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Petitioner: PAKISTAN TELECOMMUNICATION CO. LTD, ISLAMABAD VS Respondent: DCIT, CIR-11, COMPANIES ZONE, ISLAMABAD
Court Name: Appellate Tribunal Inland Revenue Judge(s): Istataat Ali, Muhammad Jahandar, Khalid Waheed Ahmed Title:PAKISTAN TELECOMMUNICATION CO. LTD, ISLAMABAD vs DCIT, CIR-11,
COMPANIES ZONE, ISLAMABAD Case No.:I.T.As Nos.1023/IB to 1026/IB of 2006 and M.As.(AG) Nos.439/IB and 313/IB of 2006 Date of Judgment:2009-05-30 Reported As: 2011 PTD (Trib.) 1716 Result: Order accordingly Judgment ORDER These appeals have been filed by the assessee as well as by the department. The assessee is a public limited company deriving income from providing telephone services to its subscribers. Return for assessm ent year 2001-2002 was filed declaring total income of Rs,18,864,579,186. For the reasons recorded in assessm ent order under: Income declared = 18,658,283,186 Addbacks (1) Borrowing cost on machinery = 94,511,846 (2) Bad debts written off = 4,180,874,040 (3) Provisions Added back (i) Provision for doubtful debts = 1,744,882,000 (ii) Provisions for doubtful advances: = 11,392,000 (iii) Provision for diminution in value of investments= 15,282,000 Total = 1,870,556,000
(4) Depreciation of building 5% depreciation allowed on fifteen percent of the buildings not being factories, workshops or labour quarters) Addition. = 42,351,841
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(5) Depreciation on plant and machinery due to reduction in W.D.V. Addition. = 1,519,915,688 (6) Addition under section 24(c) on salaries:= 311,464,102 (7) Addition under section 24(i) on account of excess perquisites:= 501,071,033 (8) Addition under section 24(b) on satellite charges:= 685,356,938 Income assessed under section 22 from business:= 27,864,384,674 Add dividend income under section 30:= 206,296,000 Total income = 28;070,680,674 2. The assessee filed appeal against this assessment and learned CIT(A) vide order dated 19-9- 2000 disposed of the issues in dispute. The assessee filed second appeal on the following grounds:- (i) That order dated 19th September, 2002 passed by the learned Commissioner of Income Tax, Appeals Zone I, Islamabad (the CITA) is bad in law and against the facts of the case. (ii) That the CITA was not justified in upholding disallowance of interest amounting to Rs,94,511,846 claimed by the appellant under section 23(I)(vii) of the Income Tax Ordinance, 1979 (the Ordinance). (iii) That the CITA was not justified in upholding disallowance of bad debts amounting to Rs,4,180,874,040 for assessm ent year 2001-2002. (iv) That the CITA was not justified in upholding disallowance of Rs,311,464,102 under section 24(c) of the Ordinance being 20% of basic salary of staff for alleged non-deduction of tax from salaries of employees. (v) That the CITA was not justified in upholding addition of Rs,501,071,033 under section 24(i) of the Ordinance for alleged provision of excess perquisites to employees. (vi) That the CITA was not justified in upholding addition of Rs,75,163,550 out of an addition of Rs,685,356,938 under section 24(b) of the Ordinance on account of non-deduction of tax under section 50(3A) of the Ordinance from payments to Asia Satellite Telecom Co. Ltd., Hong Kong a non-resident satellite company and not giving any finding about additions amounting to Rs,166,526,372 under the above said clause. 3. The department has also filed second appeal for assessment year 2001-2002 on the following grounds:-- (1) That the order of the learned CIT(A), Islamabad is had in law and contrary to the facts of the case. (2) That the learned CIT(A) was not justified to delete the addition made under section 24(b) for default of section 50(3A) on, payment made to Intelsat UK Ltd. (3) That the learned CIT(A) was not justified to hold that Intelsat was a USA Company as during assessm ent proceedings the assessee provided agreement copy and also admitted that the payments was made to INTELSAT UK Ltd. (4) That the fiscal domicile of the signing company would apply and not the parent company and as the recipient company was UK based hence the Pakistan-UK Taxation Treaty was rightly applied by treating the payments as royalty as per clause 12 of the treaty. (5) The CIT(A) has erred in treating the INTELSAT Organization and the INTELSAT UK Ltd., and INTELSAT USA Ltd., as same entity for taxation purposes.
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(6) The International Telecommunication Satellite Organization created by Resolution of the United Nations General Assembly may have its income/assets exempt in Pakistan. But Intelsat UK Ltd., cannot avail exemption as it is a separate entity from the International Satellite organization as this fact is clearly established from the definition given in the agreement. The agreement states that Intelsat Ltd., is company registered by the laws of Bermuda. The Intelsat UK Ltd. Is registered under the laws of UK. (7) That the Learned CIT(A) was not justified to hold that the income of Intelsat UK Ltd. (or even Intelsat USA Ltd.) were exempt in Pakistan. 4. For assessm ent year 2002-2003 the assessee filed return declaring income of Rs,24,841,538,414. For the reasons recorded in assessment order under section 62 dated 18-4-2003 the declared version was rejected and net income was assessed as under:-- Income declared = 24,839,538,414 Addbacks (1)Borrowing cost on machinery = 3,273,269,309 (2)Bad debts written off against provisions for doubtful debts= 917,000 (3)Bad debts written off claimed as operating cost= 1,993,046,000 (4)Provisions added back = 569,737,534 (5)Additions under section 24(i) on account of excess perquisites:= 479,856,941 (6)Addition under section 14(b) on satellite charges:= 31,210,436,776 Income assessed under section 22 from business: = 31,210,436,776 Add dividend income under section 30: = 2,000,000 Total income assessed = 31,212,436,776 5. The assessee filed appeal on various points and learned CIT(A) vide his order dated 24-12-2003 decided the issues raised in appeal before him. Now, the assessee has filed second appeal on the following grounds:-- (i) That the learned CIT(A) was not justified in upholding disallowance of bad debts amounting to Rs,3,258,693,167 written off and claimed under section 23(1)(x) of the Income Tax Ordinance, 1979 (the Ordinance). (ii) That the CIT(A) was not justified in upholding addition of Rs,569,737, 534 under section 24(i) of the Ordinance for alleged provision of excess perquisites to employees. (iii) That the CIT(A) was not justified in upholding addition of Rs,479,856,941 under section 24(b) of the Ordinance on account of non-deduction of tax under section 50(3A) of the Ordinance from payments to non-resident satellite companies which sum was not chargeable under the provisions of the Ordinance. 5. Return for tax year 2003 was filed declaring income of Rs,37,321,776,492. This return was deemed to have been accepted under section 120. Subsequently, discrepancies in audited accounts were detected by the Assessing Officer who started proceedings for amendment of assessment. Finally, through order under section 122, dated 10-5-2004 the assessment was amended in the following manner:-- Income as per computation chart/return : Rs,37,323,676,492 Additions. (1) Borrowing cost on machinery: 13,132,000 (2) Bad debts: 2,339,000 (3) Receivables 2,827,000
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(4) Provisions for doubtful debts 1,169,826,000 (5) Provisions for doubtful advances; 14,924,000 (6) Bad debts written-off against provisions for doubtful debts:1,070,505,000 7. The assessee filed appeal contesting various additions and learned CIT(A) vide his order dated 15-7-2004 disposed of the issues raised in these grounds of appeals. The assessee filed second appeal against the aforesaid orders of learned CIT(A) on the following ground:- (i) That order of 15th July 2004 passed by the learned Commissioner of Income Tax Appeals Zone-I, Islamabad (CIT(A)) is bad in law and against the facts of the case for the following and for such further reasons as may be raised at the time of hearing of appeal. (ii) That the learned CIT(A) was not justified in upholding addition of Rs,538,324,000 under section 21(c) of the Income Tax Ordinance, 2001 (the Ordinance) on account of non-deduction of a tax under section 152 of the Ordinance from payments to nonresident satellite companies although such sums were not chargeable to tax under the provisions of the Ordinance. 8. The assessee filed miscellaneous applications for assessment year 2002-2003 and tax year 2003 raising following additional grounds:-- (1) "That the learned Commissioner of Income Tax (Appeals) Zone-I, Islamabad (CIT) was not justified in remanding back disallowance of interest amounting to Rs,54071578 for assessment year 2002-2003 allowable under section 28(1)(a) of the Income Tax Ordinance and Rs,13,132,000 for tax year 2003. (2) That for tax year 2003 the learned CIT(A) was not justified in setting aside disallowance of bad debts written off directly in profit and loss account, bad debts written off against provision for doubtful debts and receivables written off amounting to Rs,2,359,000, Rs,1,070,505,000 and Rs,2,827,000." 9. Additional grounds.---Learned AR stated 'that no fresh fact finding is involved in the matter of additional grounds because the points raised therein were either set aside or confirmed. No jeopardy is caused to the department through these additional grounds. These additional grounds initially escaped the attention of AR who has raised the same in order to avoid the fresh drill of reassessm ent. Learned AR stated that the additional grounds raised by the taxpayer relate to the core issues and merit to be admitted for adjudication. Learned DR initially opposed the admissibility of these additional grounds. Attention of learned DR was invited to the question of limitation relating to completion of reassessment. After this potation learned DR did not oppose the admissibility of these additional grounds. The same was accordingly admitted for adjudication. 10. Borrowing cost on acquisition on machine.---The assessee claimed a sum of Rs,94511846 for assessm ent year 2001-2002 Rs,54071578 for assessment year 2002-2003 and Rs,13132000 for tax year 2003 as interest on borrowed capital. The Assessing Officer disallowed the claim of the assessee for the reason that it was in the nature of capital expenditure. Learned CIT(A) in his order dated 10-9-2000 for assessm ent year 2001-2002 observed that the treatment given by the Assessing Officer was legally right. He also observed that facts of the case reported as 1993 SCMR 1224 = 1993 PTD 758 are distinguishable from this case because in that case it was held that in the case of increase of business if additional machinery is acquired through a loan to increase the efficiency of existing productivity and not in the new production, then interest on such loan is allowable even if the machinery is yet to be commissioned whereas this assessee acquired a loan for installation of new telephone lines. The loan was thus put in use for new production. The disallowance of interest for assessm ent year 2001-2002 was confirmed by CIT(A). For assessment year 2002-2003 learned CIT(A) observed that facts of disallowance of the claim on 'his account are different than the facts relating to assessment year 2001-2002. For assessment year 2001-2002 the disallowance was confirmed by CIT(A) for the reason that it was a pre-production expenditure
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which was to be capitalized whereas for assessment year 2002-2003 a large portion of the borrowed capital was used for acquisition of machinery which was installed, commissioned and put to use for improving the efficiency as the old system of Analogue was converted to the Digital system. He, therefore, remanded the case back to the Assessing Officer with the directions to re- determine the inadmissible capital expenditure and admissible revenue expenditure. For tax year 2003 learned CIT(A) vide his impugned order dated 15-7-2004 again remanded the case back to the Assessing Officer because in his opinion the facts for tax year 2003 were not different than the facts for assessm ent year 2002-2003. Assessment on this point for tax year 2003 was also set aside with the directions for Assessing Officer to verify the facts and determine the quantum of expenditure of capital nature vis-a-vis, revenue nature and re-examine its admissibility on the similar lines as spelled out for assessment year 20022003. 11. Learned AR stated that the CIT(A) upheld the disallowance of borrowing cost incurred by the appellant during the period prior to the commissioning of the relevant plant by misinterpreting the judgment of the honourable Supreme Court of Pakistan reported as 1993 SCMR 1224 = 1993 PTD 758. It was held by the honourable apex court in para 11 of the judgment as follows:-- "(11) Secondly in the finding of ITO there is reference to preproduction stage which is not supported by the record for the reason that loan was not obtained for installation of machinery in order to go for new products but to add efficiency to the production already in existence, hence question of preproduction stage did not arise and in any case reference to preproduction stage was unnecessary as deduction of interest under section 10(2)(iii) is to be allowed in full regardless of the fact whether stage was pre-production or otherwise.... " 12. Learned AR stated that section 10(2)(iii) of the, repealed Income Tax Act 1922 reads as follows:-- (2) Subject to the provisions of this Act, such profits or gains shall be computed after making the following allowances, namely:- (i) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid." 13. He further stated that parallel provisions to section 10(2)(iii) of the repealed Income Tax Act, 1922 are contained in section 23(1)(vii) of the repealed Income Tax Ordinance, 1979 which reads as follows:-- "23(1). In computing the income under the head "income from business or profession", the following allowances and deductions shall be made, namely:-- (i) to (vi)--- (vii) any interest paid in respect of capital borrowed for the purposes of the business or profession" 14. Learned AR emphasized that as held by the honourable apex court in the above referred judgment, deduction of interest paid in respect of capital borrowed is to be allowed regardless of the fact whether stage was pre-production or otherwise. 15. Learned DR stated that the CIT(A) was fully justified in upholding disallowance under section 23(1)(vii) of the Income Tax Ordinance, 1979 on account of interest. The company had claimed the amount in question as borrowing cost on acquisition of machinery and deducted the same straight from income under section 23(1)(vii) while computing the taxable income. When confronted, the company explained that these are financial charges duly capitalized during the year 20002001. During assessm ent proceedings the company admitted that the interest was capitalized in accordance with the accounting policy which provided that mark-up, interest and other charges on redeemable capital, long term loans and other borrowings are capitalized up to the date of commissioning of the respective asset, acquired out of the proceeds of such redeemable capital and long, term liabilities. All other mark-up, interest, profit and other charges are charged to income. Learned DR stated that it clearly establishes that the assets acquired out of borrowed funds on which interest and mark-up was claimed, had not been commissioned during
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the year. It is settled proposition of law that interest on assets not actually put to business use or commissioned is not admissible as revenue expenditure and is to be capitalized. The assessee has also not proved that the assets had actually been commissioned and that the amount was wrongly capitalized in books. Viewed in this context these expenses being in the nature of capital expenditure cannot be allowed as deduction from income chargeable to tax. Therefore the CIT(A) rightly observed that the expenditure on installation of new telephone lines was a capital expenditure which should be capitalized. 16. We have considered arguments of both the sides in the light of relevant facts. We have noted that learned CIT(A) while upholding the addition for assessment year 2001-2002 properly took into account the relevant facts. He drew a distinction between the facts of this case and facts of the case cited by the assessee. Therefore, confirmation of this addition by him for assessment year 2001-2002 is quite justified specially when proper opportunity had been provided to the assessee to substantiate its claim but it failed and the Assessing Officer conclusively established that the amount in question is in the nature of capital expenditure which is inadmissible. Action of both the authorities below on this point, for assessment year 2001-2002 is confirmed and assessee's appeal fails. The Department is not in appeal before us against setting aside of assessment on this point for assessm ent year 2002-2003 and tax year 2003. Therefore, action of the CIT(A) on this point is confirmed and assessee's appeal is not accepted for assessment year 2002-2003 and tax year 2003. 17. Bad debts.--For assessm ent year 2001-2002 bad debts of Rs,4180874040 were disallowed for the reason that these were not written off during the year under consideration. This addition was confirmed by learned CIT(A) vide his impugned order dated 19-9-2002. For assessment year 2002- 2003 bad debts of Rs,3274186309 were disallowed because the Assessing Officer found that all measures for recovery were not exhausted to his satisfaction. Learned CIT(A) vide his impugned order dated 24-12-2003 for assessm ent year 2002-2003 observed that disallowance pertaining to exemption period was in order. However, disallowance out of the claim for current year was set aside for re-examination of evidence, material and relevant facts. For tax year 2003 the disallowance of bad debts written off and charged in ,P&L account, bad debts written off against provision for doubtful debts and receivables written off were set aside for re-verification of claim/contention of the assessee company. The assessee company has filed appeal contesting that confirmation of add-back on this account for assessment year 2001-2002 and its setting aside for assessm ent year 2002-2003 and tax year 2003 by CIT(A) was not justified because the assessee was entitled to straight relief on this account. 18. Learned AR stated that disallowance of bad debts written off has been upheld the learned CIT(A) for the reasons that the debts were not written off during the relevant income year; these debts related to period when income of appellant's predecessors who were not subject to income tax; and debts related to a period before the appellant came into existence. He stated that the CIT(A) incorrectly assumed that the debts were not written off during the relevant income year. The fact is that the debts were actually written off on 30-6-2001 which action was approved on 8-11- 2001 by appellant's Board of Directors subsequent to the years end while considering its accounts. He claimed that the CIT(A) failed to conceive the very concept of bad debts when he held that debts related to the period when income of appellant's predecessors was not subject to income tax. The fact is that debts invariably become bad much later than the date of their creation. A debt which is considered as recoverable at the time of its creation becomes bad or irrecoverable in a subsequent period when an assessee loses all rays of hope of its recovery. Accordingly, deduction on account of a bad debt is allowable in the period when it becomes irrecoverable. The period when a debt is created thus becomes irrelevant for the allowance. He stated that recoverability or
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in-recoverability of the amount under consideration was not questioned by the Assessing Officer or the CIT(A). 19. Learned AR stated that the CIT(A) again misconceived the concept of bad debts when he confirmed the disallowance of bad debts for the reason that debts related to a period before the assessee came into existence. The fact is that certain debts were created by appellant's predecessors whose business was taken over by the appellant. Deduction for bad debts relates to a period when these became irrecoverable which is invariably subsequent to creation of the debts. Thus the period of creation of the debts becomes irrelevant for the said allowance. The matter of allowance of bad debts in the case of succession of business was dealt with by the honourable Madras High Court in the case of Mettur Sandalwood Oil Co. v. Commissioner of Income Tax, Madras reported as 47 ITR 781. It was held in the case that constitution of a partnership to continue and carry on the erstwhile joint family business as, result of partition brought about a succession by the firm of the preexisting business and that the assessee firm was entitled to claim the allowance of bad debts because the trade debts written off as bad and irrecoverable did not constitute capital assets in the hands of the assessee. In the appellant's case debts written off in assessm ent year 2001-2002 related to three different periods. The first is upto 14-12-1990 i,e,, when the assets later transferred to the appellant were under the control of the Telephone and Telegraph Department of the Federal Government. The second period runs from 15-12-1990 to 31-12-1995 during which the business was owned by Pakistan Telecommunication Corporation which was exempt from income tax. The third period is from. 1-1-1996 to 30-6-2000 during which period the appellant was exempt from income tax. Details of debts written off that related to each of these periods, presented in a region-wise format is as under:- Total upto 1990 439,824,099 Total 1991 to 1995 3,663,113,580 Grand Total upto 1995 4,302,937,679 20. Learned AR stated that bad debts can only be allowed if the conditions laid down in section 23(1)(x) of the Income Tax. Ordinance, 1979 (the repealed Ordinance) are fulfilled which require that (a) the amount of bad debt must actually be written off; and (b) the amount claimed as a bad debt must be determined to be irrecoverable by the Assessing Officer. The appellant has fulfilled both these conditions for allowance of bad debts. The debts were actually written off during the relevant income year. The date of approval of the write off by appellant's Board of Directors in a subsequent period has no bearing on the action of writing off which undoubtedly was made in the relevant income year. No reservation was expressed by the Assessing Officer in his assessment order regarding the recoverability of the debts claimed to be bad. Since the appellant has fulfilled both the statutory conditions; the facts that these debts were created when the income of the appellant or its predecessors was exempt from income tax is simply irrelevant. 21. Learned DR stated that it is universally recognized principle of law that the revenue expenditure to be admissible must have relevance to the earning of income for the current year. Viewed in the back drop of this principle the allowance of bad debt pertaining to non-taxable income cannot be allowed against the taxable income. In the present case; (i) taxpayer at present enjoys status of a Public Ltd. Company; (ii) it was a government department namely Telegraph and Telephone department established in 1967 and remained so up to 1991; (iii) thereafter through Ordinance XVII 1990 promulgated on 15-12-1990, it became Pakistan Telecommunication Corporation and enjoyed the same status upto 31-12-1995. The income of Pakistan Telecommunication Corporation was also exempt under clause (140A) of Part-I of Second Schedule to the Income Tax Ordinance, 1979; (iv) later through Pakistan Telecommunication (Re-Organization) Act, 1996 it was converted into a Public Ltd., Company incorporated w,e,f,, 1-1-1996 and was granted exemption for three years from its incorporation under clause (140B) of Part-1 of Second Schedule to the Income Tax Ordinance,
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1979; (v) admittedly the bad debts claimed by the taxpayer company relate to the period 1967 to 1995 when the income of the company was exempt. Moreover, although the company made huge profits from 1967 to 1995, the profit earned, from 1992 to 30-6-1999, alone were more than 110 billion, but these so called bad debts were not written off and the assessee waited for termination of exemption period and made the claim on this score only when its income become taxable. It was done intentionally to reduce the income and tax liability of taxable period. 22. Learned stated that bed debts in the case Messrs PTCL pertain to the years 1967 to 1995 when its income was exempt. However the entries of bed debts running into billions of rupees relating to 1967 to 1995 have been claimed by the taxpayer against the taxable income. It did not…
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