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Petitioner: INVESTMENT COMPANY LTD. VS Respondent: COMMISSIONER INLAND REVENUE, ZONE-I, LTU, ISLAMABAD, 419/IB, 420/IB
Court Name: Appellate Tribunal Inland Revenue Judge(s): Muhammad Majid Qureshi, Muhammad Waseem Ch. Title:INVESTMENT COMPANY LTD. vs COMMISSIONER INLAND REVENUE, ZONE-I, LTU,
ISLAMABAD, 419/IB, 420/IB Case No.: I.T.As. Nos. 239/LB to 241/IB of 2014, 419/IB, 420/IB of nnand 153/LB of 2012 Date of Judgment:2015-12-07 Reported As: 2016 PTD (Trib.) 1519 Result: Order accordingly Judgment ORDER MUHAMMAD MAJID QURESHI, ACCOUNTANT MEMBER.---The titled appeals have been preferred at the instance of the appellant calling in question the impugned Orders Nos. 237, 238 and 239, for Tax Years, 2004, 2005 and 2006 all dated 02-01-2009 passed by learned CIR (Appeals-I), Islamabad, who had disposed off appellant's appeals against impugned Assessment Orders passed by ADCIR (Audit-II) LTU under section 122(5A) of the Income Tax Ordinance, 2001 all dated 24-05-2008 treating the assessm ents under section 120 as erroneous in so far as prejudicial to the interest of revenue. The appellant is also aggrieved with the adverse treatment in impugned Orders of first appellate authority for the Tax Years 2008 to 2010, against which it has preferred appeals before us on the following grounds:-- Grounds for Tax Years 2004 to 2006 1. That the order dated January, 2, 2009 issued under section 129 of the Ordinance, 2001 by the CIR(A), Islamabad is bad in law and contrary to the facts of the case to the extent stated below: 2. That the CIT(A) has erred in confirming the order of the Additional Commissioner/Taxation officer, who has amended the deemed assessment order under section 120 of the Ordinance vide order dated May, 24, 2008 which is not erroneous in so far as prejudicial to the interests of revenue under the provisions of section 122(5A) of the Ordinance in the light of several pronouncements of the apex courts. 3. Notwithstanding the above the learned CIT(A) erred in confirming the order without appreciating that: The claim of your appellant is admissible under the provisions of section 29 of the Ordinance.
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Once the conditions have been fulfilled as per the section 29, the assessing officer is not competent to add back the amount of bad debts. Such a provision has been made in compliance to the regulatory framework prescribed by the State Bank of Pakistan relating to Development Financial Institutions. The expense allowed and recovered subsequently are chargeable to tax in the year when the same is received by the person and in this way there is no loss of revenue to the exchequer. That the learned AC failed to interpret the phrase "written off" appearing in section 23(1)(x) of the Repealed Ordinance as explained by the Income Tax Appellate Tribunal (ITAT), Lahore Bench, Lahore in the case laws reported as 2002 PTD (Trib.) 1898 and [(2002) 85 Tax 245 (Trib.)]. 4. Notwithstanding the above, the learned CIT(A) erred by relying on the judgment passed by the Honourable Sindh High Court in its order I.T.A. No,565 of 2000 dated 10.5.2006 (Messrs Grindlays Bank Ltd.) without appreciating that:-- The facts and circumstances of the instant case are quite different from the Grindlays Bank case. This judgment relied by CIT(A) has been decided in preliminary hearing without appreciating and discussing the correct ratio of Sindh High Court's orders in the case of Messrs National Bank Ltd. reported as (1967) 34 Tax 158 (H.C. Kar.) and Messrs Grindlays Bank Ltd. reported as 1991 PTD 569. The subject case has been decided without substantiating the findings and declaring the cases of Messrs National Bank Ltd. and Messrs Grindlays Banks as per incuriam. In the subject case Honourable Sindh High Court ignored the fact that the department did not file any appeal against the orders of Sindh High Court in the cases of Messrs N'dtional Bank Ltd. reported as (1967) 34 Tax 158 (H.C. Kar.) and Messrs Grindlays Bank Ltd. reported as 1991 PTD 569 and that these decisions have attained finality and are binding on the subordinate authorities under Article 201 of the Constitution of Pakistan. 5. That the learned CIT(A) further erred in confirming the order of learned AC by apportioning the expenses between exempt/PTR and taxable income without taking into account the 'nature and size' of the activity carried on by your appellant as is enshrined in section 67 of the Ordinance. The allocation has been without following the principal elucidated therein. 6. That the learned CIT(A) further erred in not allowing the credit for the tax deducted during the relevant period. Grounds for Tax Year 2008. 1. The appellate order No, 105/2011 dated May 26, 2010 issued by the learned CIR (Appeal-II) is bad in law, on facts and in the circumstances of the case. 2. The learned CIR (Appeals-II) has erred by not holding that the order passed by the learned DCIR is without jurisdiction and accordingly is illegal, null and void. 3. The learned CIR (Appeals-II) has further erred in stating that the Company's case was rightly selected for audit in accordance with the provisions of section 177 of the Ordinance Without prejudice to the aforesaid grounds of appeal 4. The learned CIR (Appeals-II) has erred in passing the impugned order based on unsubstantiated contentions, without addressing the contention and submissions of your Honour's Appellant on various issues in appeal. Accordingly, the said order is violative of section 24A of the General Clauses Act, 1897 which stipulates that public functionaries are obliged to decide the controversy between the parties with reasons and application of mind. The aforesaid act of the CIR (Appeals-II) is violative of Article 10A of the Constitution of the Islamic Republic of Pakistan. 5. The CIR (Appeals-II) has erred in upholding the action of the learned assessing officer of making disallowance of Appellant's claim for provision against non-performing loans. The learned Commissioner Inland Revenue (Appeals - II) has further erred in not appreciating that aforesaid provision is in accordance with prudential regulations, is admissible under section 29 of the Income Tax Ordinance, 2001 and no loss is caused to revenue as Company offer to tax any amount
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recovered from previously classified doubtful portfolio. 6. The CIR (Appeals-II) has erred in maintaining disallowance of Appellant's claim for Riyadh office expenses and has further erred in stating that Company had not submitted details in this respect at assessm ent stage. 7. The CIR (Appeals-II) has erred in upholding the disallowance of Rs.256,792 (being provisions/ write off in this respect of non recoverable amount from National Accountability Bureau) on the premise that Company had not submitted related information at the time of assessment. 8. The CIR (Appeals-II) has also erred in not deleting the additions on account of non deduction of tax from reimbursement of medical expenses etc. (i,e, items which do not constitute taxable salary). The CIR (Appeals-II) has further erred in alleging that the Company had not submitted details to the assessing officer at the stage of assessment. 9. Although the CIR (Appeals-II) has deleted the addition of Rs.250,000 (for alleged short deduction) yet he has erred in construing the same as reimbursement of actual expenses 10. The learned CIR (Appeals-II) has failed to appreciate that lease rentals offered to tax on cash basis cannot be subject to double taxation (on accrual basis as well) accordingly the learned CIR (Appeals - II) has grossly erred in upholding assessing officer's contention of making addition on account of unearned lease income. 11. The CIR (Appeals-II) has erred in upholding assessing officer's action of apportioning Financial and Administration Expenses between exempt/final tax regime income and taxable income. 12. The CIR (Appeals-II) has also failed to appreciate that the assessing officer has apportioned incorrect amount of expense. 1. The learned CIR (Appeals-II) has erred by not directing assessing officer to adjust brought forward loss. Grounds for Tax Year 2009 1. The appellate order No 104/2011 dated May 26, 2010 issued by the CIR (Appeals-II) is bad in law, on facts and in the circumstances of the case. 2. The learned CIR (Appeals-II) has erred by not holding that the order passed by the learned DCIR, LTU, Islamabad is without jurisdiction and accordingly is illegal, null and void Without prejudice to aforesaid grounds of appeal 3. The CIR (Appeals-II) has erred in passing the impugned order based on unsubstantiated contentions, without addressing the contention and submissions of your Honour's Appellant on various issues ha appeal. Accordingly, the said order is violative of section 24A of the General Clauses Act, 1897 which stipulates that public functionaries are obliged to decide the controversy between the .parties with reasons and application of mind. 4. The aforesaid act of the CIR (Appeals-II) is violative of Article 10A of the Constitution of the Islamic Republic of Pakistan. 5. The learned CIR (Appeals-II) has erred in upholding the action of the learned assessing officer of making disallowance of Appellant's claim for provision against non-performing loans. The CIR (Appeals-II) has further erred in not appreciating that aforesaid provision is in accordance with prudential regulations, is admissible under section 29 of the Income Tax Ordinance, 2001 and no loss is caused to revenue as Company offer to tax any amount recovered from previously classified doubtful portfolio. 6. The CIR (Appeals-II) has also erred in not deleting the additions on account of non deduction of tax from reimbursement of expenses, medical expenses etc (i,e, items which do not constitute taxable salary). The CIR (Appeals-II) has further erred in alleging that the Company had not submitted reply to the assessing officer at the stage of assessment. 7. The CIR (Appeals-II) has erred in upholding DCIR's action of apportioning Financial and Administration Expenses between exempt/final tax regime income and taxable income.
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8. The CIR (Appeals-II) has also failed to appreciate that the assessing officer has apportioned incorrect amount of expense 9. The CIR (Appeals-II) has erred by not directing DCIR to adjust brought forward loss. Grounds for Tax Year 2010 1. The appellate order No 568/2011 dated December 10, 2011 issued by the CIR (Appeals-II) is bad in law, on facts and in the circumstances of the case. 2. The CIR (Appeals-II) has erred by not holding that the order passed by the ADCIR is illegal null and void. 3. The CIR (Appeals-II) has erred in upholding the action of the learned assessing officer of making disallowance of Appellant's claim for provision against non-performing loans and has further erred in not following the ratio decided to this effect by 5 member bench of Honourable Appellate Tribunal. 4. The CIR (Appeals-II) has erred in disallowing Appellant claim of penalty. 5. The CIR (Appeals-II) has erred in remanding the issue of tax on property income to ACIR without appreciating that same shall have been deleted from the record that ACIR had proceeded in this issue without confronting the taxpayer. 6. The CIR (Appeals-II) has erred in upholding assessing officer's action of apportionment of Financial and Administration expenses between exempt/final tax regime income and income chargeable under other heads of income. 7. Appellant craves leave to add to, amend or alter the above grounds of appeal. 2. These appeals on behalf of appellant were represented by the learned Authorised Representatives Mr. Rashid Ibrahim, FCA and Hafiz Muhammad Idrees, Advocate Supreme Court. Whereas Shiekh Anwar ul Haq, Advocate High Court assisted us on behalf of department. The following main contentious issues were pressed on bar for our adjudication:- (i)Disallowance of Provision for Bad Debts in respect of nonperforming loans; (ii)Add back of apportionmed of common expenses between Normal and FTR. (iii)Addition on account of Non-Deduction of Withholding tax from Salary and perquisites; (iv)Additions of Expenses incurred in Riyadh Office Employees; (v)Add backs on account of amount written off in respect of non-recoverable amount from NAB; and (vi)Additions in income in respect of 'Unearned Finance Lease'. 3. The summary of the submissions by the learned Authorised Representatives on various issues are as under:-- (i) The department has made following additions in respect of non-performing loans and the learned CIR (Appeals-II) has confirmed the addition in computation of income:-- Impugned periodsAmount (Rs.) Tax Year 2004 130,735,646 Tax Year 2005 40,448,061 Tax Year 2006 267,212,553 Tax Year 2008 448,043,068 Tax Year 2009 603,300,550 Tax Year 2010 180,632,276 In respect of 'Provisions for Non-performing loans' it was argued that this matter has already been decided in favour of the taxpayers that the provision for non-performing loans is an admissible expense in terms of section 29 of the Income Tax Ordinance, 2001 by the Larger Bench of Appellate Tribunal Inland Revenue, Lahore in the cases reported as 2012 PTD (Trib.) ' 1139 and Division Bench in
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the judgment reported as (2013) 107 TAX (Trib.) 473. He has also relied upon two unreported judgments of Sindh High Court, Karachi in the case of Messrs Securities Leasing Corporation Limited and Messrs Standard Chartered Bank in ITRAs Nos. 219 of 2008 and 216 of 2011 respectively. In this context they have submitted that these judgments are binding on the appellate tribunal, therefore, the additions made by respective officers on account of non-performing loans may be deleted. (ii) The second issue was relating to additions on account of apportionment of common expenses. Being assailed from the order of the first appellate authority where the following additions made by the tax department were confirmed in all tax years:-- Impugned periodAmount (Rs.) Tax Year 2004 52,385,919 Tax Year 2005 302,778,058 Tax Year 2006 57,457,212 Tax Year 2008 1,375,451,945 Tax Year 2009 616,185,899 Tax Year 2010 521,577,088 The learned A.Rs. of the appellants have submitted that the apportionment of common expenses to income under final tax regime has been rejected by the learned first appellate authority who has not considered the various judgments which were decided in favour of the taxpayers in terms of following judgments of Hon'ble High Court and this Tribunal. They have relied on the following judgment:-- (a) 2005 PTD 2586 (Karachi High Court) (b)ITA No, 562-61KB/2009 decided on 04-02-2013 in Faysal Bank Case (c)2012 PTD (Trib.) 1268 (d)2011 PTD (Trib.) 1039 (e)2008 PTD (Trib.) 679 (f)2013 PTD (Trib.) 246 = 2012 PTR 124 (Trib.) in the case of Allied Bank (g) 2013 PTD (Trib.) 1429 In this respect it was submitted that the above authorities were binding on the appellate tribunal, the additions on account of apportionment of common expenses may be annulled and assessm ent on this count may be canceled and order to this extent may be vacated. (iii)The learned AR also agitated additions on account of salary due non-deduction of withholding tax amounting to Rs. 5,240,980. It was argued that amounts not offered for tax were rerelating to maintenance of car, medical allowance and reimbur sement of expenses which were not taxable in the hands of employees. Provision for vehicles has been offered in accordance with Rule 5 of the Income Tax Rules, 2002. The learned AR of the appellant submitted a reconciliation in this respect. (iv)The learned A. Rs. of the appellant argued that the additions on account of Regional Office Riyadh (KSA), amounting to Rs.1,165,654 was erroneously added on the pretext that no foreign income was earned during the Tax Year 2008. It was argued before the Deputy Commissioner that these were on account of out-sourced staff in Saudi Arabia whose services were procured from other service providers. ARs submitted that the learned first appellate authority was not justified in rejecting the claim as adequate explanation was provided which was reproduced in his appellate order wherein it was clearly submitted that the company is a joint venture of Government of Pakistan and Government of Saudi Arabia with 50% holding of respective Governments. He stated that the Chairman of the company and two directors are Saudi Nationals. Two employees were deputed in Riyadh Office and the said expense w.as wholly and exclusively for the purpose of
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business. It was argued that it is not a case of section 21(c) of the Income Tax Ordinance, 2001 on the basis of which the CIR(A) has confirmed the additions. They have placed reliance on the judgment reported as 2012 PTD 704 and 2011 PTD 1893 wherein the Appellate Tribunal has accepted the new documentary evidence not produced earlier. It was prayed that on the strength of above judgments the additions may please be deleted. (v)Next question is regarding certain add backs to income made on account of amounts written off in respect of non-recoverable amount from National Accountability Bureau. According to the explanation available in the Notes to the audited accounts, this amount of provision represent the advance given to National Accountability Bureau for the purchase of 32.718 million shares in Saudi Pak Commercial Bank Limited. Out of this company received 32.703 million shares in the current year, while the receipt of remaining shares is doubtful. (vi)It was submitted by the learned A.Rs. that learned CIR(A) was not justified in confirming additions of Rs. 121,472,003 on account of unearned finance lease income for Tax Year 2008. It was contended by the ARs of the appellant that the amount represent unearned lease finance income not recognized in the audited accounts and has been disclosed only in accordance with International Accounting Standard - 17 (Leases) which requires disclosures of the future income to be recognised in the year in which such income accrues. This disclosure has been made in Notes to audited accounts. They submitted that since the first appellate authority has failed to appreciate this fact, therefore, he was not justified to confirm the additions made on this score. 4. The learned counsel on behalf of department has opposed the submissions made on behalf of the appellant and supported the Orders of first appellate authority and departmental officers. 5. We would like to dispose of this appeal on issue to issue basis. The first issue we take up is that of additions on account of 'Provisions for Non-performing loans'. Before adverting to the controversy before us, it is appropriate to reproduce the provisions of the Income Tax Ordinance, 2001 governing Bad Debts. 6.1 Section 29 of the Income Tax Ordinance, 2001 read as under:-- Bad debts.---(1) A person shall be allowed a deduction for a bad debt' in a tax year if the following conditions are satisfied, namely:- the amount of the debt was (i) previously included in the person's income from business chargeable to tax; or (ii) in respect of money lent by a financial institution in deriving income from business chargeable to tax; (b) the debt or part of the debt is written off in the accounts of the person in the tax year; and (c) there are reasonable grounds for believing that the debt is irrecoverable. (2) The amount of the deduction allowed to a person under this section for a tax year shall not exceed the amount of the debt written off in the accounts of the person in the tax year. (3) Where a person has been allowed a deduction in a tax year for a bad debt and in a subsequent tax year the person receives in cash or kind any amount in respect of that debt, the following rules shall apply, namely:- (a)where the amount received exceeds the difference between the whole of such bad debt and the amount previously allowed as a deduction under this section, the excess shall be included in the person's income under the head "income from Business" for the tax year in which it was received; or (b)where the amount received is less than the difference between the whole of such bad debt and the amount allowed as a deduction under this section, the shortfall shall be allowed as a bad debt deduction in computing the person's income under the head "Income from Business" for the tax year in which it was received. Before resolving the controversy, it is important to look into certain basic concepts relating to the
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impugned subject in common parlance, income tax statute and cases law. First of all we will examine what is 'debt bad debts' and what it implies? 6.2 Debts, what it implies? The word 'debt' has been defined in subsection (15) of section 2 of the Income Tax Ordinance, 2001 as well as in various legal dictionaries, thesaurus and cases law as under:-- Subsection (15) of Section .2 of the Ordinance; "debt" means any amount owing, including accounts payable and the amounts owing under promissory notes, bills of exchange, debentures, securities, bonds or other financial instruments; The definition in Income Tax Ordinance, 2001 is enumerative definition with reference to financial and negotiable instruments. In other words, a debt may be defined as a sum of money due from one person to another. As a general rule where a taxpayer is entitled to receive a sum of money from another either at law or in equity, it is accepted that a debt exists for the purposes of section 2(15) of the Income Tax Ordinance, 2001. There is a debt for the purposes of section 2(15) where a taxpayer has merely an equitable entitlement to the debt. "Debt" has been defined as "a sum of money due from one person to another. A debt exists when a certain sum of money is owing from one person to another.... 'Debt' denotes not only the obligation of the debtor to pay, but also the right of the creditor to receive and enforce payment.... "- (Earl Jowitt in his Dictionary of English Law). "A sum of money due from one person to another...." (Wharton Law Lexicon, 14th Edition). The word "debt" comprises an ascertained sum of money provided it is ascertainable by reference to relevant data and the liability to pay is unconditional, that is to say, it has to be paid anyhow and in all circumstances--- Webb v. Stenton, (1883) 11 QBD 518, 527, 528. "A debt in such cases is an outstanding which if recovered would have swelled the profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section a debt means something more than a mere advance. It means something which is related to business or results from it. To be claimable as a bad or doubtful debt it must first be shown as a proper debt"- A. V. Thomas & Co. Ltd. v. CIT (1963) 48 ITR (SC) 67, 75. 6.3 Bad Debt, what it implies? What is bad debt and what it implies is evident from the following treatises, dictionaries and cases law: According to Principles of Income Tax Law with Glossary by Huzaima Bukhari and Ikram ul Haq, second edition, pp. 26, "Debt which is unlikely to be paid (for example, because of probable or actual financial failure of the debtor). Bad Debts may usually be treated as losses and written off against reserves for such debts". According to LEGAL TERM AND PHRASES by M. Ilyas Khan, "The dictionary meaning of a bad debt is that it is a kind of debt which is not recoverable or in other words will never be paid CIT/WT v. Hail Anwar ur Rehman 2004 PTD 1940." THE LAW AND PRACTICE OF INCOME-TAX IN PAKISTAN by S. M. Raza Naqvi, Fourth Enlarged Edition, Volume II, pp. 409, (which was the most authoritative commentary on the Income Tax Act, 1922) has comprehensively discussed the basic issue of bad debts with reference to its basic concept, discharge of onus by the assessee, conditions for bad debts for the writing off as follows: -- "The debts which are found to be irrecoverable are called bad debts. Before claiming an allowance for bad debts or irrecoverable loans under this clause, the following conditions must be satisfied (1) The debts or loans must be relating to the business which is carried on by the assessee in the relevant accounting year;
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(2) The method of accountancy followed must not be on cash basis, but this condition will not apply in the case of moneylenders; (3) The loan must have been made in the ordinary course of business, profession or vacation and be incidental to the business; (4) The debt or loan must have become irrecoverable in the relevant accounting year and not prior to that year. (5) The sum allowed under this clause should not exceed the amount actually written off as irrecoverable in the books of the account. Common causes of failure to secure payment are insolvency, poverty, death or disappearance. Common kinds of sums found to be irrecoverable are amounts owed for goods supplied or services rendered. Losses occasioned by such causes and such debts can, as a rule, be allowed without question." The burden of proving that a debt has become bad lies on…
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