ZAHID SIKANDAR, JUDICIAL MEMBER. The titled appeal pertaining to tax year 2008 has been filed by the department against order dated 04.04.2016 passed by Commissioner Inland Revenue (Appeals-IV), Lahore.
2. Brief facts emanating from record are that the respondent taxpayer is a listed company deriving income from providing Wireless Local Loop (WLL) and long distance and international (LDI) services. The taxpayer filed income tax return for tax year 2008 declaring loss at Rs.1,363,776,000/- which was deemed as an assessm ent order under section 120 of the ITO. Proceedings in the instant case were initiated under section 122(5A) as the taxpayer's return for the said tax year was found erroneous in se far as prejudicial to the interest of revenue for different stated reasons and eventually assessm ent was amended under section 122(5A) resulting in tax demand of Rs.1,076,690/-.
3. Aggrieved, the taxpayer filed appeal under section 127 before the CIR(A) against amended assessm ent order who set aside the assessment order to some extent and deleted charge of minimum tax and additions made on account of allocation of expenses to property income, dividend, income and exempt capital gain whereas maintained the inadmissible deductions claimed by the taxpayer on the basis of provisions of section 34(3). Hence, the department has filed this appeal before the ATIR assailing the CIR(A)'s order to the extent of the said deletions.
4. Instant appeal was fixed on 04.04.2023, 04.05.2023, 08.08.2023, 01.09.2023 and 03.10.2023 but despite notices duly issued through registered post no one turned up to represent the respondent assesse. On the other hand, DR is present for the department. Since no one has appeared for the respondent taxpayer therefore the titled appeal is decided ex-parte on merits and on the basis of available record and assistance rendered by the DR. Issues agitate in this appeal before us are decided as follows: Charge of Minimum Tax:
5. It is the claim of the department that the taxpayer wrongly computed the tax liability as revenue of the taxpayer was on account of fee for services i.e. telecom services and broadband services and as per section 113(3), turnover was to be taken equal to "gross fees" for the purpose of calculation of tax under section 113. Hence tax was to be paid on turnover of Rs.4,655,957,000/- (Rs.4,508,111,000+Rs.147,846,000/-) including commission and not Rs.4,573,667,000/-. Further, turnover on account of scrap sales (Rs.413,000/-), sale of assets (Rs.14,145,000/-) and miscellaneous receipts (Rs.41,314,000/-) was also not included in the total turnover by the taxpayer.
The said discrepancy was confronted to the taxpayer with the intention to charge minimum tax on the turnover after including the above said amounts. In response, the taxpayer explained that calculation of minimum tax was rightly worked out at Rs.22,868,335/- on turnover of Rs.4,573,667,000/- after excluding sales tax/discount. The learned AR contested the working of tax liability on the basis of tribunal's judgment reported in 2010 PTD 1245 wherein the ATIR held that turnover means gross receipts exclusive of trade discount shown on invoices or bills derived from sale of goods or from rendering/giving services or benefits or from execution of contracts. The learned AR also contested the proposed inclusion of scrap sales, gain on sale of assets and miscellaneous receipts in turnover for calculating minimum tax being not in accordance with law and against the decisions of the tribunal on the issue in cases cited in 2009 PTD 1187 and 2010 PTD 553.
6. The assessing officer denied to concede to the contentions of the learned AR and held that as per section 113(3)(b) of the ITO, turnover includes "the gross fees" in case of rendering services, providing of services or giving benefits including commissions. Further, turnover in case of rendering services is gross fee without exclusion of sales tax/discount. On the issue of scrap sales, sale of fixed assets and miscellaneous income in the total turnover for calculation of minimum tax, the OIR held that tax is to be determined on 'turnover from all sources'. The assessing officer by including the aforesaid amounts in the total turnover determined minimum tax liability on the part of the taxpayer as follows: Gross revenue on account of fees for services4,655,957,000 Scrap sales 413,000 Sale proceedings from assets 14,145,000 Miscellaneous 41,314,000 Total turnover for the purpose of section 1134,711,829,000 Tax @ 0.5% 23,559,145 Tax on property income 224,600 Total tax 23,783,745
7. In first appeal, the CIR(A) confirmed the charge of minimum tax on gross fees inclusive of sales tax and FED whereas relying upon the above referred judgment by the AR i.e. 2009 PTD 1187 inclusion of sale of assets and scrap sales in total turnover for charging minimum tax was deleted.
The learned DR has agitated against the deletion of scrap sales and sale of fixed assets from the turnover.
8. Minimum tax was charged on sale of assets and scrap by the OIR as according to him the sale of any item with the view to earn profit qualifies for the inclusion of the same in the turnover and sale of fixed assets is also part and parcel of taxpayer's business activity. In our view, the scrap, generated and which is sold, only goes to reduce the cost of material consumed in the manufacturing process. Further, scrap churned out in the process of the assessee's manufacturing activities did not form part of the trading goods or stock-in-trade of the assessee hence, the scrap sales could not be taken as a part of turnover of the business carried out by the assesse. The assessee is not engaged in the business of sale of scrap. The turnover means the value of goods purchased/sold in the course of carrying of business. The scrap sold by the assessee, thus, does not have element of turnover in the instant case. In the light of view taken in the aforesaid decision 2009 PTD 1187 while no contrary decision has been brought to our notice on behalf of the Revenue, we have no hesitation in holding that the scrap sales could not be taken as a part of turnover for the purpose of deduction. The CIR(A) rightly deleted the charge of minimum tax on sale of scrap.
9. It would also be advantageous to reproduce the definition of turnover given in section 113(3) which reads as follows: "(3) "Turnover" means:-
(a) the [gross sales or] gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invokes, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of the tax liability for which tax is already paid or payable;
(b) the gross fees for the rendering of services for giving benefits including commissions; except covered by final discharge of tax liability for which tax is separately paid or payable;
(c) the gross receipts from the execution of contracts; except covered by final discharge of tax liability for which tax is separately paid or payable; and
(d) the company's share of the amounts stated above of any association of persons of which the company is a member.]"
10. As evident from the above section 113(3)(a), term 'turnover' means gross sales or gross receipts exclusive of sales tax and federal excise tax or trade discount and any deemed income assessed as final discharge of tax liability. Undisputedly, the assesse was in receipt of fixed assets which was included in total turnover as according to the learned OIR, tax was to be computed on 'turnover from all sources'. The expression 'turnover', 'gross sales: 'gross receipts' predominantly appear to be interchangeable. These expressions do not only overlap, but might confuse an assessee. For example 'gross sales' means total of all sales: 'turnover' also means aggregate of sales: 'gross receipts' means similarly, entire cash received as sale price. These expressions have the sting of overlapping and convey analogous meaning. The decision of the Supreme Court in M. K Ranganathan v. Government of Madras AIR 1955 SC 604 indicates that a word is known by the company it keeps. The Indian Supreme Court observed thus:- "It is well recognized rule of construction that when two or more words are susceptible of analogous meaning are coupled together noscunter a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, that is more general is restricted to a sense analogous the legs general (Maxwell Interpretation of Statute, 10th edition, P.332. (P.609) 'Total Sales; 'turnover' and 'gross receipts' may broadly mean gross in flow of cash receivable and other consideration arising in the course of ordinary activities of an enterprise from the sale of goods or from the rendering of services. It is measured by the charges made to customers or clients for goods supplied or Services rendered to them and by the charges and rewards arising from the use of sources by them. It should, however, exclude amounts collected on behalf of the third parties trusts or obligations."
11. The expressions 'gross sales; 'gross receipts' in the definition of turnover given in section 113 of ITO allude to transactions which have a bearing on the computation of taxable income of an assesse, under Income Tax Ordinance, from the business or profession carried on or deemed to be carried on by him. The amounts received should have profit making quality about them. The amounts, though received during the course of carrying on the business, would fall outside the scope of the expressions "gross sale; 'gross receipts' envisaged in the definition of turnover if these do not have profit making quality about them. The only question requires scrutiny here is as to whether receipts against sale of fixed assets is to be included in the scope of word "gross receipt". There is nothing in the record available or impugned orders to suggest as to whether receipts of fixed assets were having element of profit. Even no description of the fixed assets has been given in any of the orders below. Though, the OIR is correct in holding that sale of any item with a view to earn profit qualifies for the definition of turnover as per section 113 but he has not discussed at all as to what were the fixed assets and whether their sale had any co-relation with the business activity with the element of profit making quality. Not every sale of fixed asset can be considered as part and parcel of the taxpayer's business activity and without bringing any material or evidence on record relating the sale of fixed asset with the business activity with the element of profit gain, such inclusion of sale receipts of fixed assets in total turnover cannot be endorsed. The learned DR has failed to address the bench on this issue with any plausible rebuttal, hence in view of above, we find no reason to interfere in the impugned order which is accordingly upheld.
Allocation of expenses to property income Rs.4,903,050/-:
12. The taxpayer was confronted on the issue as follows: "Property/rental income amounting to Rs.4,492,000/- has been subjected to tax as separate block of income. However, expenses attributable to this income have not been allocated to this income especially the depreciation claimed in respect of rented out property, repair/maintenance allowance and administrative/financial expenses etc."
13. In response, it was the claim of the taxpayer that properties were rented out in previous years therefore some negligible charges were incurred which were immaterial and did not warrant any need to allocate the expenditure to the income. The assessing officer denied to accept the taxpayer's version and allocated expenses relatable to rental income. Same contentions were reiterated in the first appeal wherein the CIR(A) after relying upon some previous decision of his predecessor on the similar issue deleted the addition made on account of allocation of expenses to property income. According to the CIR(A), allocation of expenses to property income is against provisions of section 67 of the ITO read with rule 13 of Income Tax Rules, 2002. Only on the basis of the rationale that the income of the assessee is taxed in two heads of income, there is no justification in the assessing officer's stand to allocate expenses from rented property. There was no tangible evidence before the Assessing Officer to show that the allocated expenses were specifically incurred for earning income. We agree with the finding of CIR(A) that expenses prorated by the OIR have no relevance with the earning of property income. The impugned order on this issue is without any legal infirmity hence confirmed.
Allocation of expenses to Dividend income Rs.301,628/-:
14. The taxpayer was confronted as follows: "As per Note No.34 to the financial accounts, you have received dividend income at Rs.
581,000/-. The said income is chargeable to tax am% as separate block of income. However, the financial and administrative expenses required to be allocated to dividend income offered for tax at reduced rate i.e. in terms of section 67 of the Ordinance, were not allocated/apportioned as required."
15. In response, the taxpayer's stance was that requisite dividends were received in respective CDC account of the taxpayer and therefore no material expenditure was incurred in earning this income hence the same did not warrant allocation of expenses. The learned AR for the taxpayer also relied upon various judgments as referred in ONO. The assessing officer did not accept the taxpayer's plea as according to him taxpayer company has employed the capital, self-generated or through subscription or borrowed etc in different ways and in different business activities just to earn income from these sources. After deliberating upon the issue and relying on various different decisions the OIR allocated expenses against dividend income. During the first appeal, the CIR(A) simply relying upon a judgment cited in 2012 PTD 1385 deleted the addition on this account.
16. Having regard to the facts and circumstances of the case, we are of the view that, if the assesse incurs any expenditure for earning of dividend, such expenditure shall be allocated from the dividend income. As a matter of principle only the actual expenses are to be allocated. There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation. Only the actual expenses should be taken into account in reducing the dividend income and not any notional expenditure as has been done in the instant case. Every case is to be decided on its own facts and merits and the deletion of CIR(A) by simply relying upon some previous decision is erroneous however, the assessing officer did not bring on record any evidence with regards to actual expense incurred by the taxpayer in earning dividend income especially after the denial of the taxpayer in respect of expenses incurred. The addition made by the assessing officer is primarily hypothetical and without any evidence hence is not sustainable. The impugned order is maintained on this issue.
Allocation of expenses to exempt capital gain Rs.9,887,284/-:
17. The additional commissioner allocated expenses at Rs.9,887,284/- to the exempt capital gains declared by taxpayer at Rs.19,045,000/-. The CIR(A) relying upon an earlier tribunal's decision on the issue reported in 2006 PTD 356 deleted the addition made on account of allocation of expenses to exempt capital gain. We have gone through the contents of the referred decision and find that it was categorically held by the tribunal that Income from capital gain being a separate block of income and Wing similar in its charge to property income having restrictive allowance of expenditure could not be quantified for prorating the expenses claimed otherwise. Hence, apportionment of expenses is not permissible between exempt capital gain and income earned from other operations. The findings of the tribunal on this very account is very clear and no contrary view has been placed or even agitated with any reasoning before us. Hence, the CIR rightly by following the tribunal's view on the issue cited in the aforesaid decision deleted the allocation of expenses under this head. We do not find any reason to differ on this account therefore impugned order is upheld on this issue.
18. With the above narrated reasons and observations, the titled department's appeal is dismissed.