ORDER: This Tax Reference and connected reference applications bearing PTR No. 355 of 2008, PTR No. 360 of 2008 and PTR No. 361 of 2008 are directed against consolidated order dated 14.06.2007 of the learned Income Tax Appellate Tribunal (Appellate Tribunal). Reference applications relate to the Assessm ent Years 1999-2000, 2000-2001, 2001-02 and 2002-2003.
2. Single question of law is proposed for our determination, which is, "Whether under the facts and circumstances of the case, the learned ITAT was justified to hold that the lease rental income was assessable u/s 12(19) of the repealed Income Tax Ordinance,1979 on actual receipt basis and not on the accrual basis, whereas, section 12(19) of the repealed Income Tax Ordinance,1979 clearly holds that lease rental income is assessable on received or receivable basis?
3. Briefly the facts leading to the lis at hand are that assessee, a public limited company is inter alia engaged in the business of leasing. Assessee company was duly approved by the CBR - now FBR - for the purposes of Third Schedule of erstwhile Income Tax Ordinance, 1979 ('Repealed Ordinance').
Assessee filed return(s) of income for the assessment years under reference, which were subjected to examination under section 62 of the Repealed Ordinance, upon issuance of notice. In the light of the reply/ documents submitted the total income of the assessee was assessed vide order dated 30.06.2004. Various issues were dealt with in the assessment order, however, the issue of determination of income qua the lease rentals is the heart of the dispute. It is the case of the department that amounts of lease rentals, either paid or payable by the lessee against the leased assets - either owned by the assessee or not - shall be the deemed income of the assessee, treatable as income from business in terms of sub-section (19) of section 12 of the Repealed Ordinance. It is alleged that assessee declared the lease rentals received only and withheld declaration of receivable rentals, which practice is contract to the mandate of subsection (19) of section 12 of the Repealed Ordinance. Adds that Appellate Tribunal failed to adjudge the underline controversy and instead decided the controversy based on Tribunal's earlier order dated 02.09.2003 in ITA No. 4028/LB/2001.
4. Conversely, learned counsel for the assessee submits that determination of the income, against incidence of lease rentals, have had to be undertaken in accordance with the regularly adopted accounting practices of the assessee, reference was made to section 32 of the Repealed Ordinance. Adds that in fact transaction was a hire-purchase arrangement, a specie of finance lease, wherein actually assets were agreed to be sold, in accordance with the terms of the leasing agreement, and upon conclusion of lease period same stood transferred in the name of the lessee against the residual value, already deposited as initial lease money - commercially identified as Lease Key Money or security deposits - quantum whereof varies. Further submits that the amounts of rentals received, and the residual value, had to be treated as sale proceeds, in terms of Third Schedule, third proviso to sub-clause (5) to clause 8 of the Repealed Ordinance. Learned counsel has referred to the decision in the case of Commissioner of Income Tax v. Grays Leasing Ltd, Lahore (PTCL 2020 CL. 358) to support submissions this decision by this court affirmed the order of the Tribunal dated 02.09.2003, relied upon by the Tribunal to allow the appeal of the assessee.
5. Arguments heard and order of the Tribunal is examined with the assistance of the counsels.
6. Fundamentally, the controversy calls for interpretation of sub-section (19) of section 12 of the Repealed Ordinance, in the context of section 32 of the Repealed Ordinance, which are reproduced hereunder, for facility of reference.
Section 12(19)
"Where an assessee, being a scheduled Bank, a financial institution, or such modaraba or leasing company as is approved by the Central Board of Revenue for the purposes of the Third Schedule, has leased out, on or after the first day of July, 1985, any asset, whether owned by it or not, to another person, any mount paid or payable by the said person in connection with the lease of the said asset shall be deemed to be the income of the said assessee"
32. Method of accounting.--(1) Income, profits and gains [except income from dividends,] shall be computed for purposes of sections 17, 19, 22, 27 and 30 in accordance with the method of accounting regularly employed by the assessee.
(2) Notwithstanding anything contained in sub-section (1), the Central Board of Revenue may, in the case of any business or profession, or class of business, or profession, or any other source of income or any class of persons,--
(a) require, by a general or special order published in the official Gazette that the accounts shall be maintained in such form and in such manner as may be prescribed; and
(b) prescribe the manner in which payments of commercial nature shall be made or commercial transactions recorded, and thereupon, the income, profits and gains of the assessee shall be computed on the basis of the accounts or records maintained or payments made accordingly.
(3) Where no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the [Deputy Commissioner], the income, profits and gains cannot be properly deducted therefrom, or where, in any case to which sub-section (2) applies, the assessee fails to maintain accounts, make payments or record transactions in the form or manner, as the case may be, prescribed under the said sub-section, then, the income, profits and gains of the assessee shall be computed on such basis and in such manner as the Deputy Commissioner thinks fit.
[(4) For the purpose of sub-section (3), where the Central Board of Revenue deems necessary, it may, by a general or special order prescribe rates of net profit or gross profit and conditions of their applicability in respect of any trade, business or profession for any assessment year or years: Provided that such rates shall be applicable in case of an assessee at his option to be exercised in writing before the finalisation of assessment proceedings for an assessment year.]
7. The primary submission that computation of income regarding the lease rentals must be in accord with the method of accounting adopted by assessee is misconceived and undermines the significance of the deeming clause sub-section (19) of section 12 of the Repealed Ordinance, which provision of law was conspicuously missing from the provisions of law identified in section 32 of the Repealed Ordinance, wherein reference was made to sections 17, 19, 22, 27 and 30 of the Ordinance, 1979. Argument is otherwise misplaced when examined in the context of the observation by the Deputy Commissioner, notifying that assessee was maintaining accounts based on mercantile system of accounting.
8. Submission that projected transaction of lease was in fact hire-purchase, and be treated as sale and be assessed in light of the Third Schedule of the Repealed Ordinance, is fallacious. It is strange that this argument was not advocated by the assessee before the authorities, because assessee has claimed deductions in the guise of initial depreciation as well as normal depreciation on the vehicles, treating the transaction as lease, only extending the right of use to the lessees. It is apparent from the order in original that assessee has claimed depreciation allowance, which was computed in terms of the Third Schedule - where one of the allegations being excessively claimed written down value, while disposing of vehicles against the adjustment of residual value -salvage price of the asset at the end of lease period. Third Schedule provides mechanism for the computation of the depreciation allowance, which would trigger once the stage of disposal of the assets arrives in terms of clause 7 of the Third Schedule of the Repealed Ordinance. The arguments made had disregarded these material facts, where assessee assumed ownership of the leased assets and claimed depreciation against the vehicles. It is unfair that assessee claimed depreciation, initial and normal, and simultaneously sought exclusion of receivable rentals from the ambit of deemed income. There is no scholarly interpretation required. Textual and literal reading of the sub-section (19) of section 12 of the Repealed Ordinance affirms that lease rentals, received and receivable, are to be the deemed income of the assessee, which have had to be accounted for while submitting return of income.
9. The judgment in the case of Grays Leasing Ltd, Lahore (supra) is not applicable to the issue/question proposed for our determination. In the said case the controversy was regarding the lease key money - and not with reference to the interpretation of sub-section (19) of section 12 of the Repealed Ordinance. Learned appellate tribunal simplicitor allowed appeal on the ground of previous determination made, without appreciating distinguishing features of the matter previously decided regarding lease key money.
10. Our answer to the question is in negative. Reference applications are decided in favour of the department. It is appropriate to remand the matter to the Appellate Tribunal, which blindfolded decided the matter in wake of alleged previous decision, lacking proximity to the. controversy. It is noted that Commissioner (Appeals) had remanded the controversy regarding leasing income for redetermination, which findings were reversed by the Appellate Tribunal, deciding matter based on previous decision.
11. 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 Income Tax Ordinance, 2001. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.