Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: ALLIED BANK LIMITED, LAHORE and others VS Respondent: COMMISSIONER INLAND REVENUE, LTU, LAHORE and others
Court Name: Appellate Tribunal Inland Revenue Judge(s): Syed Nadeem Saqlain, Mian Masood Ahmad Title:ALLIED BANK LIMITED, LAHORE and others vs COMMISSIONER INLAND REVENUE,
LTU, LAHORE and others Case No.:I.T.As. Nos.5115/LB, 3580/LB, 3581/LB, 4063/LB, 4064/LB of 2004, 4581/LB, 4582/LB, 5061/LB to 5064/LB of 2003, 5105/LB, 5106/LB, 6029/LB, 6022/LB of 2005, 1119/LB, 1146/LB of 2006, 711/LB, 651/LB of 2008, 305/LB, 440/LB, 441/LB of 2009, 145/LB of 2010, 627/LB, 628/LB, 769/LB, 597/LB and 1613/LB of 2011 and M.As. (Rec.) Nos. 242/LB of 2009 and 33/LB of 2011 Date of Judgment:2012-05-15 Reported As: 2013 PTD (Trib.) 246 Result: Order accordingly Judgment ORDER ' The taxpayer is a scheduled banking company registered under the Banking Companies Ordinance, 1962 and working under rules and regulation framed by the State Bank-of Pakistan from time to time. Cross appeals have been filed, which are being disposed of through this consolidated order. These appeals arise from orders of Commissioner (Appeals) adjudicating orders passed under section 62 of the repealed Income Tax Ordinance, 1979 (hereinafter "the repealed Ordinance") for assessm ent years 1996-1997 to 2002-2003, orders made under section 122(5A) of Income Tax Ordinance, 2001 (hereinafter "the Ordinance") for tax years 2003 to 2008 and 2010, order under section 121 of the Ordinance for tax year 2009 and order under sections 161/205 of the Ordinance for tax year 2007. The Authorised Representative (AR) of appellant-bank on previous dates of hearing provided a detailed chart showing issues involved and copies of relevant case- law for comments by the learned Departmental Representative (DR). The learned DR also submitted Department's point of view on all issues in writing and provided copies of case-law relied upon by him. After examining the impugned orders, written averments of both the sides and case-law cited, the titled appeals are adjudicated as under: 2. Before deciding appeals on merits, we deem it proper to decide legal grounds first having impact for many years under appeal:
---
## Page 2
' ASSUMPTION OF JURISDICTION UNDER SECTION 122(5A) OF INCOME TAX ORDINANCE, 2001 [TAX YEARS 2003 TO 2007 AND 2010] 3. This has been a controversial issue as many conflicting judgments were in the field. The honourable Islamabad High Court in a recent judgment has decided the issue in favour of the department in Writ Petition No,2412 of 2009 dated 27-4-2012. No contrary decision of Lahore High Court or any other High Court is available at the moment. In fact, it was conveyed by the learned AR that the honourable Sindh High Court also decided the matter in favour of the Department through a short order. We appreciate the assistance rendered by the learned AR in bringing all the cases decided against taxpayers to our knowledge at the outset of the hearing and providing copies of the same. The AR argued that on the basis Of latest orders by Sindh High Court and Islamabad High Court the Tribunal had to decide the matter accordingly but arguments advanced and adjudicated against assumption of jurisdiction by the Additional Commissioner in 2010 PTD 705 (Trib.) and in 625/IB of 2010 should be considered as integral part of this order so that appellant-Bank could agitate the matter in Lahore High Court where many writs and appeals on the same issue were pending. We have no objection to this argument and thus following the judgment of honourable Islamabad High Court (supra), we dismiss all the appeals of the appellant-bank on this issue and allow that of Department. ' ASSUMPTION OF JURISDICTION UNDER SECTION 121 OF INCOME TAX ORDINANCE, 2001 (TAX YEAR 2009) 4. Facts of the case are that return for tax year 2009 was filed on 30-9-2009 which was taken to be assessm ent order under section 120(1) of the Ordinance. The case was selected for audit under section 177 of the Ordinance. Subsequently, Deputy Commissioner Inland Revenue passed assessm ent order under sections 121/177 of the Ordinance. The appellant-bank contested before Commissioner (Appeals) that assessment order under section 121 was illegal in the presence of order under section 120(1) holding the field. In support of his argument, the AR before the CIT (A) cited the following judgments: (i) (2010) 101 TAX 153 (Trib.) = 2010 PTD (Trib.) 2602 [Full Bench] (ii) 2010 PTD (Trib.) 30 (iii) 2010 PTD (Trib.) 1067 (iv) 2010 PTD (Trib.) 1473 (v) 2010 PTD (Trib.) 819 (vi) 2011 PTD (Trib.) 1552 5. The department, however, argued before learned Commissioner (Apeals) that by insertion of subsection (10) of section 177, the ratio decided by this Tribunal in the above cases lost its relevance as the said subsection provided that assessment treated to have been made on the basis of return or revised return shall be of no legal effect while making best judgment assessment under section 121. The appellant-bank before the learned CIT (A) argued that said insertion through Finance (Amendment) Ordinance; 2010, promulgated on 6-2-2010, could not be applied in respect of already completed assessm ents under section 120 of the Ordinance. It could only be applied in respect of assessm ents treated to have been made under section 120 after insertion of the said subsection. The learned Commissioner of Appeals, however, did not accept the arguments of appellant-bank and held, that the order under section 121 was valid in view of section 177(10). 6. Before us the learned A.R. Pressed for adjudication on merit notwithstanding the above cited judgments. Accepting his request, the legal ground is disposed of not been pressed and adjudication is made on merit alone for tax year 2009. ' MERITS 7. Banks appeals for assessm ent years 1997-1998 and 1998-1999 have already been decided by this Tribunal vide order in I.T.As. Nos.4579 and 4580/LB/2003 dated 24-3-2005 whereas departmental appeals for these are pending before this tribunal for adjudication. Similarly, appeal of the
---
## Page 3
appellant-bank for tax year 2008 has already been decided in I.T.A. No,306/LB of 2009 dated 8-8- 2009 wherein order under section 122(5A) of the Ordinance dated 29-11-2008 has been annulled. 9. Summary of issues pending for adjudication in departmental and cross appeals for assessment years 1996-97 to Tax year 2010 are tabulated as under:-- S. No.Issue Year Appellant 1. Taxation of interest on securities on accrual basis1999-2000 to 2002- 2003 and 2003Bank 2. Loss on diminution in value of investment1999-2000 to 2002- 2003,2006,2009 and 2010Bank 3. Taxation of 'other provisions'/provisions against other assets1999-2000 to 2007, 2009 and 2010Bank 4. Set aside of disallowance of expenses under the head Optional Retirement Scheme'2001-2002 Bank 5. Disallowance of contribution towards Superannuation (Pension) Fund2001-2002 and 2002-2003Bank 6. Disallowance of compensated absences2002-2003,2006 and 2007Bank/department 7. Disallowance of Post Retirement Medical benefit2001-2002,2002- 2003, 2005 and 2006Bank/department 8. Disallowance of penalties paid to State Bank of Pakistan2001-02, 2002-03 and 2003Bank 9. Short allowance of tax credits in respect of tax paid in Azad Kashmir and tax deducted under section 50(2)2001,2002 and 2002-2003, 2003 and 2004Bank 10. Allocation of expenses 2001-2002,2003 Bank/department relating to capital gain and PTR incomeTo 2005,2009 and 2010 11. Set aside of addition on account of transfer of assets to Allied International Bank PLC a joint venture company2002-2003 Bank 12. Reversal of provision against non- performing loans2007 2009 and 2010Bank/department 13. Reversal of provision against other assets2007 and 2010 Bank 14. Reversal of provision against Off Balance Sheet Items2007 and 2010 Bank/department 15. Reversal of provision for diminution in value of investment2007 Bank
---
## Page 4
16. Set-aside of amortization of Expenses2003 Bank 17. Provision against Off Balance Sheet Items2004, 2006, 2007 and 2009 18. Set-aside of addition under the head "acquisition of assets in settlement of non-performing loans"2004 Bank 19. Amount written of 2005, 2007, 2009 and 2010Bank/department 20. Loss in respect of lease operations2007 Bank 21. Computation in violation of Seventh Schedule2009 and 2010 Bank 22. Unrealized loss on revaluation of investment2010 Bank 23. Disallowance of Defined Benefit Plan2003 and 2004 Bank 24. Deletion of addition of gratuity fund, benevolent fund, postretirement medical and contribution to pension fund2005 and 2009 Department 25. Amortization of expenses 2004, 2008 and 2010Department 26. Non-issuance of notice under section 128(1)2003 and 2004 Department 27. Depreciation expenses 2001-2002,2002- 2003,2003,2004 and 2007Bank/department/Cross 28. Disallowance of additions under section 241996-1997 Department 29. Taxation of dividend at concessional rate1997-1998 to 2002- 2003Department 30. Set aside of Bad debts and unrealized interest written off.1997-1998 to 2002- 2003Department 31. Deletion of provision for bad debts1997-1998 to 2009 Department 32. Deletion of Profit and Loss additions1997-1998 to 2002- 2003Department 33. Deletion of addition on a/c of contribution towards unapproved superannuation fund2000-2001 Department 34. Amortization of premium on investment2000-2001 Department 35. Disallowance of 50% depreciation on vehicles due to use of directors2003 to 2006 Department 36. Deletion of addition on the issue of adjustment of loss of Ibrahim leasing Co.2006 Department
---
## Page 5
37. Expunging the remarks of concealment of income under the head "income on foreign currencies"2005 Department 38. Remanding the case to Taxation Officer to allow Foreign Tax Credits and credit under section 61 subject to qualification under the law.2007 and 2008 Department 39. Recalling of order in I.T.A. 306/LB of 2009 dated 8-8-2009(MA (Rec.) 242/LB of 2009)2008 Department 40. Allowance of provision for non- performing advances at 1% of gross advances instead of net advance (MA (AG) 33/LB of 2010)2010 Department 41. Credit of compensation against admitted liability under section 137(1)2010 Department 42. Computation of compensation for tax year 2008 on the basis of law as amended by Finance Act, 20092008 Department 43. Invoking of sections 161/205 on payment of profit on debt and P&L expenses2007 Bank ' Issue-wise adjudication is made as under:- (1). TAXATION OF INTEREST ON SECURITIES ON ACCRUAL BASIS [ASSESSMENT YEARS 1999-2000 to 2002-2003] 9. The learned Commissioner (Appeals) confirmed taxation of interest on securities on accrual basis in the light of decision of this Tribunal in (1994)-69 Tax 197 (Trib.) (sic). The learned AR, however, pointed out that this issue was subsequently decided in favour of taxpayers by this Tribunal in I.T.A. No,812(IB) of 2006 and 2003 PTD 1146 and by honourable Sindh High Court in Habib Bank Ltd. v. CIT 2009 PTD 443 (H.C. Kar.). By following its earlier reported judgment, the honourable Sindh High Court also rejected departmental appeals in I.T.As. Nos.145, 148, 149, 151, 152 and 154 of 1998 dated 13-10-2009. The learned DR supported the order passed by the taxation officer and Commissioner of Appeals relying on 1994 PTD (Trib.) 1051. 10. We have examined the case-law cited by parties. The case-law cited by learned AR later in time and that of High Court cover the issue in hand. The appeals are, therefore, accepted with the direction to the department to tax interest on securities on actual receipt basis and not on accrual basis. (2) LOSS ON DIMINUTION IN VALUE OF INVESTMENT [1999-2000 TO 2002-2003, 2006, 2009 AND 2010] 11. The taxpayer claim is that these provisions were made as per prudential Regulations of State Bank of Pakistan which override Income Tax law vide section 91A read with .Section 35 of Banking Companies Ordinance, 1962 and sections 46B and 54A. Of State Bank of Pakistan Act, 1956. The learned AR argued that the Prudential Regulations are issued by the State Bank of Pakistan pursuance of powers vested in it under a special law. Sections 46B and 54A of State bank of
---
## Page 6
Pakistan Act, 1956. He further argued that a cumulative reading of above sections shows that they override any conflicting provision of the Income Tax Ordinance, 1979. The banks are bound to prepare their accounts according to International Accounting Standards and Regulations issued by the State Bank. These accounts represent their regularly employed method of accounting as envisaged in section 32 of the repealed Ordinance. The department could not reject this method. The department did not show any flow in this method of account. According to him, there is no prohibition in income tax law not to record closing stock at lower of cost or market price. The learned AR also pointed out that this issue has been decided by full bench of this Tribunal in 2010 PTD (Trib.) 679. The learned AR also argued that department in this case for tax year 2010 has allowed impairment loss. 12. The learned argued that this issue was decided in favour of the department in the following cases:- (i) 2006 PTD 354 (ii) 2002 PTD 925 (iii) 2000 P (Trib.) 2668 (iv) (2002) 85 TAX 245 (v) I.T.A. No,3819/LB of 1997 dated 7-12-1999 (vi) I.T.A. No,400/LB of 2000 dated 10-12-2001 13. We have examined the arguments of both sides and also perused case-law cited by them. We are not persuaded to agree with the learned AR That provisions referred by him from the State Bank of Pakistan Act vis-a-vis Companies Ordinance, 1962 are of any help to the taxpayer. This issue has been dealt in detail in our judgment in 2006 PTD (Trib.) 356. As regards judgment of full bench of this Tribunal in 2010 PTD (Trib.) 679, that was passed with reference to Fourth 'Schedule to the repealed Ordinance is distinguishable as far as all the years before the enforcement of the Seventh Schedule to the Ordinance that made the assessments in the case of banks at par with insurance companies as held in 2011 PTR 222 (Trib). The additions made by the department, for assessm ent years 1999-2000 to 2002-2003 and 2006 are upheld. The department is; however, directed to allow impairment loss, if any, at the time of actual sale as it had done itself for tax year 2010. 14. For tax years 2009 and 2010, the learned AR contended that disallowance of provision for diminution in the value of investment for these years was against Rule 1 of the Seventh Schedule to the Ordinance as held in the case of another bank reported as 2011 PTR 222 [Tribunal] 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 department could make adjustments and additions in net profit as per books of account that were specifically mentioned in Rule 1(a) to Rule 1(h) of the Schedule. The learned DR 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. 15. We have examined the record and found that in the impugned orders there is no mention of any Rule of the Seventh Schedule or section of the Ordinance under which this disallowance was made before the Commissioner of Appeals, the appellant-bank relied on the Full Bench judgment of this Tribunal reported as (2010) 101 Tax 73 (Trio.). This judgment was adjudged by Commissioner of Appeals as irrelevant being related to insurance companies. It is obvious that Commissioner of Appeals had not appreciated the fact that assessment of banks with effect from tax year 2009 had become at par with the assessm ents of insurance companies. The language of section 100A read with Seventh Schedule is exactly the same as section 99 read with the Fourth Schedule to the
---
## Page 7
Income Tax Ordinance, 2001. This issue has already been decided in favour of taxpayer in 2011 PTR 222 (Tribunal). By following our earlier judgment, we order deletion of this addition tor tax years 2009 and 2010. (3) TAXATION OF 'OTHER PROVISIONS'/PROVISIONS AGAINST OTHER, ASSETS [1999-2000 TO 2007, 2009 AND 2010]. 16. The claim of taxpayer is that these are ascertainable liabilities and not mere provisions. It is the substance that matters and not the mere nomenclature given to any transaction. In 2001 PTD 1427 and 2001 PTD 744 it has been elaborated that any ascertainable accrued liability is deductible under the mercantile system of accounts. According to him, even disputed liabilities are allowable under mercantile system, of accounting as held in 2001 PTD 3326. The legislature's intention is also very clear as it has provided that any subsequent recovery thereof would be offered for tax as per section 25(a) of the repealed Ordinance.-He also 'pointed that this issue was authoritatively decided by this Tribunal in 2006 PTD (Trib.) 356, I.T.As. Nos. 1012 and 1014/IB of 1995 dated 18-7-2006 and 2011 PTR 222 (Trib.). 17. The learned DR argued that in I.T.A. No, 565 of 2000 in the case of Grindlays Bank, the honourable Sindh High Court held that provisions were not allowable deductions. The learned AR, in reply argued that the said judgment was passed with reference to provision for bad debts and that too on the basis of distinguishable facts as held by the five-member bench in 2011 PTR 165 (Trib.). He further argued that in a recent judgment in ITRA No,219 of 2009 re: CIT v. Security Leasing Corporation, the honourable Sindh High Court allowed provision for bad debt and this case was followed by the larger bench in 2011 PTR 165 (Trib.). 18. We have examined the arguments of both sides and case-law cited by him. We agree with the learned AR that it is substance that matters and not the nomenclature given to any transaction. A liability cannot become unascertainable if it is named as provision. This was F explained by the honourable Sindh High Court in Habib Bank v. CIT reported as 2009 PTD 443. The case-law cited by learned AR applies on all fours. The department is, therefore, directed to allow this deduction. (4) SET ASIDE OF DISALLOWANCE OF EXPENSES UNDER THE HEAD 'OPTIONAL RETIREMENT SCHEME' (20012002) 19. Deduction under the 'Optional Retirement Scheme' was disallowed on the ground that bank failed to prove that tax was deducted on these payments. The Commissioner (Appeals) observed that except for certain employees who did not draw their salaries, tax was deducted and deposited into government treasury. It was argued that after making this factual finding, the action of setting aside the issue was not justified. While strongly contesting the remanding of the case back to department, the AR argued that it would unnecessarily force the taxpayer to another round of cumbersome proceedings. In this respect, he referred to judgments of honourable Sindh High Court in Ayeshbee (Pvt.) Ltd. v. Income Tax Appellate Tribunal and others 2002 PTD 407 and this Tribunal in 2006 PTD (Trib.) 356. The learned D.R., however, supported the order of Assessing Officer and argued that addition was rightly made. 20. We have examined the arguments of taxpayer and Department, case-law cited and orders available in appeal papers. We agree with the learned AR that once Commissioner (Appeal) observed that tax was duly deducted on payment, he should have deleted the addition instead of subjecting the taxpayer to another round of cumbersome proceedings. Such practice has been deprecated by higher courts in cases cited by learned AR. In view of this position, the order of CIT(Appeal) on this issue is vacated and department is directed to allow this expense. (5) DISALLOWANCE OF CONTRIBUTION TOWARDS SUPERANNUATION (PENSION) FUND [2001-2002 and 2002-2003] 21. These appeals have been filed by the appellant-bank. Facts of the case are that appellant-bank estimated Rs,1,806,386,000 as short fall in the pension fund for past service liability. This short fall
---
## Page 8
was provided in five years. The appellant-bank made additional contribution towards superannuation fund at Rs,1987.480, approval of which was, granted by Commissioner vide Letter No,7193/J dated 8-4-2002 subject to amortization in 10 equal installments. As per information provided at assessm ent stage, the appellant bank amortized additional contribution of Rs,1,806,135,000 over five years. Amortization for assessment years 2001-2002 and 2002-2003 was at Rs,361,227,000 for each year. Since additional contribution was approved by Commissioner with the condition that it would be amortized in ten equal installments against five equal installments claimed by the appellant, the department disallowed 180,613.000 each for assessment years 2001- 2002 and 2002-2003. In appeal before CIT(A), the appellant-bank did not press these additions as approval of Commissioner and condition attached thereto was accepted by the appellant-bank. 22. In view of above factual position, there appears no justification for agitating the additions again before this Tribunal. Appeals of the appellant-bank are, therefore, dismissed. (6) DISALLOWANCE OF COMPENSATED ABSENCES [2002-2003, 2006 AND 2007] 23. According to learned AR this claim represents ascertained liabilities that are allowable as expense and merits acceptance as per ratio decidendi of judgement of honourable Supreme Court of Pakistan in CIT v. Oriental Dyes and Chemicals Co. Ltd. (1992) 65 Tax 254 (S.C. Pak.) holding that any such liability is an allowable expenditure on accrual basis. According to him, by following the above judgment of apex court, the honourable Sindh High Court has specifically adjudicated this issue in Commissioner Legal Division, v. Civil Aviation Authority 2008 PTD 647 as under:-- "This Income Tax Reference application- has been filed the Commissioner of Income Tax under section 133 of the Income Tax Ordinance, 2001, seeking the opinion of this Court on the following proposed question:-- "Whether on the facts and in the circumstances of the case, the learned ITAT was justified in law to hold that provision made in the books of account of compensated absences was allowable expenses even though it was not based on the demand in this regard?" "We have also examined the judgment of Honourable apex Court reported in the case of Commissioner of Income Tax v. Oriental Dyes and Chemical Co. Ltd. Reported in (1992) 65 Tax 254 (S.C. Pak.) = 1992 SCMR 763 in which the Honourable Apex Court had held that the provision for gratuity being an ascertained liability is an allowable expense even, though not actually paid during the year" "Respectfully following the above judgments we uphold the judgment of the Income Tax appellate Tribunal and since the matter has already been adjudicated by the Honourable apex Court, we refuse to answer the proposed question." 24 The learned DR supported the order of assessing office and argued that it is not an ascertained liability and thus not allowable under the law. 25. We have examined the, arguments of both sides and case-law cited. Following the ratio of the judgments of the honourable higher courts cited above, we hold that there was no justification for disallowance of this deduction. It should be allowed as such as also held in our recent judgment reported as 2011 PTR 222 (Trib.) . (7) DISALLOWANCE OF POST RETIREMENT MEDICAL BENEFIT [2001-2002, 2002-2003, 2005 AND 2006] 26. The claim of taxpayer is that these are ascertainable liabilities and not mere provisions. It is the substance that matters and not the mere nomenclature given to any transaction. In 2001 PTD 1427 and 2001 PTD 744 it has been held that any ascertainable accrued liability is, deductible under the mercantile system of accounts. According to him, this issue has already been decided by this Tribunal in its decision in I.T.As. Nos.1516 to 1520/KB of 2003 dated 23-11-2005. 27. The learned DR supported the order of Assessing Officer and argued that instead of providing employee-wise detail of expenses on actual basis, the bank provided total figure worked out by
---
## Page 9
actuaries. 28. We have examined the arguments of learned AR and case-law cited by him. We agree with the learned AR that it is substance that matters and not the nomenclature given to any transaction. A liability cannot become unascertainable if it is named as provision. The cases cited by learned AR squarely cover the issue in hand. The department is, therefore, directed to allow this deduction. (8) DISALLOWANCE OF PENALTIES PAID TO STATE BANK OF PAKISTAN [2001-2002, 2002-2003 AND 2003] 29. This issue has been decided by honourable Supreme Court of Pakistan against the taxpayer in CIT v. Premier Bank Ltd. And another (1999) 79 TAX 589 (S.C. Pak.). We need not to dilate further on this issue. In the light of the judgment of the honourable Suprcme Court (supra), we confirm the order of learned CIT(A)…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.