxable income". In the year 2009 with regard taxability of income of Rs. 19,01,55,000 and Rs. 1,17,53,426 the same are remanded for re-adjudication, it is directed to allow opportunity to the appellant to present its case.
24. The appeals of the taxpayer are disposed of in the manners as indicated above.