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Petitioner: BANK OF PUNJAB, LAHORE VS Respondent: COMMISSIONER INLAND REVENUE, LTU, LAHORE
Court Name: Appellate Tribunal Inland Revenue Judge(s): Tabana Sajjad Naseer, Syed Nadeem Saqlain Title: BANK OF PUNJAB, LAHORE vs COMMISSIONER INLAND REVENUE, LTU, LAHORE Case No.: I.T.As. Nos.774/LB and 805/LB of 2011 Date of Judgment:2011-12-19 Reported As: 2012 PTD (Trib.) 1055 Result: Order accordingly
Judgment ORDER This is the case of a scheduled bank, engaged in banking business. Brief facts of the case are that the appellant-Bank filed return for tax year 2009 under section 114 of Income Tax Ordinance, 2001 ("the Ordinance") which was treated as assessment order under section 120(1) of the Ordinance. Later on, audit proceedings under section 177(1) of the Ordinance, as amended by the Finance (Amendment) Ordinance dated 28th October, 2009, were initiated. The appellant, in response to notice issued under section 177 dated 29-1-2010 took legal objection that from tax year 2009 onward, the banks were to be taxed under section 100A read with the provisions of Seventh Schedule to the Ordinance, which did not permit audit of many items mentioned in the notice. The Deputy Commissioner Inland Revenue rejected appellant's legal objection and after confronting certain additions passed the order under section 121 read with section 177(10). The order was passed ignoring the replies of the appellant-Bank on the points specifically confronted. The appellant Bank contested proceedings initiated under section 177 and order passed under section 121 on both legal and factual grounds before Commissioner Inland Revenue (Appeals), Zone-I, Lahore, who adjudicated the appeal of the bank vide Order No.46 dated 30-4-2011 ("the impugned order"). Being aggrieved with the impugned order, the Bank and the Department- filed appeals on the following grounds:-- Bank's grounds of appeal (1) That the order of learned Commissioner (Appeals) dated 30-4-2011 against order under section 121 of Income Tax Ordinance, 2001, to the extent of grounds taken below, is bad in law and against the fact of the case. (2) That the learned Commissioner (Appeals) erred in confirming assumption of jurisdiction by the Deputy Commissioner under section 121 of Income Tax Ordinance, 2001.
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(3) That the learned Commissioner (Appeals) erred in confirming assessment completed under section 121 of Income Tax Ordinance, 2001 in the presence of assessment under section 120 of the Ordinance. Without prejudice to above: (4) That the learned Commissioner (Appeals) erred in confirming computation of income in violation of section 100A read with the provisions of Seventh Schedule to Income Tax Ordinance, 2001. (5) That the learned Commissioner (Appeals) erred in confirming taxation of 'reversal of Provision for non-performing advances' at Rs.4,438,011,000, which the Bank itself offered for tax. That the learned Commissioner (Appeals) erred in confirming disallowance of unabsorbed depreciation related to leased assets at Rs.114,540,000, That the learned Commissioner (Appeals) erred in confirming disallowance of "provision against other. Assets" at Rs.10,101,000. That the learned Commissioner (Appeals) erred in confirming disallowance of "provision for diminution in value of investment" at Rs. 366,387,000. That the learned Commissioner (Appeals) erred in not adjudicating Ground No.11 relating to disallowance of "provision against compensated absences" at Rs.27,981,000. That the learned Commissioner disallowance of "contribution Rs.42,117,000. (Appeals) erred in confirming to defined benefit plan" at (11) That the learned Commissioner (Appeals) erred in confirming proportionate disallowance of financial charges allegedly relatable to dividend income taxable at reduced rate by misapplying the law. (12) That the learned Commissioner (Appeals) erred in confirming proportionate disallowance of financial charges allegedly relatable to capital gains taxable at reduced rate by misapplying the law. Department's grounds of appeal (1) that the order of the Commissioner Inland Revenue (Appeals- I). Lahore vide No.46 dated 30-4-2011, is bad in law so far as it ignores the express provisions of section 129(1)(a) of the Income Tax Ordinance, 2001. (2) That the learned Commissioner Inland Revenue (appeals) was not justified in deleting the addition made on account of provision against non-performing advances and allowance @1% of total revenue. (3) That the learned CIR(Appeals) was not justified in holding that allocation of expenses to dividend income and capital gain may be restricted to financial charges claimed as not much administrative cost is involved in this activity.. We have heard- the rival arguments on the above grounds, perused the orders passed by the Deputy Commissioner Inland Revenue and Commissioner of Appeals, relevant statutory provisions and case-law. The issue-were adjudication is made as under disposing of grounds of both the bank and the Department: ORDER UNDER SECTION 121 OF INCOME TAX ORDINANCE, 2001. The learned counsel of the appellant-Bank contested that the Bank never resisted audit proceedings and provided documents and details within the scope of Seventh Schedule as from tax year 2009, scheduled banks have to be taxed in terms of section 100A of the Ordinance. He pointed out that both the authorities below wrongly attributed non-compliance of notices. In reality, the Bank made compliance of each and every notice but insisted for strict compliance of the Seventh Schedule to the Ordinance. On the Contrary, the Deputy Commissioner misapplied the law and asked for audit violating explicit provisions of section 100A read with the Seventh Schedule to the Ordinance. He showed from record that despite repeated requests the Deputy Commissioner did not provide a copy of delegation of powers from the Commissioner under which
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she initiated proceedings under section 177 of the Ordinance. The learned LA pointed out that both in the order of the Deputy Commissioner and Commissioner of Appeals there was concurrent finding of noncompliance of notice under section 177, therefore, best judgment order under section 121 was justified. The learned AR rebutted the findings of both the authorities below by providing copies of the replies that were submitted from time to time. He contended that findings of noncompliance are factually incorrect. We have examined the letters and documents submitted by the appellant-Bank in response to notices issued by the Deputy Commissioner. The following extracts from the replies submitted by the Bank in response to notice issued under section 177 support the contention of AR: (1) Reply dated 1-2-2010.---As regards adjustment(s) under Rule 1(b) of the Schedule, the Bank has already added back penalty paid to the State Bank under section 21(g) of the Ordinance. For the purpose of application of section 21(b) or (c) read with Rule 1(b) of the Schedule, the bank has already discharged its onus by filing statements under section 165 showing withholding of taxes wherever required under the law. (2) Reply dated 12-2-2010.---As conveyed in our earlier letter dated 1-2-2010, we are ready to provide necessary details that are relevant for the purpose of application of Rule 1(a) to (h). We need sufficient time of 60 days to provide the details as branches are scattered all over Pakistan and records/documents are also voluminous. (3) Reply dated. 26-2-2010.---As conveyed in our earlier letters dated 1-2-2010 and 12-2-2010, we are providing some details that are relevant for the purpose of application of Rule 1(a) to (h). You are free to check our records/accounts as well to the extent of adjustments permissible under the Seventh Schedule as stated above, for which a mutually agreed schedule can be chalked out. (4) Reply dated 5-3-201Q.---During the hearing on March 1, 2010, it was reiterated that details/record only in respect of adjustments mentioned in Rule 1(a) to (h) of the Schedule will be provided. Substantial compliance in this regard was made on the said date. For rest of the details, we need time as the data is to be collected from branches situated all over Pakistan. (5) Reply dated 13-3-2010.---We have been submitting repeatedly that limited scope under the Seventh Schedule to the Income Tax Ordinance, 2001 does not permit your honour to conduct the audit in the manner conveyed and desired. We have not been gaining any time. On the contrary, we have complied with your notice by submitting necessary details relevant for the purpose of Seventh Schedule. We are also providing certificate required under Rule 1(c) of Seventh Schedule without surrendering our legal stance that for tax year 2009 entire claim is admissible. As regards audit of deduction of tax at source, we have been filing monthly statements as required under the law. The law provides a check and balance system through monthly statements. All the statements are with the department and no objection was ever raised when these were filed. We will attend the hearing on 17-3-2010 as desired by you provided the above mentioned documents are made available to us before the said date so that we can prove our point that jurisdiction is still being exercised on the basis a non-existent law, namely, the Finance (Amendment) Ordinance, 2009. As regards issues raised in the notice dated 29-1-2010, we have already submitted point-were reply vide letter dated 26-2-2010. It is strange that compliance of the same has been required again ignoring our detailed submissions on each point with relevant case-law and F.B.R's. Instructions, wherever relevant and necessary. The underlined portions above prove beyond any doubt that allegation of non-compliance is factually incorrect. Both the authorities below misrepresented the facts and this amounts to miscarriage of justice. It needs serious consideration of the Federal Board of Revenue (F.B.R.). Taxpayer should be treated fairly and justly. In this case, a scheduled bank is portrayed as a non- compliant taxpayer whereas the truth is otherwise. It is for F.B.R. To take notice of this lapse and
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take appropriate action so that in future taxpayers are not wrongly blamed for non-compliance. For us it is suffice to hold that order under section 121 of 18-3-2011 is not maintainable as compliance of notice within the four corners of the Seventh Schedule to the Ordinance was made by the appellant-Bank. If the Deputy Commissioner Inland Revenue was not satisfied with the reply made vide letter dated 26-2-2010 on issues raised in notice dated 29-1-2010, amendment of assessm ent already in the field could have been made but there was no justification whatsoever to resort to section 121 after compliance by the appellant Bank. Since we have held order 121 untenable on factual matrix, there is no need to adjudicate 'other grounds related to assumption of jurisdiction under section 177 or retrospective application of section 177(10) inserted through a Presidential Ordinance on 28th October, 2009. COMPUTATION. OF INCOME UNDER SECTION 100A READ WITH SEVENTH SCHEDULE The learned AR contended that from tax year 2009 onwards, the banks are to be taxed in terms of section 100A read with the provisions of Seventh Schedule ("the Schedule") to the Ordinance, 2001. According to him, the scheduler assessment in the case of banks from tax year 2009 came at par with insurance companies taxed under the Fourth Schedule to the Ordinance. He further contended that Seventh Schedule did not permit re-computation of income as done by the Deputy Commissioner in view of explicit language of section 100A read with Rule 1 of the Seventh Schedule. The learned AR argued that the Deputy Commissioner could made only permissible additions and adjustments as provided in the Seventh Schedule itself. Relying on CIT Central Zone 'A' Karachi v. Phoenix Assurance Co Ltd. 1991 PTD 1028 he argued under the scheduler assessments, the acceptance of accounts was a fait accompli for tax authorities. The learned LA contested this position and argued that in view of Rule 9 of the Schedule, all the provisions of the Ordinance were applicable and both the authorities below did not misinterpret the law. It is an undisputed fact that from tax year 2009, the Seventh Schedule to the Income Tax Ordinance, 2001 read with section 100A overrides all other provisions as far as computation of income and tax payable in the case of banks are concerned. This vital aspect escaped the attention of both the Deputy Commissioner and the Commissioner of Appeals. Rule 1 of the Seventh Schedule says that the balance of income, from all sources before tax, disclosed in the annual accounts required to be furnished to the State Bank of Pakistan subject to adjustments permissible under sub-rules 1(a) to (h) of the said Rule 1 of the Seventh Schedule to the Ordinance, are to be accepted. It is a cardinal position of law that enactment of special rule excludes general provisions when the subject-matter of both is the same E (generalibus specialia derogant). Since for the computation of income and tax, special schedule is enacted, the provisions on the same subject provided elsewhere in the Ordinance are excluded. The plain reading of section 100A read with Rule 1 of the Seventh Schedule testifies this. As regards Rule 9 of the Schedule, it applies only to provisions that "are not specifically dealt with" in the Seventh Schedule. Since computation of income and tax payable thereon is specifically provided in the Seventh F Schedule, Rule 9 cannot be interpreted in a way that would defeat the very purpose of its enactment. Rule is not a non-obstante provision that overrides all other provisions of the Seventh Schedule. On the contrary, Rule 9 says that if something is not provided in the Seventh Schedule then all other provisions of the Income Tax Ordinance will apply mutatis mutandis. The Commissioner of Appeals and Deputy Commissioner misinterpreted and misread Rule 9 of the Seventh Schedule. They have failed to appreciate that it applies only for provisions that "are not specifically dealt with" in the Seventh Schedule. If Rule 9 is to be applied in respect of provisions specifically enacted in the Seventh Schedule, it would render the entire Schedule redundant. Such an interpretation would be violative of ratio decidendi of many judgements of Supreme Court cited below and latest order of this Tribunal reported as 2010 PTD (Trib.) 679.
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The honourable Supreme Court while examining similar provisions in the case of insurance companies has held that law gives sanctity to the accounts prepared under the provisions of the Insurance law and that an Assessing Officer has no authority to upset the integrity of such accounts. The following cases decided by honourable Supreme Court and High Courts clearly establish that provisions contained in the Fourth Schedule --- similar provisions have been provided for banks under the Seventh Schedule --- are non-obstante in nature which override other provisions of the Ordinance:-- (1) EFU General Insurance Co. Ltd. v. Federation of Pakistan 1997 SCC 1174 = 1997 PTD 1693. (2) Central Insurance Co. And others v. C.B.R., Islamabad and others 1993 SCMR 1232 = 1993 PTD 766. (3) CIT Karachi v. Queensland Insurance Company Ltd. Karachi 1992 SCMR 539. (4) CIT Central Zone 'A' Karachi v Phoenix Assurance Co Ltd. 1991 PTD 1028. (5) Habib Insurance Co. Ltd. v. CIT 1989 Sec. 736 = PLD 1990 SC 430. (6) CIT Companies III. Karachi v. Central Insurance Companies Ltd. 2003 PTD 1321. (7) Home Insurance Co. Ltd v. CIT 1992 PTD 1177. The crux of the above cases is that no variance in the audited accounts of bank submitted to State Bank of Pakistan can be made. The unambiguous language of section 100A read with Rule 1 of the Seventh Schedule to the Ordinance provides that only specified adjustments/additions mentioned in Rule 1(a) to (h) can be made. Thus, the acceptance of balance of income as per accounts was a fait accompli for the Tax Department. By not adhering to it, gross violation of law has been committed by the Deputy Commissioner while the Commissioner of Appeals was not correct in law to justify it. The Commissioner of Appeals dismissed appeal on this point with the observation that Rule 9 of the Schedule authorised department to go beyond Seventh Schedule on the issues not specifically dealt with in the Schedule. Relevant part of the order is reproduced below:-- "I have noticed nowhere in 7th Schedule it has been mentioned that computation of income and tax payable thereon will be made in accordance with Rule 1 only. Why the learned AR is trying to and/insert his on words to the clear language used by the Legislature itself? This is beyond me. In fact he is trying to construe 7th Schedule in isolation, even ignoring Rule 9. It is a settled law that schedule is the part of the main statute and not a standalone legislature. In particular where rule 9 itself refers to the provisions' of the Ordinance the restriction as desired by the learned AR on the assessm ent cannot be placed that is confined to Rule 1 only. As regards the expression used overriding suffice to say that there is no conflict between the schedule and the Ordinance which may attract the concept of overriding effect. It is, therefore, held that the additions have been rightly made under different provisions of the statute as far as this ground is concerned." The above observations of Commissioner of Appeals are untenable. Section 100A read with Seventh Schedule to the Ordinance is a special non-obstante provision that overrides all other provisions as far as computation of income and tax payable by the banking companies is concerned. Tax authorities are bound to accept the audited accounts from tax year 2009 in the case of banks subject to specified additions and adjustments. This position of law has also been admitted and explained by F.B.R. In Para 10 of its Circular No.1 of 2007 dated 2-7-2007, Circular No. 2 of 2008 dated 28-2-2008, Circular No. 3 of 2009 dated 17-7-2009 and Circular No.8 of 2009 dated 25-9-2009. These instructions are strictly as per law having binding force for all subordinate tax officials under sections 206(2) and 214(1) of the Ordinance. In the presence of unambiguous position of law and legally binding instructions, the Deputy Commissioner was bound to accept the balance of income as per audited accounts subject to additions/adjustments mentioned in Rule 1(a) to (h) of the Seventh Schedule. On the basis of misinterpretation of Rule 9 of the Seventh Schedule, as elaborated above, the authorities below concluded that Seventh Schedule is not a
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self-contained provision as far as computation of income is concerned in the case of banking companies. We disapprove this interpretation and hold that for computation of income of the banking companies, the Seventh Schedule to the Income Tax Ordinance, 2001 provides rules for computation of the profits and gains of a banking company and tax payable thereon. From tax year onwards, a banking company's income as disclosed in the annual accounts furnished to the State Bank of Pakistan, subject to specified adjustments, shall be taken as "Income from Business". Rule 9 in no way can be interpreted to unsettle this requirement laid down by the Legislature. It applies for things not provided for in the Seventh Schedule. TAXATION OF 'REVERSAL OF PROVISION FOR NONPERFORMING ADVANCES' ' The learned AR pleaded that this addition was not only against the express provision of Rule 1 of the Schedule, but was also misconceived. The gross charge for the year under this head was Rs.23,301,591,000 that was reduced by Rs.4,438,()11,000 (reversals) and net charge to the accounts was Rs.18,863,580,000. Since the gross charge of 23,301,591,000 for the year was reduced by this amount, the same cannot be taxed again. It was argued that this Tribunal in I.T.A. No.306/LB of 2009 dated 8-8-2009 on this issue held as under:-- "We also endorse the point of view of the taxpayers that even otherwise it was double taxation as reversals/recoveries related to non performing loans were offered for tax" The learned AR also claimed that the above decision of the Tribunal had attained finality under section 132(10) of the Ordinance as Department did not file appeal under section 133 against it. AR further informed that the same Commissioner of Appeals following the above judgment of Tribunal in the case of Allied Bank Limited vide Order No.20 dated 31-3-2011 ordered the deletion. But strangely, in this case, he gave a contrary finding violating the rule of consistency and in utter violation of matter already settled by this Tribunal. The learned LA during his arguments did not refute the arguments advanced by the AR. We have examined the facts and case-law cited. In this case, reversal has been taxed without any justification. The appellant-Bank undisputedly claimed total provision of Rs.23,301,591,000 but reduced it to Rs.18,893,580,000 meaning by difference representing reversals and recoveries was offered for tax. The Department by disallowing amount of Rs.23,301,591,000 (which included reversal of Rs.4,438,011,000) taxed it not only twice but thrice as it added back an amount of Rs.4,438,01,000 in total income. Following our judgment in I.T. A. No.306/LB/2009 dated 8-8-2009, we delete this addition. DISALLOWANCE OF UNABSORBED DEPRECIATION RELATED TO LEASED ASSETS The learned AR argued that the learned Deputy Commissioner did not mention provision of law for making this addition. He contended that Rule 1 of the Seventh Schedule to the Ordinance required the Deputy Commissioner to accept the net profit of the bank as per audited accounts submitted to the State Bank of Pakistan. He contended that the learned Commissioner of Appeals was not justified in confirming this addition when no cogent reasons for the 'same were given by the Deputy Commissioner. Learned LA opposed the arguments of the AR contending that claim was in violation of Rule 1(b) of the Seventh Schedule. The learned AR read with Rule 8A(3) in his rebuttal. This Rule reads as under: (3) The provisions of this Schedule shall not apply to any asset given or acquired on finance lease by a banking company up to the tax year 2008, and recognition of income and deductions in respect of such asset shall be dealt in accordance with the provisions of the Ordinance as if this Schedule has not come into force: Provided that un-absorbed depreciation in respect of such assets shall be allowed to be set-of against the said lease rental income only. Plain reading of the above Rule shows that claim of the appellant-bank was strictly as per law and there was no justification to disallow the same. We hereby order the acceptance of unabsorbed
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depreciation allowance related to leased out assets claimed under Rule 8A(3) of the Seventh Schedule. DISALLOWANCE OF "PROVISION AGAINST OTHER ASSETS" According to learned AR the Deputy Commissioner did not mention provision of law for making this addition. He relied on Rule 1 of the Seventh, Schedule to the Ordinance that says the net profit as per audited accounts should be accepted. The AR claimed that the learned Commissioner of Appeals did not pass a speaking order and was not justified in confirming this addition which was made in utter violation of law. The learned LA however, pleaded that action of both the authorities was correct in law. However, he could not cite the exact provision of law under which this disallowance was made. We are of the considered view that this amount was allowable in view of Rule 1 of the Seventh Schedule. We disapprove the action of both the Deputy Commissioner and Commissioner of Appeals. DISALLOWANCE OF "PROVISION FOR DIMINUTION IN VALUE OF INVESTMENT" The learned AR contended that disallowance of provision for diminution in the value of investment was Rule 1 of the Schedule. He reiterated that from tax year 2009, the Seventh Schedule to the Income Tax Ordinance, 2001 read with section 100A overrides all other provisions as far as computation of income and tax payable in the case of banks were concerned. According to AR, the Deputy Commissioner could make adjustments and additions in net profit as per books of account that were specifically mentioned in Rule 1(a) to Rule'l(h) of the Schedule. The learned LA contended that this provision was inadmissible as per Rule 1(g) of the Seventh Schedule. The AR refuted this claim saying that International Accounting Standards 39 and 40 mentioned in Rule 1(g) was still not implemented in Pakistan and therefore reliance on the said Rule was irrelevant. We have examined the record and found that in the orders of the Deputy Commissioner and the Commissioner Appeals there is no mention of any Rule of the Seventh Schedule or section of th,- Ordinance. Before the Commissioner of Appeals, the appellant-bank relied on the Full Bench judgment of this Tribunal reported as 2010 PTD (Trib.)…
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