APPELLATE
TRIBUNAL INLAND REVENUE, BENCH-I,
ISLAMABAD
ITA
No.1679/IB/2017
(Tax
Year 2013)
ITA
No.1680/IB/2017
(Tax
Year 2014)
ITA
No.1681/IB/2017
(Tax
Year 2015)
ITA
No.1682/IB/2017
(Tax
Year 2016)
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M/s Orient Power (Pvt) Ltd; 10-Ali Block, New
Garden Town, Lahore. |
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Appellant |
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Vs |
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Commissioner Inland Revenue, Zone-III, LTU,
Islamabad. |
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Respondent |
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Appellant By |
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Mirza Taqi Ud Din Ahmed, FCA |
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Respondent By |
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Mr. Babar Chohan, DR |
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Date of Hearing |
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03.02.2021 |
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Date of Order |
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03.02.2021 |
ORDER
M. M. AKRAM
(Judicial Member): The titled appeals have been filed by the appellant/taxpayer against
the consolidated Order Nos.167 to 170 dated 30.10.2017 passed by the learned
Commissioner Inland Revenue (Appeals-I), Islamabad for the tax years 2013 to
2016 on the grounds as set forth in the memo of appeal. Subsequently, the
appellant also filed the additional grounds as well. The facts of the case and
the issue involved in all these appeals are the same and identical, therefore,
all the appeals are being decided through this consolidated order.
2. Brief
facts giving rise to the appeal are that the appellant is a company, engaged in
the business of power generation. Admittedly, the profit and gains of the
company are exempt under Clause 132 of Part-I of the Second Schedule to the
Income Tax Ordinance, 2001 (“the
Ordinance”). The appellant filed its income tax returns for all the tax
years under consideration and the returns so filed by them were treated to be assessment
orders under section 120(1)(b) of the Ordinance. Subsequently, it was observed
that the deemed orders for all the tax years are erroneous in so far as
prejudicial to the interest of revenue, and accordingly, all the assessments
were amended by the learned Additional Commissioner Inland Revenue (ACIR) under section 122(5A) of the
Ordinance on multiple issues vide all orders dated 19.05.2017. Felt aggrieved,
the appellant preferred the appeals for all the tax years before the learned
Commissioner Inland Revenue (Appeals) who vide consolidated order dated 30.10.2017
disposed of all the appeals. Still feeling aggrieved, the appellant assailed the
impugned appellate order before this Tribunal on a number of grounds.
3. This case
came up for hearing on 03.02.2021. The learned AR for the appellant reiterated
the contentions contemplated in the respective grounds of appeals for all the
tax years and in support thereof, placed on record the following judgments: -
i. 2010 PTD 1809(SC)
ii. TR No.55, 3 of 2009
iii. ITA Nos.166 to 170/IB/2013
iv. ITA Nos.1183, 1184/IB/2018
4. On the
other hand, the learned DR controverts the stance taken by the learned AR and
has opposed the submissions of the learned AR on the grounds that the order
passed by the learned CIR(A) is a speaking order and there is no infirmity in
the impugned order. He, therefore, pleaded that the appeals be dismissed.
5. Arguments
heard and record perused. The issues which are involved in these appeals are
decided in the following manner: -
i. INTEREST ON DELAYED PAYMENTS
The issue
relates to the taxing of interest of Rs.245,260,000/-, Rs.237,877,000/-,
129,251,000/- and Rs.225,847,000/- for the tax years 2013 to 2016 respectively
received from WAPDA due to late payment of the amount due to the appellant.
Indisputably, the interest amount was received by the appellant on account of
delay in payment of money due to it by its contractee i.e WAPDA. According to
the agreement, if WAPDA does not pay the amount of electricity at the proper
time, interest will be charged on the amount so delayed. Therefore, such
interest is only an accretion to the appellant's receipts from the contract. It
is obviously attributable and incidental to the business carried on by the
appellant. In our view, the interest payable to the appellant certainly
partakes of the same character as the receipts for the payment of which he was
otherwise entitled under the contract and which payment has been delayed as a
result of certain unavoidable circumstances by WAPDA. It cannot be separated
from the other amounts granted to the appellant under the contract and treated
as income from other sources. The judgments relied upon by the department are
not relevant to the facts of the case and clearly distinguishable. An almost
similar issue was posed before the Hon’ble Islamabad High Court in the case titled
M/s
Fauji Kabirwala Power Co. Ltd Vs Commissioner Inland Revenue, LTU, Islamabad,
bearing ITR Nos.74, 13 & 72/2009 vide order dated 17.12.2019. The following
question was considered and dilated upon in the said judgment:-
“Whether the
interest received by the applicant from WAPDA on delayed payments is not exempt
under clause 132 of 2nd Schedule to the Ordinance being attributable
to the business activities of its electric power generation project?”
10…………. Thus, the amount received by the applicant on account of interest for delayed payment from WAPDA has a nexus with the business income from power generation and qualifies for exemption under clause 132 of the 2nd schedule to the Income Tax Ordinance, 2001.”
The Supreme Court of India in the
case of CIT Vs. Govinda Choudhary & Songs[1], also went on the same view taken in the M/s Fauji Kabirwala Power Co. Ltd case (supra):
“...................
If the amounts are not paid at the proper time and interest is awarded or paid
for such delay, such interest is only an accretion to the assessee's receipts
from the contracts. It is obviously attributable and incidental to the business
carried on by it. It would not be correct to say, as the Tribunal has held,
that this interest is totally dehors the contract business carried on by the
assessee. It is well-settled that interest can be assessed under the head
“Income from other sources” only if it cannot be brought within one or the
other of the specific heads of charge. We find it difficult to comprehend how
the interest receipts by the assessee can be treated as receipts which flow to
it dehors the business which is carried on by it. In our view, the interest
payable to it certainly partakes of the same character as the receipts for the
payment of which it was otherwise entitled under the contract and which payment
has been delayed as a result of amounts granted to the assessee under the award
and treated as 'income from other sources”...............................
Subsequently, the Indian Apex Court in the case of CIT
Vs. B. N. Agarwal & Co[2],
following the same ratio held as under: -
"4. It is brought to our notice that the
decision of Orissa High Court in Govinda Chaudhary & Sons' case (supra) was
brought to this Court in appeal and has since been disposed of, which is CIT v. Govinda Chaudhary & Sons, [1993] 203 ITR 881. In the
said decision, it is recorded that learned counsel for the assessee conceded
that interest did constitute a revenue receipt. The court, however, held on the
interest did constitute a revenue receipt. The court, however, held on to the
other question (arising in that appeal) that the said amount of interest cannot
be taxed under the head "Income from other sources" which necessarily
meant that it has to be taxed as a business receipt. It is true that on
the question whether the interest constitutes income or not, the said decision
is based upon a concession but we are of the opinion that it was a concession
rightly made and is correct in law.”
Thus, the
judicial consensus, as it stands today, are that interest for
delayed payment has a nexus with the business income and it has to be assessed
as a business receipt. Therefore, the appellant income on this account is
squarely covered under clause (132) of Part-I of the 2nd Schedule to
the Ordinance and it cannot be taxed separately under the head “Income from other sources”.
Accordingly, this ground of appeals filed by the appellant is allowed in its
favour.
6. SET-OFF
AND CARRY FORWARD OF BUSINESS LOSSES
Whether
the appellant taxpayer is entitled to set off business losses against income
which is exempt from income tax under Clause 132 of Part-I of the Second
Schedule to the Ordinance?
It is argued on behalf of the
taxpayer that they are allowed to carry forward unabsorbed tax depreciation to
the next tax year. It is also argued that under Section 56 of the Income Tax
Ordinance, 2001 and authorities/precedents of the Apex Court, it is entitled to
claim set-off of the taxable income against the losses arising out of the
income/profits and gains, which is exempt from the charge of income tax under Clause
(132) of Part-I of the Second Schedule to the Ordinance. In further elaborating
their arguments, the learned counsel submits that the exempt income must be
included under the heads of income. In the context of authoritative
pronouncements on this issue, the learned counsel for the taxpayer has relied
upon the cases of TNB Liberty
Power Ltd. v. CIT[3],
and upheld by the Apex Court in the case of UCH Power (Pvt.) Ltd. v. ITAT[4],
relating to the interpretation and applicability of the Sections 34 and clause
176 of Part-I of the Second Schedule to the repealed Ordinance, 1979. It is
pertinent to point out that Section 34 and clause 176 of repealed Ordinance,
1979 are almost similar in their nature to Section 56 and Clause 132 of Part-I of
Second Schedule to the Ordinance, 2001.
7. We
have carefully examined these arguments addressed before us in all the tax
years under consideration. Before answering the question, the scheme of the
repealed Income Tax Act, 1922, Income Tax Ordinance, 1979, and the present
Income Tax Ordinance, 2001 has to be looked into for proper appreciation of the
legal proposition involved in the instant case. In the scheme of the repealed Act,
1922, the income tax is levied on income, profits, and gains and not on gross
receipts. Under Section 3[5]
of the Act, 1922 the yearly total
income of the assessee is charged to tax. In this connection Section, 4[6]
further amplifies that the total income of an assessee shall include all his
income, profits, and gains from whatever source derived. In fact, Section 3 of
the Act, 1922 charges total income, Section 4 defines its range, and Section 6[7]
classifies the different heads under which the tax is chargeable. Similarly,
section 9[8]
of the repealed Ordinance, 1979 also the yearly total income of the person is charged to tax. Section 11[9]
of the Ordinance, 1979 further defined the scope of total income and section 15[10]
classified the different heads of income under which the tax is chargeable. In
the Commissioner
of Income Tax v. Shaw Wallace & Co[11],
Sir George Lowndes in delivering the judgment of the Board observed that:
“The object of the Indian Act is to tax “income”, a term
which it does not define. It is expanded no doubt into income, profits, and
gains; but the expansion is more a matter of words than of substance.”
In Probhat Chandra Barua v.
Emperor[12],
Lord Russell observed that:-
“The tax is upon income, profits, and gains. It is not a tax on gross receipts. With this fact in view, each section which deals with one of the first five heads specified in Section 6 contains, where proper, specific provisions for the necessary deductions and allowances to be made for the purpose of arriving at the taxable balance.”
In this connection in another case
in Commissioner
of Income Tax, Bihar and Orissa v. Maharaja Dhiraja Kameshwar Sing of Darbhanga[13],
their Lordships of Privy Council further observed that the Income Tax Officer
was not required to compute the assessee’s receipts but the assessee’s income.
A Full Bench of the Bombay High Court in In re: B.M. Kamdar[14],
on a detailed examination of the various provisions of the Income Tax Act, 1922
held that the charge of tax does not operate upon the gross amount and in the
context of the provisions contained in Section 4 of the Act observed that: -
“The co-relation of the three words, income, profits, and
gains make this clear, for although income may be either gross or net, both
profits and gains presuppose that the expenditure laid out in order to produce
them has already been defrayed.” In this connection, Lord Parker in a case
before the House of Lords in Usher’s Wiltshire Brewery Limited v. Bruce {(1915)
A.C. 433 at page 458} observed that the profits and gains of trade imply
something in the nature of a credit and debit account, in which the receipt
appears on the one side and the costs and expenditure necessary for earning
these receipts appear on the other side. Indeed, “Without such account, it
would be impossible to ascertain whether there were really any profits on which
the tax could be assessed.”
It clearly emerges from the above, that in both the
repealed Act, 1922 and Ordinance, 1979 the levy and charge of tax on total
income of the year whereas the scheme of the Income Tax Ordinance, 2001 is
totally different from that and the levy and charge is on taxable income and not on total income. Under the Ordinance, 2001, section 4[15],
the levy and charge of tax is on taxable income whereas in the repealed Act and
Ordinance there is no concept of taxable income. The word “taxable income” has
been defined in section 9[16]
of the Ordinance, 2001 and section 10[17]
defined the “total income” comprising of “two blocks” of total income one,
incomes under all head of incomes as defined in section 11 and two, the exempt
income whereas in the repealed Act and Ordinance all incomes from whatever
source taxable or exempt come in the scope of total income and constituted “one
block” of total income. Further comparison of the scheme of the repealed
Ordinance and Ordinance, 2001 clearly shows that, in the repealed Ordinance,
the “exempt income” formed part of income under all/any heads of income under
section 15 of the repealed Ordinance, 1979 whereas in the Ordinance, 2001
“exempt income” is not included in taxable income under all/any heads of income
but constitutes a separate block of income.
8. Keeping in
view the scheme of the repealed Act, 1922, Ordinance, 1979, and the present
Ordinance, 2001 we now come to the question and the case laws cited by the
learned AR. In the case of UCH Power, amongst others, the question involved,
which could be said closely relevant to the issue before us, was that whether
income earned under one head cannot be set off against loss earned under another
head of income or from any other source (including the income which is exempt under
clause 176). In determining this question, after quoting from Section
23(deductions) and Section 34 (set-off of losses), the apex Court has
determined that there is no bar in legislative text, to set off of losses
earned from any source including the exempt income. To quote from the judgment:
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“15. A careful
reading of the above-reproduced sections from the Ordinance and placing it in
juxtaposition with clause 176 of the Ordinance leaves no room for doubt in our
mind to hold that the set-off of losses from business or profession, if any,
incurred by respondent companies, which are covered by above provisions of the
statute were not restricted to any particular head of income, but the same was
adjustable against their income under any other head, therefore, the impugned
judgment of the Islamabad High Court, affirming this position, and thereby
maintaining the findings of the Income Tax Appellate Tribunal in the same
terms, is unexceptionable. This being the position in 21 petitions, relating to
the issue of set-off of business losses, claimed by the respondent companies,
placed in the category (a), being devoid of merits, are dismissed. Leave
refused.”
In the above quote, the apex Court has upheld the judgment
delivered by the Islamabad High Court in the case of TNB Liberty Power. In this
case, the Hon’ble Division Bench of the Islamabad High Court had rejected the
submissions made on behalf of the department that losses under any head of
income, which is exempt from income tax, cannot be allowed as a set-off against
the income of a person under any other head. In this context, it was observed
by the Hon’ble Division Bench that if this had been the intention of the
legislature, it could have, in Section 34 (set-off of losses) of repealed
Ordinance, 1979, used “not exempt” after the text “any head of income”
specified in Section 15. In this context, the legislative text of Section 34 of
the repealed Ordinance, 1979 appears to be in pari materia to Section 56
of the Ordinance, 2001 in as much as, the words, “not exempt” is still absent
from the legislative text of Section 56. It is on this basis, that the learned AR
appearing on behalf of the taxpayer has argued that the omission of “not
exempt” is intentional and as such, the above dictum of the case of TBN
Liberty Power and UCH Power allows them to set off the loss against
the interest income. However, we reject their submission for the reasons set
out in the following paragraphs and find that the term “not exempt” after the
“any head of income” has been given effect in Section 56 of the Ordinance,
2001.
9. In this
respect, we start with the analysis of legislative provisions by first quoting
Section 34 of repealed Ordinance, 1979, and Section 56 of the Ordinance, 2001. It
is to be noted that we have underlined the relevant parts for emphasis only.
“34. Set-off of losses.- Where an assessee
sustains a loss (not being a loss to which section 36 or section 37 applies) in
any assessment year under any head of
income specified in section 15, he shall[, subject to clause (v) of
sub-section (1) of section 23] be entitled to have the amount of the loss
set-off against his income (other than income to which sub-section (7) or (9)
of section 12 applies), if any, under any other head assessable for that
assessment year.”
“56. Set-off of losses: - (1) Subject to sections 58
and 59, where a person sustains a loss for any tax year under any head of income specified in section 11, the person
shall be entitled to have the amount of the loss set off against the person’s
income, if any, chargeable to tax
under any other head of income except income under the head salary or
income from the property for the year.
(2)
Except as provided in this Part, where a person sustains a loss
under a head of income for a tax year that cannot be set off under sub-section
(1), the person shall not be permitted to carry the loss forward to the next
tax year.
(3)
Where, [in a tax year,] a person sustains a loss under the head
“Income from Business” and a loss under another head of income, the loss under
the head “Income from Business shall be set off last.”
In the above two quotes from the income tax legislation,
both the provisions read that subject to the conditions contained in the
respective provisions, a loss under any of the heads of incomes specified in
Section 15 of the repealed Ordinance, 1979 or Section 11 of the Ordinance,
2001, as the case may be, shall be adjustable against a person’s income.
However, there is a difference between these two provisions, in as much as,
unlike Section 34 of the repealed Ordinance, 1979, in case of Section 56 of the
Ordinance, 2001, the income against which a loss may be set off is one which is
chargeable to income tax
under different heads of incomes, which in other words implies that under
Section 56 of the Ordinance, 2001, a loss may not be set off against any income
under any head of income which is not chargeable to tax, that is, is exempt.
This condition takes the case of the present appellant far away from the
benefit availed by the taxpayers under the dictum of TBN, which was affirmed by
UCH Power.
10. Similarly, we
have also noticed some further striking differences in the schemes and
legislative provisions which are referenced in the repealed Ordinance, 1979 and
the Ordinance of 2001. In this context, further analysis of the heads of income
in Ordinance, 2001, that is, Section 12 (Salary), Section 15 (Income from the
property), 18 (Income from the business), Section 37 (Capital gains), and
Section 39 (Income from other sources) as enumerated in Ordinance, 2001 reveals
that exempt income is also excluded from chargeability of tax under different
heads. In each of these provisions, a specified legislative text “other
than ----- that is exempt from tax under this Ordinance” is included.
However, this was not the case in the repealed Ordinance, 1979, and no such
legislative text is included. See for example Section 16 (Salary), Section 19
(Income from house property), Section 22 (Income from business or profession),
Section 27 (Capital gains), and Section 30 (Income from other sources).
Similarly, through the Finance Act, 2012, the definition of total income under the
Ordinance, 2001 has also been clarified by the Parliament by incorporating
subsection (b) in section 10 of the Ordinance, 2001 to exclude the exempt
income from the definition of Total Income. In a nutshell, it is observed that
the scheme of Ordinance, 2001 and that of repealed Ordinance, 1979 is different
in the context of the treatment to be given to the exempt income.
11. Because of the above, it may conclude that to the extent of issues involved in the present case, the provisions of Sections 34 of the repealed Ordinance, 1979 and Section 56 of the Ordinance, 2001 are not in pari materia and as such, the cases of TBN Liberty and UCH Power does not favour the case of the taxpayers. In this context, it would not be out of place to mention here that under the current scenario, the above two cases favours more to the department.
12. For what has been discussed above, the issue of set-off and carry forward of depreciation losses against “income from other sources” has rightly been disallowed by both the lower authorities. The orders on this count call for no interference and the same are maintained.
13. TAX YEAR 2015: Treatment of Accounting Gain on sale of fixed assets and other business income as Profit on Debt.
The learned
AR contended that the Additional Commissioner Inland Revenue has inadvertently
considered the amount of interest income on bank deposits at Rs.16,861,000
instead of interest income on bank deposits of Rs.1,734,000. In support thereof,
the learned AR placed on record the copy of the rectification application
submitted before the Assessing Officer. Therefore, on this issue, the case is
remanded back to the Assessing Officer for de-novo consideration and with the
direction to decide the same in accordance with the record after giving the proper
opportunity of being heard to the appellant.
14. The appeals
of the appellant are disposed of in the manner stated above.
|
Sd/- |
Sd/- (M. M. AKRAM) JUDICIAL MEMBER |
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(IMTIAZ AHMED) ACCOUNTANT MEMBER |
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CERTIFICATE U/S 5
OF THE LAW REPORT ACT
This
case is fit for reporting as it settles the principles highlighted above.
(M. M. AKRAM)
JUDICIAL MEMBER
[1]
(1993) 203 ITR 881(SC)
[2]
(2003) 259 ITR 754(SC)
[3] 2010 PTD 802=PTCL 2010 CL 890=101 TAX 105
[4] 2010 SCMR 1236=2010 PTD 1089
[5] 3. Charge of income-tax.—Where any [Central Act]
enacts that income-tax shall be charged for any year at any rate or
rates * * tax at that rate or those rates shall be charged for that year
in accordance with, and subject to the provisions of, this Act in respect
of [the total income] of
the previous year of every [individual, Hindu undivided
family, [company and local authority, and of every firm and other
association of persons or the partners of the firm or the members of the
association individually]]. Emphasis supplied.
[6] 4. Application of Act.—[(1) Subject to the provisions of
this Act, the total income of
any previous year of any person includes all income, profits and gains from
whatever source derived which—
(a) are received or are deemed to be received
in [the taxable territories] in such year by or on behalf of such person,
or
(b) if such person is resident in [the
taxable territories] during such year,—
(i) accrue or arise or are deemed to accrue or
arise to him in [the taxable territories] during such year, or
(ii) accrue or arise to him without [the
taxable territories] during such year, or
(iii) having accrued or arisen to him
without [the taxable territories] before the beginning of such year and
after the 1st day of April, 1933, are brought into or received in [the
taxable territories] by him during such year, or
(c) if such person is not resident
in [the taxable territories] during such year, accrue or arise or are
deemed to accrue or arise to him in [the taxable territories] during such
year:
…………………
[7] 6. Heads of income chargeable to income-tax.—Save as otherwise
provided by this Act, the following heads of income, profits and gains, shall
be chargeable to income-tax in the manner hereinafter appearing, namely:—
(i) Salaries.
(ii) Interest on securities.
(iii) Income from property.
(iv) Profits and gains of business, profession
or vocation.
(v) Income from other sources.
(vi) Capital gains.
[8] 9. Charge of income tax.- (1) Subject to the provisions of this
Ordinance, there shall be charged, levied and paid for each assessment year
commencing on or after the first day of July, 1979, income tax in respect of
the total income of the
income year or years, as the case may be, of every person at the rate or rates
specified in the First Schedule:………………….
[9] 11. Scope of total income.-
(1) Subject to the provisions of this Ordinance, the total income, in relation
to any assessment year, or a person,-
(a) who is a resident,
includes all income from whatever source derived, which -
(i) is received, or is deemed to be
received, in Pakistan in the income year by, or on behalf of, such person; or
(ii) accrues or arises, or is deemed to accrue
or arise, to him in Pakistan during such year; or
(iii) accrues or arises to him outside Pakistan
during such year;
(b) who is a non-resident, includes all
income from whatever source derived, which-
(i) is received, or is deemed to be
received, in Pakistan in the income year by, or on behalf of, such person; or
(ii) accrues or arises, or is deemed to accrue
or arise, to him in Pakistan during such year.
(2) Notwithstanding anything
contained in sub-section (1), where any amount consisting of either the whole
or a part of any income has been included in the total income of a person on
the basis that it has accrued or arisen, or is deemed to have accrued or
arisen, to him in any year, it shall not be included again in his total income
on the basis that it is received, or is deemed to be received, by him in
Pakistan in any other year.
[10] 15. Heads of income.- All income shall, for
the purposes of the charge of tax and the computation of total income, be
classified under the following heads namely:-
(a) Salary;
(b) Interest on securities;
(c) Income from house property;
(d) Income from business or profession;
(e) Capital gains; and
(f) Income from other sources.
[11] (1932) 59 I.A. 206
[12] A.I.R. (1930) P.C. 209
[13] (1933) I.T.R. 94 at page 10
[14] (1946) 14 I.T.R. 10
[15] 4. Tax on taxable income.— (1) Subject to this Ordinance, income tax shall be imposed for each tax year, at the rate or rates specified in 1 [Division I 2 [ ] or II] of Part I of the First Schedule, as the case may be, on every person who has taxable income for the year.…………………………..
[16] 9. Taxable income.—The
taxable income of a person for a tax year shall be the total income under
clause (a) of section 10 of the person for the year reduced (but not below
zero) by the total of any deductible allowances under Part IX of this Chapter
of the person for the year.
[17] 10. Total Income.— The total income of a person for a tax year shall be the sum of the (a) person’s income under all heads of income for the year; and (b) person’s income exempt from tax under any of the provisions of this Ordinance.
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