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Petitioner: Messrs CRESCENT COTTON MILLS LTD., FAISALABAD VS Respondent: COMMISSIONER INLAND REVENUE, ZONE-III, LARGE TAXPAYER UNIT, LAHORE
Court Name: Appellate Tribunal Inland Revenue Judge(s): Ch. Anwaar-ul-Haq, Sikandar Aslam Title:Messrs CRESCENT COTTON MILLS LTD., FAISALABAD vs COMMISSIONER INLAND
REVENUE, ZONE-III, LARGE TAXPAYER UNIT, LAHORE Case No.: I.T.A. No,1355/LB of 2013 Date of Judgment:2014-04-16 Reported As: 2015 PTD (Trib.) 292 Result: Order accordingly Judgment ORDER SIKANDAR ASLAM, (ACCOUNTANT MEMBER).---The titled appeal has been field by the taxpayer pertaining to the tax year 2010 against the impugned Order No,26 dated 21-6-2013 passed by the learned Commissioner Inland Revenue (Appeals) Zone-I, Lahore. 2. Brief facts, as gathered from the record, are that the appellant a public limited company, listed on the Stock Exchanges in Pakistan, is engaged in business of manufacturing and sale of sugar, distillate and yarn. Return of total income for the tax year 2010 was filed declaring loss of Rs, (81,326,064) which was deemed to have been assessed under section 120(1) of the Income Tax Ordinance, 2001. Subsequently, the case was selected for audit by the FBR under section 214C of the Income Tax Ordinance, 2001. The said audit proceedings eventually culminated in amended assessm ent under section 121(1)(d) of the Ordinance, wherein total income of Rs,79 706,682 was determined. 3. The taxpayer, being aggrieved, filed appeal before the learned CIR(Appeals), Zone-I, Lahore who, vide his order dated 21-6-2013 adjudicated the matter by allowing some relief and confirming few actions of the assessing officer. 4. Against being dissatisfied, the taxpayer has now preferred appeal under section 131 of the Income Tax Ordinance before this forum and assailed the action of the authorities below as contrary to the law and facts of the case. The appellant company contested his case on the following grounds of appeal:- "(1) That the order of the learned Commissioner Inland Revenue (Appeals) [CIR(A)] is bad in law and against the facts of the case.
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(2) That the learned CIR(A) has legally erred in upholding the best judgment assessment order without appreciating and conceiving legal as well as factual position of the case. (3) That even otherwise, the learned CIR(A) was not justified in confirming the best judgment assessm ent order having been passed on a date which was not fixed for hearing. His action by ignoring the legal and factual position of the case, is not tenable in the eye of law. (4) That without prejudice to the above grounds 2 and 3, the learned CIR(A) has failed to appreciate the fact that no intimation whatsoever regarding selection of case of the appellant for audit was ever made, therefore, the orders passed by both the authorities below are illegal and void ab-initio. (5) That without prejudice to the grounds 2, 3 and 4 above, the selection of cases for audit under section 214C of the Income Tax Ordinance, 2001 has disapproved by the honorable courts, therefore, instant proceedings, based on illegal selection of case, are illegal and unjustified. (6) That without prejudice to the above grounds 2, 3, 4 and 5, the application of provisions of sections 122(1)/122(5) and 121(1)(d) of the Ordinance, simultaneously is illegal and unjustified (7) Without prejudice to the above all grounds: That the learned assessing officer was not justified in applying and the learned CIR(A) in confirming the purchase rate of Rs, 2, 792.86 against declared rate at Rs,2,439.34 on the basis of presumptions and assumptions. His remarks in the order under appeal are against the facts of the case. (ii) That action of the learned CIR(A) of confirming the taxation of dividend income separately and not allowing adjustment of the same against business loss is against the expressed provisions of law. (iii) That restriction of tax credit on dividend income to the extent of Rs, 106,400 against claimed at Rs,223,285, without confronting the appellant, is illegal and unjustified. (iv) That learned CIR (A) was not justified in confirming the addition of Rs,72,736,000 in income as no violation of section 39(3) was committed by the appellant. Remarks in the orders of the both authorities below are against the facts of the case. (v) That the addition of Rs,5,529,612 under section 21(c) of the Income Tax Ordinance, 2001 in respect of the payments made to the Directors is illegal and unjustified as tax was duly deducted and deposited into government treasury wherever applicable. Further, remarks given in order under appeal are contrary to the facts of the case. (vi) That the learned CIR(A) has erred in law in confirming the action of assessing officer of making addition under section 111 of Rs,6,970,682 without properly appreciating the facts of the case, legal provisions and by ignoring the decision of higher judiciary in appellant's own case. (vii)That the addition made under section 111 at Rs,6, 970,682 without confronting and even mentioning relevant subsection/ clause is illegal and unlawful as held by higher appellate fora. (viii) That the learned CIR(A) was not justified in confirming the disallowance of initial depreciation allowance of Rs,6,242,500 which was rightly claimed by the appellant. (ix) That learned CIR(A) was not justified in not dilating on/ ignoring the ground of appeal in respect of addition of Rs,25,170,900 made under sections 21(c) and 21(m) of the Income Tax Ordinance, 2001. He should have deleted addition in view of the facts of the case and provisions of the law. (x) That the appellant had made deductions at the time of making payment of salaries and benefits wherever required and by adhering the provisions of section 21(m), therefore the addition made at Rs,25,170,900 without pin pointing any specific default is illegal and unjustified. (xi) That the expenses have wrongly been apportioned between local and export sales by ignoring the relevant provisions of law and Circulars issued by. The FBR in this regard. Therefore, the learned CIR(A) was not justified to confirm the addition of Rs .14, 769,204.
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(xii) That the learned CIR(A) was not justified in not allowing set off of brought forward business losses and unabsorbed depreciation against income assessed for the year. (xiii) That the learned CIR(A) has legally erred in confirming the charge of minimum tax and normal tax simultaneously. His action being contradictory to the provisions of law and facts of the case is ab-initio void and illegal. (xiv)That the learned CIR(A) was not justified in confirming the action of the assessing officer of charging tax on turnover pertaining to local sales and export sales separately." 5. On due date, the case was attended by both the learned authorized representatives. At the very outset, the learned A.R. Of the appellant challenged the legality of upholding the best judgment assessm ent under section 121(1)(d) of the Ordinance and selection of case for audit under section 214C of Income Tax Ordinance, 2001 by the Federal Board of Revenue, Islamabad. The learned A.R. Stated that the CIR (Appeals) was not justified to confirm such selection as the same was disapproved by the Honourable High Court in number of judgments. He, however, failed to produce any judgment on this issue where selection of case for audit by the Board has been disapproved. On the contrary in an intra court appeal, the Honourable Lahore High Court in its judgment reported as 2013 PTD 1274 has decided that the F.B.R. Can select the case for audit of Income Tax affairs through computer ballot which may be random or parametric under section 214C of the Income Tax Ordinance, 2001, as the case may be. In view of the said judgment which is a binding judgment. Appellant appeal fails on this account. 6. The learned A.R. Contended that the appellant was not intimated regarding selection of his case for audit under section 214C of Income Tax Ordinance, 2001. Here we observe that in the impugned best judgment order, the assessing officer had specifically mentioned that intimation regarding the selection of case for audit was duly sent to the taxpayer by the, Commissioner Inland Revenue, Zone-III, LTU, Lahore, therefore, the appeal on this ground is not sustainable and rejected. Further, the legality of action under section 121(1)(d) of the Ordinance was also challenged with the view that the order passed on the date which was not fixed for hearing. The Commissioner (Appeals), on the other hand, observed that this contention is legally and factually incorrect. The Honourable Lahore. High Court has held that this is not a valid contention through judgment reported as 1975 PTD 58 (LHC). Perusal of the record shows that the DCIR had issued IDR and number of notices which were either remained uncomplied with or partially complied. Subsequently, amended assessm ent was framed according to the facts and circumstances of the case by the DCIR. While agreeing with the observation of the learned CIR (Appeals), we decline to interfere on this issue. 7. The appeal of the taxpayer/appellant as per Ground No.7 onwards is disposed of in the manner as indicated below:-- Sugarcane Purchase rate 8. The DCIR has applied sugarcane purchase rate at Rs.2792.86 per M.Ton against declared rate of Rs.2439.34 per M.Ton thus making addition of Rs. 64,452,706. The sugarcane purchased rate was applied by taking average rate of three sugar mills on the basis of parallel cases. On the other hand, the learned A.R. Argued that the DCIR, while applying sugarcane purchase rate of parallel cases, has not mentioned any NTN/names, area/locality of the sugar mills which was necessary to compare the average purchase rate of the sugarcane. It was further contended by the learned A.R. That the assessing authority has failed to mention the provision under which he has applied average rate of sugarcane purchased by the aforesaid three sugar mills and argued, that there was severe shortage of sugar cane during the crushing season 2008-09 thus pushing price of sugar cane to Rs.112-140 per 40 kgs and sugar mills entered into price war. The situation also increased manufacturing cost of the appellant. The learned D.R. On the other side, argued that the DCIR had considered the arguments of the appellant as general in nature, as the appellant has not furnished any documentary evidence to substantiate his claim. The learned CIR (Appeals)
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observed that during the course of audit proceedings, the appellant/taxpayer did not produce a single piece of evidence to substantiate his declared version and had confirmed the addition made by the DCIR. 9. The learned A.R. Further argued that the DCIR even failed to mention the appropriate section under which addition has been made. He also contended that complete record of sugarcane purchased was provided to the assessing officer, who failed to pinpoint any defect in the books of accounts as all payments have been made to the growers through banking channel. He places reliance on the judgment of the Honorable Lahore High Court reported as 2011 PTD 2161 in which it has been held that rejection of books of accounts on the basis of general assertions is not tenable. The learned D.R., on the other hand, supported the orders of the authorities below. 10. We have heard the arguments of both the sides and observed that the DCIR has repeatedly mentioned in his best judgment order that the appellant has failed to furnish complete books of accounts and supporting evidences to substantiate his claim. The learned Commissioner (Appeals) has also upheld the stance of the DCIR on the basis of non-production of books of accounts and relevant record. Although, the learned A.R. Of the appellant/taxpayer, argued that the relevant books and relevant record were provided to the department but it is nowhere established from the record. We have also observed that although the assessing officer has made comparison of sugarcane purchase price of the three parallel cases but failed to confront the appellant with the names, NTN/names, area/locality of these sugar mills and had not fulfilled his legal obligation and norms of natural justice. 11. In view of the above, observations, we deemed it necessary to remand back the matter back to the assessing officer with the directions that after obtaining complete books of accounts and relevant documentary evidence, the appellant/taxpayer may be confronted with the discrepancies and ask to submit specific reasons of increased rate of input. Further complete names/NTN and locality of sugar mills operating in the area shall also be communicated to the appellant/taxpayer where favorable purchase rate under the same conditions has been fetched by them. The appellant/taxpayer is also directed to cooperate with the department and provide all relevant records including evidence of payment to the growers made through proper banking channel. So the matter may be adjudicated according to the facts and circumstances of the case. The appeal on this ground is disposed of in the manner specified above. Ground No. 7(ii) Taxation of Dividend Income 12. The DCIR charged dividend income to tax @ 10% as a separate block of income and did not set off business losses against such income by rejecting the written submission of the appellant/taxpayer. The Commissioner Inland Revenue (Appeals) confirmed the treatment given by the DCIR. 13. The learned A.R. Of the appellant contended that as a result of insertion of proviso in section 8 through the Finance Act, 2007, dividend income is not a separate block of income. The learned A.R. Contended that according to section 8 of the Income Tax Ordinance, 2001, tax deducted under sections 5, 6 and 7 shall be final tax on income on which it is deducted while company has been specifically excluded from the purview of the final tax by virtue of the said proviso. This clearly means tax deducted in respect of dividend income of a company shall not be final tax with effect from 1 July 2007. Moreover, section 169(3) also excludes dividend income of a company from the scope of final tax by using the words 'or under section 5, other than dividend received by a company.' This leads to the conclusion that a company receiving dividend income has to file its return of income under normal tax regime instead of the final tax regime. The learned A.R. Also drew our attention to sub-clause (ii) of clause (c) of the above quoted section 8 of the Ordinance. He argued that bare reading of this clause along with proviso reveals that except in case of
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companies, the amount of dividend cannot be reduced by setting off any loss. He further argued that in view of the above provision of law, dividend income of the appellant falls in section 39 under the head "Income from Other Sources." Thus, the appellant has correctly set off the loss against dividend income in accordance with the provisions of section 56(1) of the Ordinance. The learned D.R., on the other hand, supported the findings recorded in the orders of authorities below. 14. We have heard the arguments of both the learned representatives. The main question before us is whether dividend income is chargeable to tax under section 5, falls under the head "Income from Other Sources?" section 11 of the Income Tax Ordinance, 2001 requires that for the purposes of imposition of tax and the computation of total income, all income has to be classified under different heads of incomes. In case, a person is engaged in the business of renting properties, income from property is not assessed under the head "income from business" but it is assessed under the head "income from property." Similarly, in case a person is engaged in the business of purchase and sale of shares, profits and gain of such business are not assessed under the head "income from business" but under the head "income from capital gain." Similarly, income of person earning dividend or profit on debt is not taxable under the head "income from business" but under section 39 as "income from other sources" except in situations specifically provided under the statute. For example, profit on debt earned by a person under specific conditions is required to be assessed under the head "income from business" [section 18(2)] and income falling under section 5, 6 or 7 would not be assessable under section 39 [as provided in section 39(5)1 Section 39(5) of the Ordinance is reproduced below for ready reference: "This section shall not apply to any income received by a person 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. " 15. The learned A.R. Of the appellant has admitted that dividends received by the company are chargeable to tax under section 5 of the Income Tax Ordinance, 2001. He however contended that such dividend falls under the head "income from other sources"" The learned A.R's contention in this regard is not tenable due to the above provision of law. The learned A.R. Reliance on the provisions of section 8(c) (ii) is misplaced because it pertains to the cases falling under final tax regime. 16. Moreover, the learned CIR (Appeals) has observed in the appellate order that section 56(1) allowed set off of losses amongst Heads of income as specified in section 11 which reads as under:- "Subject to sections 58 and 59, where a person sustains a loss for any tax year under any head of income specified in section 11, the person shall be entitled to have the amount of the loss set off against the person's income, [except income under the head salary or income from property], if any, chargeable to tax under any other head of income for the year." 17. Dividend income is a separate block of income chargeable to tax under section 5 and does not fall in any head of income as provided in section 11 which is reproduced below for ready reference:- - "Heads of income.---(1)For the purposes of the imposition of tax and the computation of total income, all income shall be classified under the following heads, namely: - (a) Salary; (b) Income from Property; (c) Income from Business; (d) Capital Gains; and (e) Income from Other Sources." 18. Since dividend income earned by a company is chargeable to tax under section 5 and does not fall under any other head of income [section 11], therefore, set off of losses from other heads or vice versa cannot be allowed under section 56 of the Ordinance. The learned CIR (Appeals)'hsas rightly confirmed the action of the assessing officer that needs no interference on the issue by us. Ground No. 7(iii)
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Restriction of Tax Credit on Dividend 19. The DCIR has disallowed the amount of tax withheld of Rs.116,885 on dividend out of total amount of Rs.223,285 after observing that tax on dividend income of Rs.1,064,000 at the rate of 10% works out to Rs.106,400 whereas the appellant has claimed tax deduction at Rs.223,285. The DCIR, therefore, disallowed the difference of Rs.116,885 and CIR (Appeals) confirmed the disallowance. 20. The learned A.R. Of the appellant argued that dividend income has been disclosed in the accounts for the period from 1-10-2008 to 30-9-2009 whereas tax deduction has been claimed for the period from 1-7-2009 to 30-6-2010. The difference therefore arises due to the timing difference. He also adds that the issue has been decided in favour of the appellant in its own case through order dated 22-7-2008 in I.T.As. ' No.436/LB of 2007 (assessm ent year 2000-2001), 437/LB of 2007 (assessment year 2001-2002), 913/LB of 2007 (assessm ent year 2001-2002) and 914/LB of 2007 (assessment year 2002-2003.) The learned D.R., on the other hand, supported the arguments of authorities below. 21. After hearing both the sides, we have observed that the issue has already been decided by this Tribunal in favour of the appellant in his own case. Accordingly, we find no reason to interfere with the earlier decision. Hence, appeal is allowed. The DCIR is directed to allow the credit of Rs.223,285 after necessary verifications accordingly. Ground No. 7 (iv) Addition under section 39(3) 22. Perusal of the record shows that the appellant had received loans from Directors/key management amounting to Rs.72,736,000. It was inferred by the DCIR that no evidence was provided that payments were made through proper banking channel. He, therefore, proceeded to disallow the amount under section 39(3) of the Income Tax Ordinance, 2001, as the appellant failed to furnish any reply. Subsequently, the learned CIR (Appeals) confirmed the treatment meted out by the DCIR. 23. During the hearing the learned A.R. Of the appellant argued that the DCIR was requested some time to submit evidence which was not allowed and best judgment order was framed without honouring request for adjournment. The learned A.R. Explained that the amount under review consists of Rs.69,691,000 which was outstanding against provident fund and salaries payable. The balance amount of Rs.3,045,000 was received through the proper banking channel. 24. After looking into the matter and giving due consideration, we find that the matter has not been properly adjudicated by the authorities below and addition on this account has been made in a slip shod manner. We, therefore, find it expedient to remand the matter to the assessing officer for de novo consideration in accordance with law for fresh adjudication. Ground No. 7(v) Addition under section 21(c) of the Income Tax Ordinance, 2001 25. The DCIR at page 9 of his order observed that the taxpayer has shown huge payments on account of salaries and perquisites to Directors and executives as per Note 35 to the accounts for the relevant period which were not reflected in the annual statement of withholding taxes filed under sections 149/165 of the Income Tax Ordinance, 2001. The DCIR, therefore, added the difference of perquisites and benefits to the extent of Rs.5,529,612 on which tax was not withheld by the taxpayer for the year under consideration. Subsequently, the treatment was confirmed by the learned CIR(Appeals). 26. The learned A.R. Submitted before us that the difference in figures appearing in the accounts and the statement filed under section 149 was due to timing difference of the accounting period of the appellant i.e. Between 1-10-2008 to 30-9-2009 and the period for which statement has been filed is from 1-7-2009 to 30-6-2010. He also added that the issue has been decided in favour of the appellant in its own case through order dated 22-7-2008 in I.T.As. No. 436/LB of 2007 (assessment
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year 2000-2001), 437/LB of 2007 (assessment year 2001-2002), 913/LB of 2007 (assessment year 2001-2002) and 914/LB/2007 (assessment year 2002-2003.) The learned D.R., on the hand, supported the arguments of the authorities below. 27. After hearing both the sides, we observed that the issue is based on fact rather than legal one. We also find that the learned A.R. Reliance on earlier judgment is misplaced. The DCIR observed that payroll has not been furnished before him and he cannot verify whether benefits and emoluments have been made patt of salary while, withholding taxes whereas the appellant stating that the difference arose due to the timing difference. It is quite clear that the issue has neither been properly examined by the assessing officer nor adjudicated by the learned CIR (Appeals). We, therefore, deemed it necessary to remand back the matter to the assessing officer for de novo consideration in accordance with law with the directions that after obtaining necessary statements under sections 149/165 of the Income Tax Ordinance, complete analysis shall be made as per relevant provisions of law. Timing difference, as contended by the learned AR shall also be examined in this regard. Ground No 7(vi) & (vii) Addition under section 111 of the Income Tax Ordinance, 2001 28. The DCIR has taken the amounts of tax paid as appearing in the cash flow statement and as claimed in the return of income and added back the difference of Rs.6,970,682 under section 111 of the Ordinance. The learned A.R. Has explained that the additions were made by ignoring the written submission of the appellant. He further submitted the breakup of income tax paid as shown in cash flow statement and as claimed in the return of tax year 2010 was due to the difference of Rs.1,796,679 (23,336,679 - 21,540,000) instead of Rs.6,970,682 between the tax paid shown in the cash flow statement and tax deductions claimed in the return of income. He stated reasons that the tax claimed in the return of income pertains to period from 01 July, 2009 to 30 June, 2010 whereas the cash flow statement, has been prepared for the period from 01 October, 2008 to 30 September 2009. Resultantly, the income tax paid as appearing in cash flow statement pertains for the period from 01 October 2008 to 30 September 2009. The learned A.R. Also relied on following reported judgment with respect to addition under section 111 of the Ordinance:-- 2012 PTD 1775 (Trib.) "In case of…
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