JUDGMENT: MR JUSTICE ASIM HAFEEZ.--(1). Instant reference application is against order of 06.10.2014, by learned Appellate Tribunal Inland Revenue, Lahore (for brevity the "Appellate Tribunal'). Matter in issue pertains to tax year 2012.
2. The primary dispute is regarding apportionment of expenditures incurred and adjustments claimed by the respondent taxpayer, claimed to have drawn income from the manufacture and sale of yarn. Respondent taxpayer had filed return of income, by computing income under Normal Tax Regime (NTR) and income attributable to exports falling under Final Tax Regime (FTR). Pursuant to the audit proceedings, amendment was sought under section 122(1)/(5) and section 122(9) of the Income Tax Ordinance, 2001 (for brevity the Ordinance) - notice was replete with multiple issues, but controversy at hand is restricted to the issue of apportionment of expenditures.
Taxpayer claimed apportionment under Rule 231 of the Income Tax Rules, 2002 ("The Rules"), and conversely department emphasized qua the applicability of section 67 of the Income Tax Ordinance, 2001 ("Ordinance"), read with Rule 13 of the Rules, for the purposes of apportionment.
3. Upon perusal of suggested question of law, we opine that question needs to be reformulated, slightly. Resettled question of law is reproduced hereunder; "Whether in the facts and circumstances of the case, learned Appellate Tribunal has rightly applied/invoked Rule 231 of the Income Tax Rules, 2002 to the case of the taxpayer?"
4. Learned counsel for applicant department submits that Appellate Tribunal erred in law while invoking Rule 231 of the Rules, without comprehending its nature, scope, and relevancy to the context. Adds that apportionment of expenditures must be done by applying the mechanism provided under section 67 of the Ordinance read in consonance with Rule 13 of the Rules. Support is solicited from ratio of decision in the case of "Commissioner Inland Revenue v. Messrs Quality Textile Mills Ltd " (2013 PTD 2095) = [(108) Tax 137 (H.C Kar)], operative part whereof reads as: "23. When the foregoing provisions are kept in mind, in our view the position that emerges is that Rule 231 has no application to a situation where the apportionment of expenditures is being considered or the issue is how expenditures relatable solely to one "class of income" are to be dealt with. For these purposes, it is section 67 read with Rule 13 that is applicable. The genesis of Rule 231 in the predecessor legislation and rules framed thereunder makes it clear that the objective sought to be achieved through this rule was quite different. It has no bearing on the issues at hand. Its predecessor Rule 216 dealt with a matter peculiar to the 1979 Ordinance, and was framed in exercise of a specific statutory power conferred to achieve a specific objective. It is significant that Rule 216 was not invoked before the Tribunal when the appeal in (1999) 79 Tax 69 was heard. As already noted, we endorse the view that was taken by the Tribunal in that decision.
Indeed, the essential principle identified in that decision appears (again, quite correctly) to be embodied in sub-rule (2) of Rule 1.3. It was only when the Board issued Circular 5/2000 that Rule 216 was made applicable. As to the wisdom (and more importantly, legal propriety) of doing so, and the decision of the Tribunal in (2003) 87 Tax 382 to accept such application, we reserve judgment. It is not necessary for us to dilate on this matter because it arose under the 1979 Ordinance, and we are concerned with the 2001 Ordinance. In our view, Rule 231 is, and ought to be regarded-as, an unfortunate and unnecessary holdover from the 1982 Rules. It may be noted that learned counsel for the respondent submitted that Rule 231 was omitted in 2009 but reinserted (in somewhat different form) in 2010. Learned counsel submitted on this basis that the Rule ought to be regarded as an exercise of the power conferred on the Board by section 67. With respect, we are unable to agree. We accept the submission by learned counsel for the Department that the two Rules. 13 and 231, have entirely different and separate subject matters. This is so for the reasons given herein above. It also follows that we are unable to agree with learned counsel for the respondent that Rule 13 embodies a general rule, while Rule 231 is a specific provision and hence has to be , applied in preference to the former. That is not so at all.
[Emphasis supplied]
5. When confronted with the ratio of aforesaid decision, learned counsel for the respondent struggled in vain to convince us regarding relevance and applicability of Rule 231 of the Rules.
6. Reliance of the Appellate Tribunal on Rule 231 is misconceived. It is discernable from bare reading of Rule 231, ibid, that same relates to computation of export profits relatable proportionately to the export sales, having no relevance to the case at hand. In terms of the ratio settled in the case of "Commissioner Inland Revenue v. Messrs Quality Textile Mills Ltd." (supra), Rule 231 and Rule 13 are distinct, claiming independent character/attributes, and each one is attracted to different set of situations/circumstances. Section 67, read with Rule 13, provides mechanism for apportionment of expenditures, with respect to class or classes of income, as classified therein. In the instant case income was derived from local sales, supplies and exports. It is expedient to reproduce section 67 and Rule 13, as existing at relevant tax year of 2012, which read as; "67. Apportionment of deductions.--(1) Subject to this Ordinance, where any expenditures, relates to-- The derivation of more than one head of income; or
(ab) derivation of income comprising of taxable income and any class of income to which subsections (4) and (5) of section 4 apply, or
(b) the derivation of income chargeable to tax under a head of income and to some other purpose, the expenditures, shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates.
(2) The [Board] may make rules under section 237 for the purposes of apportioning deductions.
"13. Apportionment of expenditures.--(1) This rule applies for the purposes of section 67, which provides for apportionment of expenditure incurred for more than one purposes.
(2) Any expenditure that is incurred for a particular class or classes of income shall be allocated to that class or classes, as the case may be.
(3) (a) Any common expenditure excluding financial expenses relatable or attributable to non- business advances or loans and the amount referred to in sub-rule (2) relatable to business including presumptive and exempt income, shall be allocated to each class of income according to the following formula, namely:-- A x B/C Where-- A is the amount of the expenditure incurred; B is the total amount of gross receipts (without deduction of expenditures) for the tax year for the class of income; and C is the total amount of gross receipts (without deduction of expenses 2[ deductions and allowances]) and net gains for the tax year of all classes of income;
(b) Where, however, net gain, brokerage, commission and other income is to be taken into account on turnover of such transactions, such income shall be compared with gross profit from business for adopting figures for components "B" and "C" of the formula at (a) above.
(4) Where expenditures are to be allocated among different classes of income under sub-rule (3), consideration shall be given to the nature and source of each class of income, on reasonable basis to earn each class of income (particularly, in allocating selling expenses).
(5) ..........
(6) ..........
7. There is another aspect of the matter. Income derived from export sales and tax deducted thereupon is treated as final tax - in terms of subsection (4) of section 154 and subsection (1) of section 169 of the Ordinance. And in terms of clause (a) of subsection (2) of section 169 of the Ordinance - where said section applies - the income generated thereunder shall not be chargeable to tax under any head of income in computing the taxable income of the person and by virtue of clause (b) of subsection (2) of section 169, ibid, no deduction is allowable under the Ordinance for any expenditure incurred in deriving such income. It is essential to observe that apportionment of expenditures, under section 67 and Rule 13 of the Rules inter alia provided for apportionment of expenditures with respect to two stream revenue/income - involving NTR and FTR, when unsegregated accounts were maintained by the respondent taxpayer.
8. In view of the above, we firmly opine that apportionment of expenditures, in the instant case, is required to be carried out under section 67 and Rule 13 of the Rules. And Rule 231 has no application in the context of the expenditures/deductions claimed by the taxpayer.
9. The question of law proposed is decided in negative.
Appellate Tribunal erred in law while applying Rule 231 of the Rules. This reference application is decided in favour of the department: The matter is remanded to the Appellate Tribunal for de-novo determination and fresh decision on the appeal of the taxpayer, after affording hearing to the parties.
10. Office shall send a copy of this order under seal of the Court to the learned Appellate Tribunal, Inland Revenue as per Section 133(5) of the Ordinance.