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Official Citation: 2012 PTD 5
Court / Jurisdiction: INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN
Parties: HONDA ATLAS CAR (PAKISTAN), LTD., LAHORE vs C.I.T., LEGAL DIVISION, R.T.O., LAHOREAsim Zulfiqar,Muhammad Tahir
This judicial decision was delivered by the INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN. The matter involves proceedings between HONDA ATLAS CAR (PAKISTAN), LTD., LAHORE and C.I.T., LEGAL DIVISION, R.T.O., LAHOREAsim Zulfiqar,Muhammad Tahir, officially reported as 2012 PTD 5. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.
2012 P T D (Trib.) 5 [Inland Revenue Appellate Tribunal of Pakistan] Before Jawaid Masood Tahir Bhatti, Judicial Member and Mrs. Tabbana Sajjad Naseer, Accountant Member Messrs HONDA ATLAS CAR (PAKISTAN), LTD., LAHORE Versus C.I.T., LEGAL DIVISION, R.T.O., LAHORE
I.T.As. Nos.627/LB, 628/LB, 678/LB and 646/LB of 2010, decided on 9th June, 2011.
(a) Income Tax Ordinance (XLIX of 2001)---
----S.21(e)---Income Tax Rules, 2002, R.117---Deductions not allowed--Gratuity fund---Amount paid to fund and claimed as deduction to be classifiable as 'initial contribution' to fund was disallowed on the grounds that it required a special approval from Commissioner Inland Revenue under provisions of R.117 of the Income Tax Rules, 2002 which was not obtained and that a further amount representing 'transitional liability' computed by actuary was separately disallowed---Taxpayer contended that amount paid was within the limits prescribed i.e. such amount was not in excess of participating employees, aggregate salaries for last months of relevant financial year in respect of which benefit of 'staff gratuity' had vested and a similar issue was raised by the Commissioner Inland Revenue at the time of issuance of 'exemption certificate' to the fund established by taxpayer and after examining the record, concerned Authority had agreed that such amount was not in excess of the prescribed limit and no statutory approval under R.117 of the Income Tax Rules, 2002 was required---Validity---Authority to enforce the limits prescribed in R.117(2) of the Income Tax Rules, 2002 rested with the Commissioner Inland Revenue which did satisfy himself on this account---Such position, prima facie, verifiable from the documents furnished before the Appellate Tribunal and had been conceded to by the Departmental Representative---Taxation Officer had formed a view that was in conflict with another departmental official and that too senior in hierarchy to him---Contents of reply submitted by the taxpayer showed that the amount was not in excess of limit prescribed in R.117(2) of the Income Tax Rules, 2002 and subsequent issuance of exemption certificate substantiated that after due verification, such contention of taxpayer was found to be correct---Disallowance had been made on an assumption that was unfounded and was not supported by facts and circumstances---Disallowance had been made on the basis of an imaginary position, which did not exist---Section 21(e) of the Income Tax Ordinance, 2001 conferred a right upon the taxpayers to claim as deduction the 'payments' made to an 'approved fund' was very well founded and was corroborated by the plain text of such legal provisions---Such right could not be taken away by placing reliance on the provisions of Rules that were subordinate to the provisions of Ordinance, a creation of legislature---If a fund failed to comply with any of the conditions prescribed in the Rules, the legitimate way was to revoke the approval accorded to such fund in consequence to which provisions of S.21(e) of the Income Tax Ordinance, 2001 would come into play and the amount in question would stand disallowed---Taxation Officer had mis-understood the situation and had not only erred in understanding facts of the matter but had misinterpreted the relevant scheme of law---Appellate Tribunal directed that an amount paid to an approved fund by the taxpayer company be allowed as a deduction.
I.T.As. Nos.4776 to 4780/LB of 2004 and I.T.As. Nos.5121 to 5124/LB of 2004 not relevant
(b) Interpretation of Statutes---
----Fiscal law---Right conferred upon a taxpayer under primary legislation cannot be taken away through a subordinate legislation i.e. Rules, notification etc.
(c) Income Tax Ordinance (XLIX of 2001)---
----Ss.21 (c) & 152(1)---Deductions not allowed---License fee paid to parent company by the taxpayer was subjected to withholding tax @ 15% under S.152(1) of the Income Tax Ordinance, 2001 considering same to be in the nature of 'royalty'---Taxation Officer disputed such position and found that license fee was not classifiable as 'royalty' and attracted the withholding tax rate of 30% prescribed under S.152(2) of the Income Tax Ordinance, 2001 and provisions of S.21(c) of the Income Tax Ordinance, 2001 were applicable in the case of subject expense and expense on account of license fee was disallowed---Validity---Appellate Tribunal directed that expense of 'license fee' be allowed to the taxpayer as per claim, as there was no justification for such disallowance. I.T.A. No.767/LB of 2009 rel.
(d) Income Tax Ordinance (XLIX of 2001)---
----S.221---Rectification of mistake---Adjustment against determined refunds---First Appellate Authority found that matter of adjustment of refunds of other tax years against the liability for the subject tax year fell within the domain of 'rectification' and taxpayer should seek remedy through filing of an application with the Taxation Officer under S.221 of the Income Tax Ordinance, 2001---Taxpayer contended that since adjustment was refused in the order without assigning any reason, matter was appealable and finding given by the First Appellate Authority was not proper---Validity---Matter was appealable and the First Appellate Authority should have recorded his finding on the matter---Appellate Tribunal directed that while giving effect to the order of Appellate Tribunal, adjustment be allowed against available determined refunds so as due right of taxpayer was not infringed.
(e) Income Tax Ordinance (XLIX of 2001)---
----S.21(k)---Federal Board of Revenue Circular No.16 of 1990 dated 4-12-1990---Deductions not allowed---Perquisite---Provision of food and cost living allowance---Taxpayer contended that expenses incurred on provision of food etc, to employees during their stay at factory was not classifiable as a perquisite; and cost of living allowance' being a 'statutory allowance' was also not classifiable as a 'perquisite, for which relief was accorded by the First Appellate Authority---Validity---Under the provision of Federal Board of Revenue Circular No.16 of 1990 dated 4-12-1990 canteen subsidy could not be classified as a 'perquisite'---Cost of living allowance being a statutory allowance payable to employees under legislative compulsion also could not be considered to be includable in 'perquisites'---Relief granted by the First Appellate Authority was maintained by the Appellate Tribunal and Departmental appeal failed.
(f) Income Tax Ordinance (XLIX of 2001)---
----Ss. 22 & 122(5A)---Depreciation---Loss on scrapped assets---Admissibility---Fixed assets having a tax book value were scrapped---Assets were in the nature of jigs, moulds, dyes etc, used to manufacture proprietary items and were required to be scrapped due to change in model of cars---While such assets were no longer required in the manufacturing activity, being items of 'proprietary' nature, these had to be defaced and scrapped so as no unauthorized manufacturing could be undertaken by the buyers of these items; and were sold as 'scrap'---Taxpayer was confronted that since these were assets on which 'depreciation' was earlier allowed, gain/loss on disposal thereof should be commuted by reference to tax written down value and sale proceeds fetched by taxpayer on disposal and claim of entire written down value of assets as an expense under the head 'fixed assets scrapped' could not be allowed---Taxpayer explained that amounts fetched on disposal of such assets had been duly offered for tax as 'scrap revenue' and treatment required to be followed had been meted out---Claim was accepted to the extent of 1/3rd on the grounds that it could not be ascertained that all these items were sold during the period relevant to assessment year and some of these items may have been sold as part of scrap in period subsequent to that relevant assessment year; and balance 2/3rd claim was considered for allowance in next two years in equal proportions---Relief was accorded by the First Appellate Authority on the ground that requisite evidence was duly produced before the taxation officer during the amendment proceedings, which showed that entire defaced items were sold during the period relevant to tax year under consideration; and claim was accepted on merit---Validity---Claim of the taxpayer was proper and legitimate---Sale proceeds of each individual item scrapped was not identifiable as the items were scrapped and sold in bulk---Departmental stance clearly caused an undue hardship to the taxpayer---Entire scraped assets were disposed off in period relevant to tax year under consideration as scrap could not have been carried by taxpayer for the entire year---Taxation officer directed to divide the claim in three tax periods while such a mechanism was detrimental to the interest of taxpayer in terms of tax cash outflows---Position adopted by the taxation officer was unlawful particularly when it was verifiable from the record that the taxpayer had provided the evidence regarding sale of scrap during the year under consideration---Taxation officer was conducting the amendment proceedings under S.122(5A) of the Income Tax Ordinance, 2001, he was not justified in requisitioning the evidence and disallowing the amounts under consideration for want of evidence---Such action was taken outside the legal jurisdiction available to taxation officer---Finding of First Appellate Authority was upheld by the Appellate Tribunal and directed that such claim be allowed to the taxpayer.
(g) Income Tax Ordinance (XLIX of 2001)---
----S.60A---Workers' Welfare Fund Ordinance (XXXVI of 1971), S.4---Workers' Welfare Fund---Computation of liability---Procedure---Levy of 'Workers Welfare Fund' being allowable as a deduction from taxable income, taxpayer computed such levy by applying a ratio of 2/102 to the income before deduction on this account---Taxation officer computed workers welfare fund @ 2% of the income before charging workers' welfare fund---Validity---Departmental stance was at variance with the provisions of S.60A of the Income Tax Ordinance, 2001---Workers' Welfare Fund was deductible against income and 'taxable income' was a sum arrived at after deducting such statutory levy---Under the provisions of S.60A of the Income Tax Ordinance, 2001 workers' welfare fund was computable by applying a ratio of 2/102 to income before charging workers' welfare fund; in this manner, both the statutory provisions i.e. S.4 of Workers' Welfare Fund Ordinance, 1971 and S.60A of the Income Tax Ordinance, 2001 would be complied with---Departmental appeal was dismissed by the Appellate Tribunal on this account.
(h) Income Tax Ordinance (XLIX of 2001)---
----S.75(3A)---Disposal and acquisition of assets---Write-off of 'idle assets'---Admissibility of loss---Assets having a tax written down value not being usable in manufacturing activity were declared as 'idle' and deduction was claimed under S.75(3A) of the Income Tax Ordinance, 2001---Such claim was not allowed by the Taxation Officer while First Appellate Authority accorded the relief---Validity---Since the matter had already been decided in taxpayer's favour, Appellate Tribunal upheld the order of First Appellate Authority and departmental appeal was dismissed.
(i) Income Tax Ordinance (XLIX of 2001)---
----S.21 (g)---Deductions not allowed---Provisions for customs duty---Admissibility of---Reduced rate of customs duty was applicable to import of vehicles in 'completely knocked down' form subject to condition that taxpayer would follow an indigenization of imported parts---Subsequently it was found by the relevant governmental authority that such condition was not fully complied with by the taxpayer and remission of customs duty earlier accorded was required to be recouped to a certain extent---Department disputed such claim on the grounds that such amount being penal in nature was hit by mischief of S.21(g) of the Income Tax Ordinance, 2001 and any such payment of duty was admissible only when it was actually paid---Taxpayer contended that under accrual basis of accounting, provisions of Ss.32 & 34 of the Income Tax Ordinance, 2001 was required to be followed mandatorily---Such amount was admissible as the events giving rise to the expense / liability had already occurred---Such amount being in the nature of general customs duty was not penal in the nature---Validity---Issue had already been decided in favour of the taxpayer---Following the ratio laid down earlier, Appellate Tribunal endorsed the findings of First Appellate Authority---Departmental grounds were not entertained and appeal was dismissed. Asim Zulfiqar, FCA for Appellant (in I.T.As. Nos.627/LB and 628/LB of 2010). Muhammad Tahir, D.R. for Respondent (in I.T.As. No.627/LB and 628/LB of 2010). Muhammad Tahir, D.R. for Appellant (I.T.As. Nos.678/LB and 646/LB of 2010) Asim Zulfiqar, FCA for Respondent (I.T.As. Nos.678/LB and 646/LB of 2010). Date of hearing: 13th April, 2011.
ORDER
Through these four cross appeals two separate impugned orders of the learned CIR(A) dated 26-2-2009 for Tax Years 2003 and 2004 have been objected by both the parties. The department has objected the impugned orders on the following grounds:-- TAX YEAR 2003 (2) That the learned CIR (Appeals) was not justified in deleting the addition made on account of canteen subsidy and cost of living allowance at Rs.33,21,235 being excess cost of perquisites under section 21(k) of the Income Tax Ordinance, 2001. (3) That the learned C1R (Appeals) was not justified in deleting the addition made under the head loss on scrapped, assets at Rs.5,252,715. (4) That the learned CIR (Appeals) was not justified in directing to compute the WWF by applying the Ratio of 2/102 as taxable income. TAX YEAR 2004 (2) That the learned CIR (Appeals) was not justified in deleting the addition made under the head loss on account of idle assets written off amounting to Rs.74,68,255. (3) That the learned CIR (Appeals) was not justified in directing the addition made under the head loss on account of scrapped assets at Rs.5,252,715. (4) That the learned CIR (Appeals) was not justified in directing to allow the provision for customs duties amounting to Rs.42,000,000, (5) That the learned CIR (Appeals) was not justified in deleting the addition made under the head loss on account of perquisites under section 21(k) at Rs.4,791,280. (6) That the learned CIR (Appeals) was not justified in directing to compute the WWF by applying the rate of 2/102." While the Taxpayer through cross appeals for the above two tax year has objected the impugned order on the following grounds:-- TAX YEAR 2003 "(1) The order dated February 26, 2010 (served on March 15, 2010), passed by the Commissioner Inland Revenue Appeals-I, Lahore (C1R(A)') in the matter of amendment order dated December 29, 2008 passed by the then Additional Commissioner of Income Tax, Audit-C. Large Taxpayers Unit, Lahore ('ACIT') under section 122(5A) of the Income Tax Ordinance 2001 ('Ordinance') is bad in law and against the facts of the case. (2) That the learned CIR(A) has erred in upholding the amendment order disregarding the fact that such order was void ab initio as the then Commissioner of Income Tax, Audit Division, Large Taxpayers' Unit, Lahore did not hold the assessment be erroneous and prejudicial to the interest of revenue and thus fundamental pre-requisite for invocation of Provisions of section 122(5A) of the Ordinance remained unfulfilled. (3) That without prejudice to ground of Appeal No. 2 above learned CIR(A) has erred in upholding the disallowance of expense Rs.14,850,000, incurred on account of contribution to gratuity Fund, without appreciating the fact that ACIT's reliance in this respect on provisions of section 21(e) of the Ordinance read with Rule 117 of the Income Tax Rules, 2002 ('Rules') was misplaced. (4) That without prejudice to grounds of Appeals Nos.2 and 3 above, learned CIR(A) has erred in confirming the disallowance of Rs.14,850,000 without appreciating the fact that the disallowance was initially confronted to the extent of Rs.9,875,000 and thus provisions of section 122(9) of the Ordinance were not complied with the ACIT while making the disallowance. (5) That without prejudice to ground of Appeal No.2 above, learned CIR(A) has erred in upholding the disallowance of expense of Rs.4,920,000, representing 'transitional liability' relating to gratuity, without appreciating the fact that ACIT's reliance in this respect on provisions of section 21(e) of the Ordinance read with Rule, 117 of the Rules was misplaced. (6) That without prejudice to grounds of Appeals Nos. 2 and 5 above, the learned CIR(A) has erred in upholding the disallowance of Rs.4,920,000 as such amount had already been disallowed being included in the amount of Rs.14,850,000. (7) That without prejudice to ground of Appeal No.2 above, learned CIR(A) has erred in upholding the invocation of provisions of section 21(c) of the Ordinance by ACIT disallowing the expense on account of 'license fee' amounting of Rs.6,611,014 by alleging default under section 152 of the Ordinance. (8) That without prejudice to grounds of Appeals Nos. 2 and 7 above, learned C1R(A) has erred in upholding AC1T's action of disallowing the expense of Rs.6,611,014 under section 21(c) of the Ordinance as no default under section 152 of the Ordinance existed there being no payment of such expense during tax year 2003. (9) That without prejudice to the grounds of Appeals Nos. 2, 7 and 8 above, learned C1R(A) has erred in endorsing the disallowance of entire amount of expense on account of 'license fee' as admittedly the alleged default under section 152 of the Ordinance was relatable only to the one-half of the amount of such expense. (10) That without prejudice to ground of Appeal No.2 above learned CIR(A) has erred in directing that appellant should seek relief under section 221 of the Ordinance in the matter of adjustment of tax liability against determined refunds pertaining to various previous assessment years." TAX YEAR 2004 (1) The order dated February 26, 2010 (served on March 15, 2010), passed by the Commissioner Inland Revenue, Appeals 1, Lahore ['CIR(A)'] in respect of amendment order dated January 31, 2009 passed by the then Additional Commissioner of Income Tax, Audit-C Large Taxpayers Unit, Lahore ('ACIT') under section 122(5A) of the Income Tax Ordinance, 2001 ('Ordinance') is bad in law and against the facts of the case. (2) That the learned CIR(A) has erred in upholding the amendment order disregarding the fact that such order was void ab initio as the then Commissioner of Income Tax, Audit Division, Large Taxpayers' Unit, Lahore did not hold the assessment be erroneous and prejudicial to the interest of revenue and thus fundamental pre-requisite for invocation of provisions of section 122(5A) of the Ordinance remained unfulfilled. (3) That without prejudice to ground of Appeal No. 2 above, learned CIR(A) has erred in upholding the invocation of provisions of section 21(C) of the Ordinance by ACIT disallowing the expense on account of 'license fee' amounting to Rs.8,973,000 by alleging default under section 152 of the Ordinance. (4) Without prejudice to the grounds of Appeals Nos.2 and 3 above, learned CIR(A) has erred in endorsing the disallowance of entire amount of expense on account of 'license fee' as admittedly the alleged default under section 152 of the Ordinance was relatable only to one-half of the amount of such expense." 2. In view of the fact that the present appeals are cross appeals and involve more or less the same issues, these are therefore being disposed of through this consolidated order. Relevant facts, in brief, are that the taxpayer in this case is a public limited listed company engaged in the business of manufacturing and assembling of motor vehicles under the brand name 'Honda'. The appellant also imports spare parts, and vehicles in 'completely Built Unit' condition for sale in local market in the same state. For both the years in appeal the assessments were deemed to have been finalized under section 120 of the Income Tax Ordinance, 2001. The Additional Commissioner assumed jurisdiction under section 122(5A) of the Ordinance and amended the assessments through separate orders for both the tax years vide order dated 29-12-2008 and 31-1-2009. The Taxpayer assailed the orders passed under section 122(5A) before the first appellate authority who while partially accepting the appeals, upheld the amendment orders on certain issues. Through the present appeals, the taxpayer has agitated the findings of first appellate authority favouring the department. While the department has through cross appeals assailed the impugned orders dated 26-2-2010 to the extent of relief extended to the taxpayer. 3. During the appeal proceedings the Taxpayer company was represented by Mr.Asim Zulfiqar, FCA and the department's contentions were pleaded by Mr. Muhammad Tahir, Additional Commissioner Learned DR. Both the learned representatives elucidated contentions of respective parties and argued their cases at length. 4. For both the years under review the taxpayer has objected the legality of amendment proceedings under section 122(5A) of the Ordinance which is Ground No.2 in both the appeals for the tax years 2003 and 2004. This ground being not pressed by the learned representative of the Taxpayer, the appeals on this ground stand dismissed the ground in this respect being not pressed by the learned counsel. 5. The two appeals filed by the Taxpayer on the remaining grounds are discussed and decided as under:-- The grounds of Appeals Nos. 3 to 6 in the tax year 2003 are regarding the admissibility of payments made to staff gratuity fund. Facts in brief relating to the issue in hand are that upto the period relevant to assessment year 2002-2003 taxpayer/assessee was accounting for the expense on account of staff gratuity payable to employees through a yearly 'provision' charged to profit and loss account. In the past, such provision was not allowed as a deduction to the taxpayer and only the actual payments made to taxpayer's employees on account of gratuity were allowed as a deductible expenditure against the taxable income. History of expenditure and admissibility practice thereof is not disputed by the parties. During the period relevant to tax year 2003, taxpayer established a separate 'gratuity fund' for provision of staff gratuity benefits to its employees which was admittedly got duly approved under Sixth Schedule to the Ordinance from the concerned competent authority. Upon establishment of gratuity fund, the taxpayer company got its liability estimated by a qualified actuary whose report recommended that a contribution in this respect is made to the Fund so as to meet the related obligation. In view of the fact that an amount of Rs.7.484 million was brought forward from previous year being the 'unpaid' expense earlier recognized a further expense of Rs.7.366 million (Rs.14.850 million less Rs.7,484 million) was recognized in profit and loss account and the aggregate amount of Rs.14.850 million) was paid to Fund during the year under consideration. In view of the fact that as per history. Taxpayer was only allowed actual payments on this account, the whole amount paid to Fund was claimed as a deduction by the Taxpayer. The Taxation Officer, considering, the said amount, paid to fund and claimed as deduction to be classifiable as 'initial contribution' to Fund, disallowed the same on the grounds that it required a special approval from concerned Commissioner, Inland Revenue under provisions of Rule 117 of the Income Tax Rules, 2002 which according to Taxation Officer was not obtained by the Taxpayer. Furthermore, an amount of Rs.4.92 million representing 'transitional liability' computed by actuary was separately disallowed by taxation officer on the strength of an earlier judgment of this Tribunal in I.T.As. Nos.4776 to 4780/LB of 2004 and I.T.As. Nos. 5121 to 5124/LB of 2004 vide order dated 31-1-2005. While, making such disallowance, taxation officer also disallowed amount of Rs.2.853 million representing the payment on account of statutory gratuity during the year, considering it to be a part of payments made to Fund. However, later on, amendment order was rectified and disallowance of Rs.2.853 million was deleted when it was clarified by the taxpayer company that payment in this respect was on a separate account of 'statutory gratuity' and had no nexus with the payments made to Fund. Learned first appellate authority CIR(A) endorsed the view point of the taxation officer and refused to interfere into the amended order in this score. Thus the dispute before this Tribunal involves disallowance aggregating to Rs.19.770 million [Rs.14.850 million (alleged initial contribution) + Rs.4.92 million (transitional liability)]. 6. The learned A.R's arguments against both…
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