SEEMA IMRAN, JUDICIAL MEMBER --- Through this order, we intend to dispose of this appeal filed by the appellant against the Order No, 179, dated February 10, 2011 passed by the Commissioner Inland Revenue (Appeals-III), Karachi on the following grounds:---
(1) The order of the Commissioner Inland Revenue (Appeals), Zone III, Karachi (hereinafter. referred to as 'Commissioner (Appeals)) is bad in law and on facts of the case.
(2) The Commissioner (Appeals) erred in not adjudicating on the revised ground filed by the Appellant before the passing of the impugned order.
(3) The Commissioner Appeals erred in maintaining the change in the basis of allocation of common expenses into income falling under Final Tax Regime and that under Normal Tax Regime.
(3.1) The Commissioner Appeals erred in maintaining the allocation of common expenses on the basis of Gross Profits as against declared basis of allocation i,e, turnover basis as per the returned version [deemed assessed under Section 120 of the Income Tax Ordinance, 2001 (Ordinance)], despite the fuel that no negative inference was drawn on the returned version un that count.
(3.2) Without prejudice to the grounds No, 3 and 3.1 above, the Commissioner Appeals erred in maintaining allocation of alleged common expenses against the dividend income despite of .the fact that no negative inference was drawn or that count on the declared position in the returned version deemed assessed under Section 120 of the Ordinance.
(4) The Commissioner Appeals erred in maintaining the disallowance of initial depreciation on Plant and Machinery amounting to Rs, 32,275.000 done without cogent reason.
(4.1) Without prejudice to the Ground No, 4 above, the Commissioner Appeals erred in maintaining the disallowance of initial depreciation on Plant and Machinery of Rs, 32,275,000, done on the allegation that these assets, are motor vehicles not plying for hire and thus not entitled for initial depreciation under. Section 23(5) of the Ordinance.
(5) The Commissioner Appeals erred in maintaining the disallowance of initial depreciation on Plant and Machinery amounting to Rs, 5,335.000 done without any cogent reason.
(6) The Commissioner Appeals erred in maintaining the disallowance of 'Settlement of Stock in Transit and Storage Development Claim with Government of Pakistan (GOP) amounting to Rs, 151,341,000 done without any cogent reason.
(7) The Commissioner Appeals erred in maintaining disallowance of loss incurred by the company on liquidation of subsidiaries amounting to Rs, 18,275,000 done without any cogent reason.
(8) Your Appellant also seeks consequential relief of Workers' Welfare Fund liability and tax liability pertaining to Azad Kashmir operations in respect of all or any of the above grounds.
(9) Your appellant craves leaves to add to, amend or alter any of the above grounds of appeal.
2. Brief facts of the case are that the tax-payer is a public listed company engaged in the marketing of petroleum and related products. Return of total income was filed under Section 114(1) of the income Tax Ordinance, 2001, which was deemed to have been assessed u/s. 120(1) of the Income Tax Ordinance, 2001 [The Ordinance] Subsequently, the deemed order was found erroneous insofar as it was prejudicial to the interests of revenue and amended under Section 122(5A) of the Income Tax Ordinance, 2001.
3. Being aggrieved and dissatisfied with the order passed by Additional Commissioner Inland Revenue, Audit Division-1, Large Tax-payers Unit, Karachi [ACIR] the taxpayer preferred appeal before learned Commissioner Inland Revenue (Appeals-Ill) [CIR(A)] who decided the appeal of the tax-payer vide order dated 10.02.2011. Being aggrieved and dissatisfied with the order passed by- learned CIR(A), the tax-payer preferred instant appeal before the Tribunal.
4. Mr. Qadeer Ahmad, ICA, attended the proceedings on behalf of the appellant/tax-payer while Mr. Abdul Hameed, D.R. attended on behalf of respondent/ department.
5. The AR of the appellant informed the bench that certain issues in the instant appeal are similar to the issues which have recently been decided against the appellant by another division bench of AIR vide order ITA 625/KB/2012, dated March 8, 2016 for tax year 2008. However, the AR of the appellant states that he is respectfully of the view that the arguments and facts plated before that bench for the case have not been discussed in that order, therefore the AR pleaded that the ATIR's order for tax year 2008 is not based on correct facts/correct provisions of the law. The AR sought permission to indicate the errors in facts/law in that decision and if the bench then considers appropriate then the AR requested that he may please be allowed to argue the appeal.
6. On inquiry from AR that how did he determine the decision given by the division bench is .not based on correct facts/correct law, the AR as an example, informed this bench that Ground No, 3 of appeal, relating to allocation of expenses was also decided-in appeal before ATIR in tax year 2008.
The CIR(A) had confirmed the ACIR's treatment to allocate expenses under Rule 13 of the Income Tax Rules, 2002 (read with Section 67) and the Tribunal had confirmed on pages 8 and 9 of the order that Rule 13(3)(b) has correctly been applied. The AR read the Rule 13(3)(a) and 13(3)(b) and summarized that these sub-rules relate to the following:--- Rule 13(3)(a) Method of allocating common expenses to non-business advances or loans and the deductions and allowances that is incurred for a particular class of income, relatable to business including presumptive and exempt income."
Rule 13(3)(b)Method of allocating expenses to "net-gain, brokerage commission and other income."
7. The AR stated that the appellant company had allocated following expenses in its return: -business income assessable on net income basis; -presumptive income being export of petroleum products; and -presumptive income being dividend income.
8. The AR further stated that it does not earn any net-gain; brokerage or commission. Thus Rule 13(3)(a) is applicable to the appellant and it had applied Rule 13(3)(a) in its return of income whereby it had not claimed expenses related to presumptive income of the appellant (i,e, export sales and dividend income)
9. The taxation officer in the current tax year and also in tax year 2008 has not specified or stated or discussed in the orders that Rule 13(3)(a) is not applicable to the appellant. The taxation officer has not discussed or even stated anywhere in orders for both these years that Rule 13(3)(b) is applicable, however, the taxation officer has applied the formula given in Rule 13(3)(b).
10. The CIR(Appeals) in the order for tax year 2008 held that the taxation officer had correctly prorated the expenses. The CIR(Appeals) did not mention whether Rule 13(3)(a) is applicable or whether Rule 13(3)(b) is applicable. These sub-rules are not even mentioned in the appellate order.
The Tribunal in its order No, 625/KB of 2012, dated March 8, 2016 relating to tax year 2008, discussed only Rule 13(3)(b) and maintained the treatment of the taxation officer.
11. In the instant appeal, the CIR(Appeals) on page 4 of the order No, 179, dated February 2, 2011 held as under:--- "it appears to me that the arguments of learned AR have effectively been rebutted by the Additional Commissioner Inland Revenue. In my opinion the treatment meted out by the ACIR was in accordance with Rule 13(b) of the Income Tax Rules, 2002 which is reasonable basis and by same is upheld."
12. The AR stated that, the Tribunal in tax year 2008 and the CIR(Appeals) in the instant tax year has maintained that Rule 13(3)(b) is applicable to the appellant. Both these authorities have not discussed Rule 13(3)(a) anywhere in the order. The assessment orders are also silent as to which sub-rule is applicable to the appellant. The AR stated that none of the authorities have stated nor discussed why Rule 13(3)(a) is not applicable to the appellant.
13. After hearing the above, we consider that the AR has been able to justify to this Bench that perhaps a mistake had been made in the order No, 625/KB of 2012, dated March 8, 2016 relating to the appellant's tax year 2008. We, therefore, allow the AR to argue and present his case.
Grounds No, 1 & 2 Regarding confirmation of action under Section 122(5A) of the Ordinance
14. These grounds are directed towards the legality of the notice under Section 122(5A) of the Ordinance. The Ground No, 2 relates to the fact that the CIR(A) has not adjudicated in the revised ground filed before him as to whether the Commissioner or the Assistant Commissioner can pass an order under Section 122(5A).
15. The learned A.R. of the Appellant argued that the learned CIR(A) was not justified in maintaining the action of the Additional Commissioner regarding amending the assessment under Section 122(5A) of the Ordinance. Being a junior and subordinate to the Commissioner, he was not having jurisdiction to amend the deemed assessment order made by the Commissioner. It is the Commissioner, who can pass an amended order under Section 122(5A) of the Ordinance.
16. We are of .the opinion that this issue has already been settled by Honourable Sindh High Court, this Tribunal and lately by Larger Bench of this Tribunal in case of Prime Commercial Bank v, CIR Lahore against the appellant. We respectfully following the decisions of the higher appellate fora mentioned above reported case-laws 2013 PTD 747 and 2013 PTD 1012, dismiss these grounds of the appellant.
17. Nevertheless, we consider to mention here that the AR has stated that certain issues involve fishing inquiries made by the taxation officer which are out of the scope of Section 122(5A) of the Ordinance. These issues are considered in later part of the order in light of the recent decision of Larger Bench of the learned Appellate Tribunal Inland Revenue, Karachi in the case of Ws Meezan Bank Limited v. The Commissioner of Inland Revenue, Zone-IV, L.T.U., Karachi reported as ITA Nos, 181-185, 893, 1051/K13 of 2011, dated February 06, 2016.
Grounds No, 3, 3.1, 3.2 Pro-rating of expenses between Final Tax Regime (FTR) and Normal Tax Regime (NTR) income.
18. These grounds comprises of two parts as under:--- -proration of expenses to presumptive income being dividend income; and -proration of expenses to presumptive income being export sales,
19. The AR stated that the appellant had not allocated any expenditure to dividend income in its return. The reason for not allocating expenditure is that the appellant does not buy or sell any investments each year. The investments were all made in the prior year, and the appellant has these investments till tax year 2015. The AR has referred this Bent:, to note 16 to the financial statements for the year ended June 30, 2004 to corroborate this fact.
Pakistan Refinery Limited Since 1976 Pak grease Manufacturing Company (Private) LimitedSince 1976 Asia Petroleum Limited Since 1997 Pak Arab Pipeline Company (Private) Limited (PAPCO)Since 2002.
20. The AR stated that appellant has not earned any capital gains/exempt income in tax years 2003 to 2016. Since then investments were made Prior to 2002, the appellant did not incur any expenditure in the instant year for earning the dividend income.
21. Over here the AR continued to argue that the appellant in its return had allocated expenses to export sales (covered under final tax regime) on the basis of turnover consequent to the provisions of Section 67 read with Rule 13. Rule 13(3)(a) provides basis of apportionment of expenses "relatable to" business including presumptive and exempt income as under:--- Expenditure X "Cross receipts (without deduction of expenditure) "total amount of gross receipts (without deduction of expenses and net gains for the tax year of all classes of income").
22. The AR referred to the notice (reproduced on page 4 of 31 of order) wherein the taxation officer has written the amounts of export sales; dividend income and gross income. The taxation officer then stated that expenses have not been allocated in accordance with Section 67 and Rule 13; however, the taxation officer did not state how the appellant is incorrect; and what is the correct basis/procedure. Nor the revenue involved was specified in the notice.
23. After considering the appellant's reply, the taxation officer gave his conclusion/ discussed this issue on pages 8 of 31 to 11 of 31 of the order. The taxation officer however, has not slated anywhere in these 4 pages of the order: -why and how the appellant is incorrect; -what is the basis provided in. Section 67 read with Rule 13; and -what basis has he adopted in the assessment order.
24. The AR has referred to page No, 66 of the ATIR's larger bench order dated February 6, 2016; the ATIR has stated that the inquiries made by the tax department should contain two mandatory conditions as follows:--
(i) There should be an apparent error of law; or
(ii) There should be an apparent loss of revenue.
25. These two mandatory conditions have not been fulfilled in the notice or the order. Thus the treatment in the, return of income may kindly be accepted.
26. The AR continuing arguments stated that the taxation officer has allocated the expenses on the following basis (contained on page No, 30 of 31 of the order read with page No, 29 of 31 of the order:--- Percentage Expenses allocatedNormal Income Gross profit on export sales. (as per rectified order dated 25.10.2010)0.12 11,902,810 4,686,617 Disallowed- Gross profit on Local sales (allocated on turnover ratio of gross sales)94.68 9,158,628,1903,606,122,1269,019,957,385 Gross dividend received4.2 402,100,000 158,323,024 Disallowed 100 9,572,631,0003,769,131,7679,019,957,385
21. The above treatment which resulted in disallowance of Rs, 163,009,641 in addition to the expenses of Rs, 4,873,309 voluntarily disallowed/offered by the appellant for the following reasons: --
(i) The taxation officer has not accounted for 'other income' of Rs, 294,806,276 in the-above computations and has taxed the same at gross amount on page 30 of 31 of the order;
(ii) The taxation officer has not matched like with like i,e, gross profit focal sales and gross profit on export sales has been considered along-with gross receipts of dividend.
Rule 13(3)(a) provides that "gross receipts" (without deduction of expenditures) is to be taken.
28. The AR pleads that in view of the above, the treatment as per the return, which is in conformity with Rule 13(3)(a) may kindly be accepted.
29. CIR(A) has accepted the treatment of ACIR with the following observations on page No, 4 of his order dated February 10, 2011:-- "It appears to me that the arguments of learned AR have effectively been rebutted by the.
Additional Commissioner Inland Revenue. In my opinion the, treatment meted out by the ACIR was in accordance with rule 13(b) of the Income Tax Rules, 2002 which is reasonable basis and by same is upheld."
30. AR stated that in light of the above discussion, Rule 13(3)(b) is not applicable to the appellant since the said Rule applies to "Net gain, brokerage, commission and other income is to be taken into account on turnover of such transactions and income shall be compared with gross profit from business." The appellant does not earn any brokerage or commission, thus Rule 13(3)(a) is applicable to the appellant.
31. The AR continued to argue that how did the CIR(Appeals) find out that the ACIR had applied Rule 13(3)(b) since it is nowhere written in the notice or in the assessment order. The learned AR has read the notice and the entire discussion of the ACIR in the assessment order and then the AR stated that Rule 13(3)(a) or 13(3)(b) have not been written or mentioned anywhere The AR continued that in both the notice and the assessment order it has been stated that Section 67 read with Rule 13 has to be applied on a reasonable basis. The AR stated that the appellant agrees that Section 67 read with rule 13 has to be applied and therefore for allocating expenses to presumptive income representing export sales, it disallowed in its return expenses by applying the basis contained in Rule 13(3)(a) on the export sales, The AR reiterates that Rule 13(3)(a) is applicable to the appellant and has thus requested that the treatment adopted by the appellant in its return may please be accepted.
32. The learned DR has argued that the taxation officer had correctly applied Section 67 read with Rule 13. On enquiry from this Bench as to which sub-rule 13(3)(a) or sub-rule 13(3)(b) is applicable to the appellant the DR responded that Rule 13(3) is applicable.
33. On another enquiry from the learned DR as to why the appellant was not confronted in the notice the 'apparent error of the law' or the revenue involved: and why this error has also not been discussed anywhere in the order, The DR contended that the notice and the order are correct as per the stance of the tax department
34. When the DR's attention was drawn by this Bench to the Tribunal's Larger Bench decision dated February 6, 2016 wherein it has been held that the enquiries made by the tax department should contain two mandatory conditions being 'there should be an 'apparent error of the law; and 'there should be an apparent' loss of revenue'. The DR accepted that these conditions have not been fulfilled, however, the DR stated that the department is contesting the Tribunal's decision at the High Coat', thus the department's contention remains the same as earlier.'
35. We have gone through the arguments placed before us by both AR and DR. It is apparent and as also acknowledged by the DR during the hearing, from the notice and order issued under Section 122(5A) of the Ordinance, that the tax department has not mentioned anywhere the 'apparent error of law' or the apparent loss of revenue'. As far as Rule 13 is concerned, the notice or the order has not discussed why rule 13(3)(a) is not applicable and why rule 13(3)(b) is applicable.
We are unable to understand how can expense be prorated without referring to Rule 13(3)(a) or 13(3)(b) since the basis of proration is given in the respective sub-rule (a) and sub-rule (b) of Rule 13(3). Rule 13(3) without reference to sub-rules does not itself gives any basis for proration. It is strange as to, how the CIR(Appeals) concluded that Rule 13(3)(b) has been correctly applied by the ACIR since this Rule 13(3)(b) is not written anywhere in the notice or the assessment order.
Since the facts of the instant case relate to presumptive income i,e, export sales and dividend income, fact accepted by the DR during the hearing, the provisions of rule 13(3)(a) squarely apply to the appellant.
36. Notwithstanding the above, it seems strange that the appellant had not allocated expenses under Rule 13(3)(a) of the presumptive income representing dividend income, it would be justified if we direct the taxation officer to allocate expenses under Rule 13(3)(a) on gross turnover basis on the presumptive income representing dividend income. This proration would be in addition to that already done by the appellant under Rule 13(3)(a) in its return on the presumptive income representing export sales.
Ground Nos, 4, 4.1 and 5
37. The Ground Nos, 4, 4.1 and 5 relate to disallowance of initial depreciation on plant and machinery amounting to Rs, 32,275,000 and Rs, 5,335,000 respectively.
38. The AR of the appellant stated that the disallowance in these years is not being pressed, however, the AR has requested that directions may kindly be issued so that normal depreciation on the increased written down values is allowed in subsequent years. The DR informed the bench that these grounds were decided against the appellant by the tribunal in tax year 2008.
39. We consider that the request of the AR is reasonable, hence we dismiss these grounds as not being pressed, however the ACIR is directed to allow normal depreciation on the increase WDV in subsequent years.
Ground No, 6 Settlement of Stock in Transit and Storage Development claim with Government of Pakistan.
40. The AR stated that the assessing officer in, the notice reproduced on page 16 of 31 of the order /had required the appellant to show-cause as under:-- "As per computation of 'income, you have claimed Settlement of stock in transit and storage development claimed with GOP at Rs, 151.341 (M) as admissible expenses against income assessable under the normal law. The same is not allowable under the law and needs to be disallowed and added back to your income."
41. After considering the appellant's response, disallowance was made with the following observations:--- "The reply of the counsel of the tax-payer has been examined and not found tenable under the law. The amount was receivable from the Government of Pakistan and therefore, its writing off/adjustment against payables is not in accordance with the provisions of law. Therefore, settlement of Stock in transit and storage development claimed with GOR at Rs, 151.341 (M) is disallowed and added back to the income of the tax-payer "
42. The AR contended that this show-cause represents a fishing and roving inquiry. The ACIR was not aware at time of issuing notice, of the Sector under which it was to be disallowed.
43. Notwithstanding the above, the AR submitted the copy of the agreement which is made between FSO and the Government of Pakistan (Ministry of Petroleum & Natural Resources) through contracts between them were terminated and in consequence of this settlement certain dues were written off by the appellant.
44. On the other hand, the DR contended that this claim cannot be substantiated and be disallowed under the provisions of the law. However, the DR failed to respond that as to why no provision of law was mentioned in the notice while issuing notice to the appellant under Section 122(5A) of the Ordinance. The DR countered that this has been disallowed in substance and mere non-provision of law in the notice does not validate the claim made by the appellant in is return.
45. We have considered arguments of both AR and DR. We are of the point of view that the taxation officer has not considered the true essence of Section 122(5A) of the Ordinance while issuing show- cause notice to the appellant. This matter has recently been upheld by the Larger Bench of the Appellate Tribunal Inland Revenue in the case of M/s. Meezan Bank Limited ITA Nos, 181-185, 893, 1051/KB of 2011, dated February 6, 2016, the Hon'ble Tribunal has held that the taxation officer is empowered to conduct inquiries under Section 122(5A) only where there is apparent illegality or error of law is evident from the deemed assessment under Section 120 or 122 of the Ordinance and there is apparent loss of revenue. In the above notice, both criteria mentioned by the learned Tribunal are not met, that is:
46. From the plain reading of the show-cause notice, it is very clear that the officer was not sure under which provision of law the claim is not allowable under the Ordinance. The officer has only touched one legal requirement of Section 122(5A) i,e, he has only referred to the loss of revenue in his notice thus other legal requirement i,e, erroneousness and illegality which was required to be highlighted in missing. In view of this legal defect order is not sustainable, thus placing reliance on the decision of the larger bench of ATIR, the disallowance made by the ACIR on account of 'Settlement of stock in transit and storage development claim with Government of Pakistan' is here deleted.
Ground No,,7.
Loss on liquidation of subsidiaries
47. The AR stated that the assessing officer in the show-cause notice dated June 8, 2010 framed under Section 122(9)/122(5A) of the Income Tax Ordinance, 2001 had required the appellant to show cause as under:-- "As per computation of income, you have claimed amount due from Subsidiaries written off on their liquidation amounting to Rs, 18.275 (M) us. admissible expense against income covered under normal law. The same is not allowable under the law and needs to be disallowed and added back to your income."
48. The AR contended that the ACIR neither in his notice nor in his' order mentioned any specific error of law which has been violated by the tax-payer. The AR added that the ACIR had no information to decide whether or not such loss is capital or revenue in nature nor did the ACIR state the Section under 'which the claim could be disallowed. Thus, the aforesaid notice represents the fishing inquiry which cannot be made under Section 122(5A) of the Ordinance as stated on page 66 of the Larger Bench order dated February 6, 2016.
49. Notwithstanding the above, the AR informed that the appellant made investment in subsidiaries and certain amount was receivable by the appellant as follows:-- Gizir Lubricants (Pvt.)
Limited RupeesArema Petroleum (Pvt.) Limited Rupees Rupees Investment made by PSO19,600,000 20 816 000 Receivables as at June 30, 20049,888,499 8,386,557 50.AR further informed that on liquidation, PSO taken over subsidiaries' assets and liabilities and accordingly' adjusted the investments and receivables as recorded in the books of the appellant as mentioned above. These adjustments were made as follows:--- Rupees Capital loss on, investment 6,646,726 Write off of Receivable balances18,275,056
51. The AR informed that these details have already been provided to the ACIR during proceedings, which has been reproduced on. page 18 of 31 of the assessment order dated June 30, 2010. The ACIR on the same page of the said order concluded as under --- "The reply of the counsel of the tax-payer has been examined and not found tenable under the law. The loss incurred is in respect of subsidiaries written off on their liquidation and is a capital loss which was not allowable as revenue expenditure to the parent. Therefore, the loss of subsidiaries claimed at Rs, 18.275 million is disallowed and added back to the income of the tax- payer."
52. AR further added that the ACIR and CIR (A) while deciding this matter disallowed this claim on the ground that capital loss is not allowable under the law, AR stated that the capital, loss, as already mentioned above is Rs, 6,646,726 which has not been claimed by the tax-payer in the return\of income and has only claimed Rs, 18,275,056 which is the receivable write off and represents the claim under Section 29 of the Ordinance.
53. The AR of the appellant pleaded that the ACIR and CI,R(A) have stated that only capital loss should be disallowed then only the actual capital loss should be disallowed of Rs, 6,646,726 instead of Rs, 24,921.782 (as has been disallowed by the ACIR on page 29 of 31 of order) while calculating the tax liability: whereas on page No, 19 of the said order he has disallowed Rs 18,275,056; although the correct actual capital loss is only Rs, 6,646,726.
54. We have gone through the arguments place before this bench of the ATIR and it is our considerate view that no action can be undertaken by the assessing officer under Section 122(5A) of the Ordinance 2001 if it does not meet the criteria laid down in the said Section and as also discussed supra in Ground No, 6 of this order. Thus, placing reliance on the decision of larger Bench dated February 6, 2016; we hereby delete this disallowance on the account of not being allowed under the scope of Section 122(5A) of the Ordinance.
55. Furthermore, the ACIR has stated that capital loss is to be disallowed. The capital loss in the instant case is Rs, 6,646,726 which has not been claimed by the appellant. The taxation officer has disallowed an incorrect amount on account of same error of Rs, 18,275.056. Hence, the disallowance of Rs, 18,275.056 cannot be sustained for this reason as well.
Ground No, 8 Workers Welfare Fund
56. The learned AR requested consequential relief in the liability of Workers' Welfare Fund for the tax year 2004.
57. The ACIR is directed to allow consequential relief of WWF at time of reassessment proceedings.
58. The appeal is decided in the manner indicated above.