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Petitioner: Messrs PACKAGES LTD. KARACHI VS Respondent: C.I.R., ZONE-III, L.T.U, KARACHI
Court Name: Appellate Tribunal Inland Revenue Judge(s): Abdul Nasir Butt, Abdul Qayyoom Sheikh Title: Messrs PACKAGES LTD. KARACHI vs C.I.R., ZONE-III, L.T.U, KARACHI Case No.: I.T.As. Nos, 194/KB, 793/KB and 800 of 2011 Date of Judgment:2014-01-18 Reported As: 2014 PTD (Trib.) 1303 Result: Order accordingly
Judgment ORDER The appeal bearing I.T.A. No, 194/KB/2011, pertaining to tax year 2004, has been filed by above named taxpayer against Order No,109 dated 4-12-2010, passed by Ld. CIR (Appeals-III), Karachi. While the appeals pertaining to tax year 2005, bearing I.T.A. No, 793/KB of 2011 and I.T.A. No, 800/KB/2011, are cross appeals filed by the taxpayer and the department respectively, against the single order No, 6-7 dated 26-6-2011, passed by Ld. CIR (Appeals-III), Karachi. These appeals involved certain common grounds and therefore, these appeals were heard together. The grounds raised by both the parties in their respective appeals are reproduced separately as under:-- I.T.A. No, 194/KB/2011 Tax Year 2004, filed by taxpayer (1) The order of the CIR(A) is bad in law and on facts. (2) The CIR(A) has erred in holding that the Additional Commissioner Inland Revenue, being an officer of a lower rank, can amend the assessment which was earlier deemed to have been made by the Commissioner (and not by the Taxation Officer) pursuant to section 120(1) (b), being an officer of a higher rank. (3) Without prejudice to the grounds of Appeal No, 2 above, the Commissioner Inland Revenue (Appeals) has erred in holding that the Additional Commissioner Inland Revenue being an officer of a lower rank has passed the amended assessment with proper delegation of powers from the Commissioner. (4) Without prejudice to the above grounds, the Additional Commissioner Inland Revenue has erred in assuming the jurisdiction to amend the assessment under section 122(5A) which section envisages exercise of mental faculty and independent mind by the Commissioner which cannot be delegated or entrusted to the Officer Inland Revenue which has been upheld by the
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Commissioner Inland Revenue (Appeals). (5) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue of invoking the provisions of section 67 of the Income Tax Ordinance, 2001 read with. Rule 13 of the Income Tax Rules, 2002 (6) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue in "allocating administration expenses against dividends without considering the fact that dividends were earned on investments made in prior years and no administration expenses incurred during the year can be related to earning of dividends as it only involved depositing dividend warrants received in the bank account. (7) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue in allocating administration expenses against fee for technical services rendered outside Pakistan especially when all the expenses related thereto were to be borne by the service recipient company in Syria under the relevant agreement for technical services. (8) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue in holding that administration expenses are allocable against insurance commission as the same is allegedly covered under the Final Tax Regime. The Commissioner Inland Revenue (Appeals) thereby ignored the relevant provisions of section 233 as were applicable during the period January 1, 2003 to December 31, 2003 (relevant to appellant's tax year 2004) whereby such commission was not liable for Final Tax Regime. (9) The Commissioner Inland Revenue (Appeals) has erred in observing that the appellant is actively involved in stock (investment in shares) related activities to hold that administrative expenses were properly attributable to the earning of dividend income. (10) Without prejudice to the above grounds of appeal and without conceding to his stance, the Commissioner Inland Revenue (Appeals) has also erred in maintaining the action of the Additional Commissioner Inland Revenue in allocating alleged common expenses against the gross receipts of dividend, technical fee and commission with reference to gross profit instead of gross receipts of the appellant by erroneously applying provisions of rule 13(3)(b) of the Income Tax Rules, 2002. (11) Your appellant craves leave to add, amend or alter the above grounds of appeal. I. T.A. No, 793/KB/2011 TAX YEAR 2005, filed by taxpayer (1) The order of the CIR(A) is bad in law and on facts. (2) The Commissioner Inland Revenue (Appeals) has erred in holding that the Additional Commissioner Inland Revenue, being an officer of a lower rank, can amend the assessment which was earlier deemed to have been made by the Commissioner (and not by the Taxation Officer) pursuant to section 120(1)(b), being an officer of a higher rank. (3) Without prejudice to the grounds of Appeal No, 2 above, the Commissioner Inland Revenue (Appeals) has erred in holding that the Additional Commissioner Inland Revenue being an officer of a lower rank has passed the amended assessment with proper delegation of powers from the Commissioner. (4) Without prejudice to the above grounds, the Additional Commissioner Inland Revenue has erred in assuming the jurisdiction to amend the assessment under section 122(5A) which section envisages exercise of mental faculty and independent mind by the Commissioner which cannot be delegated or entrusted to the Officer Inland Revenue which has been upheld by the Commissioner Inland Revenue (Appeals). (5) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue of invoking the provisions of section 67 of the Income Tax Ordinance, 2001 read with Rule 13 of the Income Tax Rules, 2002 inspite of the fact that the
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amounts treated as common expenses have no nexus with the receipts of dividend, insurance commission and fee for technical services rendered outside Pakistan. (6) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue in allocating administration expenses against insurance commission. (7) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue in allocating administration expenses against fee for technical services rendered outside Pakistan especially when all the expenses related thereto were to be borne by the service recipient company in Syria under the relevant agreement for technical services. (8) The Commissioner Inland Revenue (Appeals) has also erred in not giving his decision on the following ground of appeal: "9. Without prejudice to the above grounds of appeal and without conceding to his stance, the ACIR has also erred in allocating alleged common expenses against the gross receipts of dividend, technical fee and commission with reference to gross profit instead of gross receipts of the appellant" (9)Without prejudice to ground No,8 above, the Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue in allocating alleged common expenses against the gross receipts of dividends, technical fee and insurance commission with reference to the gross profit earned by the appellant instead of gross receipts of the appellant. (10) The Commissioner Inland Revenue (Appeals) has erred in maintaining the action of the Additional Commissioner Inland Revenue in disallowing claim of initial allowance of Rs,1,776,000 under the provisions of section 23 of the Income Tax Ordinance, 2001 on heavy vehicles added during the year. (11) Your appellant craves leave to add, amend or alter the above grounds of appeal. I. T.A. No, 800/KB/2011 TAX YEAR 2005, filed by department (1) That the order of Ld. CIR (A-III) is bad in law and on facts of the case. (2) That the learned Commissioner of Inland Revenue (Appeal-Ill) has erred in not prorating expenses in respect of dividend income on the basis that no new investment is made in this year. (3) That the appellant craves permission to add, amend or bring fresh grounds of appeal on or at any time before the hearing. 2. Briefly; the stated facts of the case are that the taxpayer is a public limited company and principally engaged in the manufacture and sale of paper, paper board, packaging materials and tissue products. It filed return of income under section 114(1) of the Income Tax Ordinance, 2001, for tax years 2004, thereby declaring income at Rs,691.242 (M). The return was deemed as an assessm ent order under section 120(1) of the Ordinance, 2001. This deemed assessment order was considered erroneous insofar as prejudicial to the interest of revenue and thus requiring amendment under section 122(5A) of the Ordinance. Subsequently, the taxpayer filed his revised return under section 114(6) of the Ordinance, claiming the amortization on computer soft wares. The revised taxable income was declared at Rs,687.926 (M). This revised return of the taxpayer was taken to be as deemed amended assessment order under section 122(3) of the Ordinance. In continuation of the proceedings under section 122(5A) of the Ordinance, the taxation authority also considered this deemed amended assessment order passed on revised return of the taxpayer as to be erroneous insofar as prejudicial to the interest of revenue and thus considering it also to require amendment under section 122(5A) of the Ordinance, ultimately the taxation/Assessing Officer passed the order in original vide D/C. No,12/71 dated 29-10-2009, purported to be an order under section 122(5A) of the Ordinance, thereby amending an amended assessment order.
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Likewise, the taxpayer is stated to have filed return of income under section 114(1) of the Ordinance, for tax year 2005, declaring its normal income at Rs,785.310 (M), which return was taken as deemed assessm ent order under section 120(1) of Income Tax Ordinance, 2001 (being referred to as the Ordinance). The taxation Officer/ACIR considered the deemed assessment order as erroneous insofar as prejudicial to the interest of revenue, therefore, he amended the deemed assessment order under section 122(5A) of the Ordinance and made amendments in the income and tax thereon through an Order-in-Original No, D/C. No,04/161, dated 21-2-2011. The taxpayer feeling dissatisfied with the orders of the respective taxation officer, filed appeals before learned CIR(A-III), Karachi, who vide impugned order dated December 4, 2010 (Tax Year 2004) maintained the order of OIR/ACIR/TO and vide the order dated June 26, 2011(Tax year 2005) partly maintained the order passed by learned ACIR/TO. Being aggrieved of these orders, the taxpayer/appellant has impugned the orders in present appeals before this Tribunal on the above stated grounds. The department has also filed an appeal against the order for tax year 2005 agitating therein the deletion of expenses prorated against dividend as per the grounds mentioned herein above. 3: We have heard and considered the arguments of learned Representatives of the parties at length and have also perused the record. The appeal bearing I.T.A. No, 194/KB/2011, pertaining to tax year 2004, however, has a peculiar feature of involving an act of filing revised return under section 114(6) by the taxpayer and therefore, we in the first instance will decide this appeal with reference to the question concerning section 114(6) of the Ordinance. Then after, if the need so arises, we will address the grounds of this appeal also along with two other appeals captioned above. 4. From the perusal of above facts, as far as pertaining to the tax year 2004, the following admitted points of fact are emerged:-- (a) The Order-in-Original bearing No, D/C. No, 12/71 dated 29-10-2009, pertaining to tax year 2004, is purported to have been passed under section 122(5A) of the Income Tax Ordinance, 2001. (b) The Order-in-Original bearing No, D/C. No, 12/71 dated 29-10-2009, pertaining to tax year 2004, is purported to have been passed on the revised return of the taxpayer filed under section 114(6) of the Income Tax Ordinance, 2001, taken to have had treated as deemed amended assessment order passed under section 122(3) ibid. (c) The Order-in-Original bearing No, D/C. No, 12/71 dated 29-10-2009, pertaining to tax year 2004, purported to be passed under 'section 22(5A) of the Ordinance, is taken to mean an amending assessm ent order, thereby further amending the deemed amended assessment order passed under section 122(3) ibid. (d) The claim of the amortization on computer soft wares in the revised return and different taxable income at Rs,687.926 (M) as compared to Rs,691.242 (M), in the original return; was subsequently raised in the 'revised return' filed under section 114(6) ibid after commencement of proceedings under section 122(5A) ibid concerning the original return/deemed assessment order. 5. As per order of Ld. ACIR, the taxpayer also filed 'Revised Return' of income in terms of section 114(6) ibid claiming the amortization on computer soft wares. The revised taxable income was declared at Rs,687.926 (M) as compared to Rs,691.242 (M), claimed in the original return. Ld.ACIR considered the revised return of the taxpayer as deemed to have been assessed under section 122(3) of ITO, 2001 and such deemed assessment order under section 122(3) was considered by Ld.ACIR as being erroneous insofar as prejudicial to the interest of revenue, requiring amendment under section 122(5A) ibid. The fresh notice under section 122(9) ibid, dated 14-3-2009, was issued to the taxpayer with intention to amend its revised return under section 122(5A), or the revised assessm ent order. The taxpayer having been confronted with the issues raised, filed his reply/explanation dated 7-4-2009 and 27-10-2009. Ultimately, Ld. ACIR passed the order dated 29- 10-2009, by exercising powers under section 122(5A) of Income Tax Ordinance, 2001.
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6. The taxpayer is believed to have filed its revised return on the ground of inadvertent mistakes which they, in the original return had omitted to claim. While visiting through above facts, we come across with certain points requiring us to interfere for finding out their correct answers. In our humble view, the proceedings in the above stated manner and form are inconsistent with law for the following reasons:-- (a) The 'revised return' filed by taxpayer/respondent does not show that the same was filed in conformity and compliance with the notice under section 122(9) r/w S. 122(5A); (b) The 'revised return' filed by taxpayer/respondent is not in conformity with the condition (c) of subsection (6) of section 114 of the Ordinance, 2001. (c) The 'revised return' filed by taxpayer/respondent is not in conformity with subsection (6A) of section 114 of the Ordinance, 2001 and the provisions thereof have not been complied with. 7. The concept of 'revised return' as laid down under section 114(6) or 114(6A) of ITO, 2001, is provided to facilitate a taxpayer to cater a situation anticipating default surcharge and penalties, arising from and after a determination is made or intended to be made against the taxpayer; in effect that the taxpayer has paid less tax than due or has omitted to pay correct amount of tax due, which is determined as being greater than the amount of tax paid and such situation is believed to culminate in entailing upon the taxpayer greater amount of default surcharge and penalties. 8. The 'revised return' filed by taxpayer under subsection (6) or (6A) of section 114 of the Ordinance, 2001, is required always, to be treated as deemed amended assessment order in terms of section 122(3) ibid. The 'revised return' treated as deemed amended assessment order cannot be amended under section 122(5A) ibid and it is amendable under section 122(4) ibid. 9. In the given set of circumstances, we feel satisfied in holding that Ld. ACIR has acted with material irregularity by diverting the proceedings from original return to revised return and conducting the proceedings upon legally defective revised return filed by the taxpayer under section 114(6) ibid after the commencement of proceedings under section 122(5A) ibid, which to law was required to treated as non existing for being inconsistent with law. Ld. ACIR acted with material irregularity by amending a deemed amended assessment order by exercising powers under section 122(5A) instead of exercising powers under section 122(4) ibid. Ld.CIR(A) has also failed to exercise the jurisdiction vested in him under sections 127 to 129 ibid for not taking the notice of such material irregularity. 10. In our humble opinion, the officers below have not applied their mind properly in line with facts, substantive law and the decisions of legal/judicial forums. We however, in all the fairness of things, deem it inappropriate to dilate upon or decide the disputed issues raised in the grounds of appeal for tax year 2004 and deem it appropriate to vacate both the orders below [{the order dated. 29- 10-2009 passed by Ld. ACIR and order No, 109 dated 4-12-2010 passed by Ld. CIR (Appeals-III), Karachi)] and remand back this case/appeal to assessing authority for conducting de novo proceedings and determining all the issues afresh and pass fresh amended assessment order in accordance with law, within the time limit provided under section 124(2) of Income Tax Ordinance, 2001, of course; by affording adequate opportunity of being heard to the taxpayer/assessee. The appeal bearing I.T.A. No, 194/KB/2011, pertaining to tax year 2004, stands disposed of in the above terms and manner. 11.We are now taking up to decide the cross appeals of the taxpayer and the department pertaining to tax year 2005. We in the first instance decide the appeal of taxpayer issue-wise as contained in the grounds of appeal bearing I.T.A. No, 793/KB/2011. 12.The ground No, 1 in the appeal of taxpayer is of general nature. It is deferred for the time being to be dealt at later stage. The grounds Nos, 2 to 4, and the issues raised therein, are interlinked therefore, the same are jointly dealt with herein below. GROUNDS Nos, 2 TO 4, TAX YEAR 2005
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13.Grounds Nos, 2 to 4, are regarding the invocation of provisions of section 122(5A) of the Ordinance by learned ACIR. Ld. Counsel/AR has contended that learned CIR(A) has erroneously maintained the action of learned ACIR to amend the assessment under section 122(5A) of the Ordinance. Learned AR contended that learned ACIR being junior and subordinate to the Commissioner cannot amend the assessment order taken to have been made by the Commissioner. It is only the Commissioner who can pass an amended order under section 122(5A) as the provisions of section 122(5A) envisage application of mental faculty E and independent mind by the Commissioner which cannot be delegated. Ld. AR further contended that there is no finding in effect that the deemed assessment order was erroneous and prejudicial to the interest of revenue. As per learned AR, the issues raised cannot be considered as prejudicial to the interest of revenue. 14.On the other hand learned DR has supported the impugned order on this issue and contended that the issue of deemed order taken to be amended by an ACIR under delegated authority is now an established reality as has been upheld by superior courts including Hon'ble Sindh High Court in the judgment reported as 2013 PTD 1012 and Hon'ble Islamabad High Court's judgment reported as 2013 PTD 747. In line with these judgments, this Hon'ble Tribunal has also decided this issue in favour of the department. 15. After considering the submissions made by both parties we are inclined to agree with the submissions of learned DR. An ACIR under delegated authority is empowered to amend the deemed assessm ent order by invoking the provisions of subsections (1), (5) and (5A) of section 122 of the Ordinance. Section 210 of the Ordinance visualizes the delegation of any or all powers vested in and exercisable by a Commissioner under the Ordinance except the power to delegate further. This issue has already been settled by Hon'ble Superior Courts of our country. Ld.CIR(A) has exhaustively discussed this issue in proper manner, therefore, we see no reason to interfere with the finding of learned CIR(A) in the impugned order on this issue. The impugned order to the corresponding extent is maintained. The appeal filed by the taxpayer to the extent of this issue/Grounds Nos, 2 to 4, accordingly fails. 16. The subsequent grounds in the appeal pertain to various deductions claimed by the taxpayer in its return filed under section 114 of the Ordinance. These grounds/issues in almost similar state, were also raised before Ld. CIR(A), who vide impugned order has not conceded to the contentions of the taxpayer, except for the dividend income. GROUNDS Nos, 5 - 7, TAX YEAR 2005 17. The issues contained in the aforesaid grounds are regarding the invocation of section 67 of the Ordinance, read with Rule 13 of the Income Tax Rules, 2002, and thereby making allocation of administration expenses against dividend income, fee for technical services and insurance commission. The Taxation Officer confronted the taxpayer that the administrative expenses amounting to Rs,347,030,000 were intended to be allocated between dividend income, fee for technical services and insurance commission within the meaning of section 67 read with Rule 13 of the Income Tax Rules, 2002 in the following manner: (a)The dividend is a separate class of income against which the common expenses can be prorated. (b)Technical fee is an exempt income and also the regular source of income. This income also can not be earned without incurring of the expenses. (c)Commission income also requires proration of expenses under the above provisions of law as the said income is covered under section 169 of the Ordinance. 18. The finding of ACIR on these issues has been maintained by learned CIR(A) in his impugned order except for alleged common administrative expenses against dividend, which learned CIR(A) deleted by considering that dividends were received on investments in shares made in prior years.
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19. The learned AR contended that section 67 of the Ordinance provides that expenditure should be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates. Only expenditure which is related to more than one activity would be regarded as common expenditure for allocation under the provisions for section 67 read with rule 13 of the Ordinance. Any expenditure which has no nexus to the activity or is exclusively related to a particular class of income can not be regarded as common expenses for H allocation under section 67 and rule 13 of the Income Tax Rules, 2002. It further pointed out that there were only nine transactions of receipt and deposit of dividend warrant during the two tax years for which the expenses of Rs,347,030,000 cannot be regarded to have incurred by any stretch of imagination. He further denied the allegation that the appellant was actively engaged in investment in shares and referred to the audited accounts. The dividend on shares has been earned in respect of old investments with no movement in such investments which is evident from the accounts. The learned AR has relied on the judgment of the Appellate Tribunal reported as 2010 PTD (Trib.) 1568. 20.In respect of allocation of administrative expenses against exempt technical fee earned outside Pakistan, the learned AR argued that fee earned by the company from rendering of technical services outside Pakistan to Vimpex through its personnel which is exempt under clause (131) of Part I of the Second Schedule to the Ordinance. AR further argued that the related expenses, in respect of rendering of technical services by appellant, are borne by Vimpex as per Clause 5.03 at page No,11 of the agreement between the appellant and Vimpex. Administrative expenses can not be attributed to technical services as the personnel through which such services are rendered are stationed outside I Pakistan and that all expenses incurred therefore are to be borne by the service recipient in view of specific clause in the agreement. 21. In respect of insurance commission earned, learned AR argued that insurance premium is paid by the company on insurance of its assets. However, at the time of payment of annual insurance premium to the insurance company; a percentage of the premium is paid back which is recorded as insurance commission. Thus no expenditure is incurred by the appellant company to earn commission income.…
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