IN THE APPELATE TRIBUNAL INLAND REVENUE
(PAKISTAN)
KARACHI
ITA No. 723/KB/2018(Tax Year 2014)
M/s Packages Limited, Karachi
……………………………………………………….………………. Appellant
V e r s u s
The Commissioner Inland Revenue, LTO, Karachi
…………………..…… Respondent
Represented by :
Appellant by : Mr. Asim Zulfiqar Ali, FCA, and
Respondent by : Mr. Abdul Wahid Shar
Date
of hearing : 19.03.2021
O R D E R
M. M. AKRAM (Judicial Member): This appeal has been filed by the appellant/ taxpayer against the impugned order No.5 dated 02.03.2018 passed by the learned Commissioner Inland Revenue (Appeals-II), Karachi for the tax year 2014 on the grounds as set forth in the memo of appeal. The facts of the case and issues involved are being decided through this order.
2. Briefly stated, the appellant is a public listed limited company engaged in the business of manufacture and sale of paper, packaging materials and tissue products. The appellant filed its income tax return for the tax year 2014 which was treated to be an assessment order in terms of section 120(1)(b) of the Income Tax Ordinance, 2001 ("the Ordinance"). After the selection for audit of income tax affairs under section 214C of the Ordinance by the FBR through random balloting, audit in terms of section 177 of the Ordinance was conducted in this case and an ‘Audit Report’ was issued by department on 14.3.2016 which remained uncompiled with. This was followed by an issuance of a show-cause notice under section 122(9) of the Ordinance dated 01.04.2016 by the assessing officer. Thereafter, feeling unconvinced by the position advanced by appellant on various issues, the learned assessing officer proceeded on to issue the amendment order dated 28.05.2016 under section 122(1) of the Ordinance. Feeling aggrieved, the appellant preferred the appeal before the learned CIR(A) who vide order dated 02.03.2018 decided the appeal. Still feeling aggrieved with the appellate order on certain issues, the appellant filed the appeal before this Tribunal and assailed the impugned order on a number of grounds.
3. This case came up for hearing on 19.03.2021. The appellant taxpayer has following grounds of appeal for the tax year under consideration:-
1.
The order of the CIR(A) is bad in law and on facts of
the case.
2. The CIR(A) has erred maintaining the action of the DCIR in invoking to the provisions of section 109 of the Ordinance on the facts and circumstances of the case, thereby maintaining the taxation of the transfer of assets between the appellant and its wholly owned company to be taxable capital gains under the provisions of section 37 of the Ordinance.
3.
Without prejudice to the ground of appeal no. 2 above,
the CIR(A) has erred in not appreciating that under the express provisions of
section 97 of the Ordinance, no gain or loss shall be taken to arise on
transfer of asset from one company to a company in its wholly owned group as
provided in the Ordinance.
4.
Without prejudice to grounds of appeal nos. 2 and 3
above, the CIR(A) has erred in not adjudicating on the ground no. 2(b) that the
gain is otherwise a notional amount as there is no receipt, which is taxable,
however, if in the opinion of ACIR the gain is not notional, then corresponding
effect of intangible and other revaluation adjustments have to be given, which
has not been considered in the impugned order.
5.
Without prejudice to grounds of appeal nos. 2 to 4
above, the CIR(A) has erred in not adjudicating on the action of determining
the amount of the gain; the facts of the case and the issuance of the shares to
the company against share premium has been misconstrued.
6.
Without prejudice to grounds of appeal nos. 2 to 5
above, the CIR(A) has erred in not adjudicating ground no. 2(d) in relation to
the gain is a receipt the same is otherwise not taxable being a capital
receipt.
7. The CIR(A) has erred in holding that the claim of
minimum tax under section 113(2)(c) of the Ordinance is to be allowed in the
light directions of High Court reported as 108 Tax 58.
8. The CIR(A) has
erred in maintaining the action of the ACIR in misinterpreting the provisions
of section 34(3) of the Ordinance; thereby resulting in disallowance of Rs
259.4 million on account of the provisions for approved staff retirement
benefit funds as under:
|
Nature of
Fund |
|
Status of
approval |
|
Rupees in ‘000s |
|
|
|
|
|
|
|
Pension fund |
|
Approved Fund |
|
189,946 |
|
Gratuity fund |
|
|
69,359 |
|
|
|
|
|
|
259,305 |
(A) ((A) GROUND NOS. 2 to 6 – TRANSFER OF ASSETS TO WHOLLY OWNED SUBSIDIARY SUBJECTED TO TAX UNDER SECTION 37
4. In
these grounds, the issue under consideration is that the learned assessing officer’s
action of invoking the provisions of sections 108/109 of the Ordinance in order
to impose tax on alleged capital gains of Rs 5,749,846,242 (computed below)
under section 37 of the Ordinance. Such tax was imposed in connection with the transfer
of assets (of Paper & Board & Corrugated Paper Business) by the
appellant company to it’s the then wholly owned resident subsidiary M/s Bulleh
Shah Packaging (Private) Limited (hereinafter referred as “BSPL”) and claimed
as a non-taxable event by appellant under section 97 of the Ordinance:
|
Description |
Amount in (Rupees) |
|
Amount in (Rupees) |
|
|
|
|
|
|
Assets of Paper & Paper & Board Business |
4,319,901,745 |
|
|
|
Add: depreciation for three months |
181,305,785 |
|
|
|
|
4,504,207,531 |
|
|
|
Land |
110,799,689 |
|
|
|
Other Assets (CWIP, Stores, Long term deposits
etc.) |
3,296,111,525 |
|
|
|
. |
7,908,118,945 |
|
|
|
Less: Liabilities |
(5,959,275,027) |
|
|
|
|
|
|
|
|
Net asset value of assets to Bulleh Shah
Packaging (Pvt.) Limited |
|
|
1,948,843,918 |
|
|
|
|
|
|
Consideration
purportedly received on sale of assets |
|
|
7,698,690,160 |
|
Less: Cost/ tax WDV of
assets as per above |
|
|
(1,948,843,918) |
|
Balance capital gain considered taxable u/s 37 |
|
|
5,749,846,242 |
6. The AR
then apprises the Bench of the sequence of events and actions which were
undertaken by the appellant, including public announcement for the induction of
foreign joint venture partner M/s Stora Enso, an entity incorporated under the
laws of Finland (‘Stora Enso’) for an investment to be in the specific
business and asserted that this objective was made public and is duly
acknowledged. In this respect, AR draws attention to the sequence of inter-alia
the following pertinent events:
|
S.No. |
Activity Performed |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
1. |
BOD meeting to resolve and
approve hive-down of operations/assets of Paper & Paperboard operations
of the Appellant and transfer to BSPL. |
|
21.03.2012 |
|
|
|
|
|
|
2. |
Approval of Shareholders of Appellant in Annual General
Meeting for transfer of Paper & Board operations to BSPL. |
|
30.04.2012 |
|
|
|
|
|
|
3. |
Asset transfer agreement
entered between BSPL and Appellant company. |
|
15.09.2012 |
|
|
|
|
|
|
4. |
Joint Venture agreement
entered between M/s Stora Enso and appellant upon BOD meeting of Packages’
Directors on the same date. |
|
17.09.2012 |
|
|
|
|
|
|
5. |
Delivery note provided by
BSPL on net assets of Rs 7.6 billion transferred to it by appellant for a consideration of issuance of 528,213,616 shares. |
|
1.04.2013 |
|
|
|
|
|
|
6. |
BOD meeting of BSPL for
considering and approving issuing 382,155,855 shares to Stora Enso against
equity injection which are to be allotted on same date. |
|
31.05.2013 |
|
|
|
|
|
7. The AR,
based on the entire sequence of events and the underneath principle objective, emphatically
argues that the said transfer of assets was a bona fide interim step for the
purposes of effecting a genuine business transaction carrying proper and
justifiable economic substance. The said transfer of assets being entered into
between “wholly owned group of companies”, the AR submits, was a non-taxable
event in terms of the provisions of section 97 of the Ordinance (which the assessing
officer also does not dispute as all the conditions stated therein were fully
met and complied with) and hence, could not be challenged arbitrarily. It was
the equity participation by Stora Enso, post completion of above transaction, the
AR further submits, that department questioned the transaction through
invocation of section 109 of the Ordinance. In this context, the AR further asserts
that learned assessing officer had misconceived the relevant facts and
misdirected by dragging in the provisions of section 109 of the Ordinance which
were ab initio inapplicable in the facts and circumstances of this case.
The learned AR explains that the principle purpose of the transaction was
always and exclusively to bring foreign investment & foreign expertise in one
of the lines of business, for which the subject transfer was required for execution
and implementation of the plan. Since neither the foreign partner had any
interest in other lines of business of the appellant company, nor the appellant
company had any benefit of the same, therefore, it was only logical and appropriate
to have a separate and independent special purpose vehicle carrying the assets
of the Paper & Board business of the appellant. It is for this purpose, the
AR reinforces, that the existing business was reorganized through a process of
hive down of relevant assets into BSPL followed by induction of a Joint Venture
partner in such entity. Thus, relating the two transactions, the AR adds, as a “tax
avoidance scheme” within the meaning of section 109 of the Ordinance, was
misconceived, misconstrued and without substance. In this regard, the AR
referred to following provisions of law as were prevalent on the statute book
prior to amendments introduced vide Finance Act, 2018:
“109. Recharacterisation
of income and deductions. — (1) For the purposes of determining liability
to tax under this Ordinance, the Commissioner may –
(a) recharacterise a
transaction or an element of a transaction that was entered into as part of a
tax avoidance scheme;
(b) disregard a
transaction that does not have substantial economic effect; or
(c) recharacterise a
transaction where the form of the transaction does not reflect the substance.
(2) In this section, “tax avoidance scheme” means any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person’s liability to tax under this Ordinance. (Emphasis supplied)
8. The
learned AR further submits that a bare reading of these provisions reveals that
‘tax avoidance scheme’ has been defined to mean as any transaction, where “one
of the main purpose of a transaction” is ‘tax avoidance’, which is not the case
here as is evident from the above explained facts which clearly demonstrate
that there were necessary business exigencies which required the appellant to
execute the subject transaction and not had any preconceived purpose of ‘tax
avoidance’. Learned AR asserts that while apparently learned assessing officer
invoked the provisions of section 109(1)(b) of the Ordinance, he did not render
any basis for holding as to how the transaction under consideration lacked any
economic or commercial purposes. The learned AR, therefore asserts that both
the authorities below had not only misconceived the relevant legal scheme, but
by failing to establish any lack of economic purpose etc. had also clearly
transgressed the powers available to hold that such a transfer invited the
mischief of provisions of section 109 of the Ordinance. In order to strengthen
the assertion that action in terms of section 109 of the Ordinance remained
without jurisdiction, learned AR draws attention to the contents of the show
cause, the related amendment order as well as the impugned order wherein the
issue was raised & decided in a very casual and non-specific manner and on
the basis of making generalized statements, one of the pertinent points being
that provisions of sections 108/109 of the Ordinance were invoked initially,
with the provisions of section 108 later on dropped in the amendment order. The
learned AR draws attention to the following excerpts from the orders of the
authorities below:
122(1) ORDER – PAGE 32
“Further, the manner
the taxpayer has constructed the transaction of sale of business, it is obvious
that it intended to give it a form as if the transaction has happened within a
wholly owned group of companies. The creation of two companies BSPML and BSPL
in span of few months, despite the fact that the intent of improving the
separated business with international expert partner was part of the original
plan, indicates that it was artificially done to get tax benefit by showing at
as a tax neutral transaction. Otherwise, the taxpayer could have straightly
entered into a joint venture and have avoided the cumbersome procedure of
forming two companies.
However, transaction
of capital nature with huge size, like the one under consideration, are
executed after a lot of investment appraisal and due diligence, hence, the
taxpayer’s claim that the taxpayer had said the business to BSPL as a separate
transaction than its transaction aiming to run the said business through
induction of international expert as a JV partner is not convincing. When the
two agreements, one for sale of business to BSPL and other for entering into JV
were entered into within the same fortnight, it cannot be presumed that their
financial appraisement was done separately. The investment appraisal including
the estimate of future streams of cash flows must have been done as if all the
transfers in the aforesaid plan is a single transaction. However, the
convoluted part of making the JV, instead of directly making the JV, was
adopted by the taxpayer an order to give it a form of a transaction executed
with wholly owned subsidiary, which in substance was a transaction with a JV –
which is not wholly owned by the taxpayer. When the substance of the
transaction with BSMPL, BSPL and Stora Enso has been unearthed in above
paragraphs. It is obvious that the taxpayer has transferred its business to a
JV, which is not akin to wholly owned subsidiary, hence, the same does not
qualify for tax neutrality envisaged under Section 97. Further, since the
taxpayer has attempted to split the transaction with more than one entities to
give it an outlook/form of a transaction with the wholly owned subsidiary this
office recharacterize the transaction under Section 108/109 to reveal its
substance and treat the sale of business to BSMPL and BSPL as of no economic
effect and declaiming that in substance the transaction of sale of business has
taken place with the JV. Consequently, the taxpayer’s claim to treat the
transaction as tax neutral under Section 97 is also rejected. Thus, the
objective of invoking Section 109 is identified which clearly is to avoid
payment of tax on capital pain to claiming eligibility of tax neutrality under
Section 97. The claim of the taxpayer in Para 15 of its letter dated 20-05-2016
that the company could have achieved tax neutrality for the transaction if it
would have done the demerger with the approval of the Hon. High Courts ratification
of the corporate amalgamations and spin offs get the force of statute and the
Hon. Courts ratify which transactions only after the thorough examination of
such transaction. The taxpayer avoided to go before the Hon. High Court for the
reasons better known to it. Moreover, as laid down in a plethora of judicial
pronouncements, if the law has provided a procedure, that procedure has to be
strictly followed. More aptly, if the procedure provided in the law for doing a
thing in a particular manner is not followed, the benefit of law cannot be
given.”
PAGES 22 AND 23 of
Appellate Order
“It is an admitted
fact that the DCIR before resorting to action confronted the appellant
regarding observation that sale of Karachi and Kasur business to BSPL, which is
it’s hundred percent owned associate BSPML and BSPL, is an attempt to avail the
benefit of section 97 to avoid payment of tax on capital gain u/s 37 of the
Ordinance. The fact that the appellant “Asset Transfer Agreement” entered on
September 15, 2012 lays down the substance of transaction. The appellant’s act
executing the subscription agreement between M/s Stora Enso and Packages
Limited on 17.09.2012, where the entities enter into a joint venture on
fulfillment of a number of conditions and to undertake the “Paper and Paper
Board business” of the appellant and syndicate Bridge Finance Loan Agreement
was signed on November 5, 2012, also leads to the inference that the appellant
being duly conversant of the agreement executed with BSPL on 15.09.2012, merely
tried to hoodwink the state exchequer to avoid incidence of tax by executing
agreement with M/s Stora Enso and Packages Limited on 17.09.2012. the said
company was not wholly owned associate / subsidiary of the appellant. Hence the
inclusion of M/s Stora Enso as partner by the appellant on 31.05.2013 as per
agreement executed on 17.09.2012 led to the conclusion that agreement executed
on 15.09.2012 with BSPL was infact a valid agreement but it’s declaration on
31.05.2013 was nothing but to avoid tax on capital gains u/s 37 of the
Ordinance.
Thus the events occurred and
transaction with BSPML and BSPL also leads to the conclusion that main purpose
behind this exercise carried out was to avoid payment of tax on capital gains
and therefore fell in the ambit of Section 109 read with Section 37 of the
Ordinance. Reliance placed on the judgement of the Hon’ble High Court of Sindh
pronounced in the case of M/s IGI Insurance Ltd vide ITRA. No. 6 of 2013 is not
on all fours and distinguishable on facts of the instant case. The case of M/s
IGI Insurance pertained to insurance business, which is governed by separate
mode of taxation under special procedure and rules prescribed thereof whereas,
the appellant’s activity is spread over on various modes of business including
paper and paper board.
Therefore in the circumstances of the instant case, there hardly appears any justification on part of the appellant to claim the transfer of assets/business to BSPL wholly owned associate as non-taxable event. Suffice to say that the transaction becomes taxable when the company disposes its ownership on the assets, which in the case of the appellant was agreed to be done through agreement made on 17.09.2012 with M/s Stora Enso. Hence I hold that the DCIR has appropriately invoked that provisions of section 37 of the Ordinance which are very much applicable in this case, therefore the action of the Officer and as such the tax on capital gain is hereby maintained.”
9. The
learned AR, in order to fortify the submission that matter clearly and without
a shadow of doubt remained outside the purview of section 109 of the Ordinance and
that the authorities erred in drawing adverse inference, as above, in the
matter, placed heavy reliance on the decision of Honorable High Court of Sindh titled
Commissioner Inland Revenue vs M/s
IGI Insurance Limited, (2018 PTD 114). The AR in this respect has also made
reference to case laws of international jurisdiction, wherein the principles
relating to transactions classifiable in the nature of ‘tax avoidance schemes’
were thrashed out in detail. In this respect, AR refers to various precedents
of the UK jurisdiction including the ‘Duke
of West Minister Case’, (IRC Vs Duke of Westminster 19 TC 90),
wherein, adopting a literalist view to examining the tax avoidance schemes, it
was held that taxpayer, can order his tax affairs in any manner he thinks fit,
provided for in applicable statutes. Moreover, reference has also been made to
judgements handed down by the House of Lords in WT Ramsey Limited Vs IRC, (1981 STC 174) and Furniss Vs Dawson, (194 STC 1530).
Learned AR submits that in the latter decisions, whilst moving on from a
literalist approach in tax avoidance matters to a purposive approach, it was
held by Courts that in tax avoidance matters, where there is a series of
pre-ordained transactions and there is an indication that transactions,
end-to-end, firstly do not have any economic purpose/substance and secondly were
mainly entered into for avoiding/deferring tax, it can only and only then be
construed as a scheme for avoidance of tax. The AR vociferously argues that if,
in the series of transactions, tax avoidance is just an ancillary and
incidental purpose then anti-avoidance provisions, it is the consistent
position of Courts (including that of their lordships of the honourable Sindh
High Court in the judgement referred supra), are not applicable. The AR,
further argues, that any other approach would offend the provisions entitling
taxpayers to benefits and concessions etc. as the revenue would always drag any
such claim in the mischief of anti-avoidance provisions and set at naught such
claim arbitrarily by labelling it as a ‘tax avoidance scheme’.
10. Without
prejudice to the above submissions, with respect to the other related Grounds
of appeal Nos. 4 to 6, learned AR submits that while these grounds were not at
all adjudicated by the Commissioner (Appeals), these sought to address the
following anomalies committed in the amendment order:
(i) Notwithstanding the position that
such capital gain is not subject to tax ab initio, it has been taxed by
ignoring the position that the said gain is a ‘notional’ amount, there
being no actual receipt which is taxable; even if for arguments sake such gain
is considered as not ‘notional’, corresponding effect of intangible and other
revaluation adjustments needs to be accounted for while computing the said
gain;
(ii) Without prejudice to above, amount
of Capital gain computed in the amendment has been arbitrarily enhanced,
inter-alia on account of the fact that not only the amount of the said gain has
not been restricted to 75% in terms of section 37(3) of the Ordinance, matter
relating to issuance of shares at a ‘share premium’ has also been misconstrued;
and
(iii) Without prejudice to all of the above, the gain is not taxable, the same being in the nature of a ‘capital receipt’.
11. The
learned AR, finally submits that determination of the notional gain in this
arbitrary manner lacks legal support even under the provisions of section 37 of
the Ordinance (definition of ‘capital asset’ reproduced below) and the
clarifications and assertions given on the proposed treatment including the
identification of the error, the effects of revaluations and the issuance of
the shares to the appellant at a share premium of 2.4 billion has not been
taken into account by the learned assessing officer. These submissions; learned
AR emphasizes, are a part of the order under section 122(1) of the Ordinance on
pages 26 to 29, though these have not been accounted for at all and the matter
needs to be addressed.
“(5)
In this section, “capital asset” means
property of any kind held by a person, whether or not connected with a
business, but does not include –
(a)
any stock-in-trade (not being stocks
and shares), consumable stores or raw materials held for the purpose of
business;
(b)
any property with respect to which the
person is entitled to a depreciation deduction under section 22 or amortization
deduction under section 24;
(c)
any immovable property; or
(d)
any movable property excluding capital
assets specified in sub-section (5) of section 38 held for personal use by the
person or any member of the person’s family dependent on the person.”
12. On the
other hand, the learned DR dispassionately supports the orders of the assessing
officer and the learned first appellate authority and reiterates:
·
the fact
that the two agreements were executed by appellant within a mere difference of
two days (i.e., asset transfer agreement on 15-09-2012 & JV agreement with
Stora Enso announced on 17-09-2012) clearly depict that reorganization of
corporate structure was meant just to obtain the cover of the provisions of
section 97 of the Ordinance in order to avoid tax as, otherwise is no business
rationale could be assigned to such a transaction;
·
the
assessing officer had correctly held the transaction to be that of a tax
avoidance scheme and imposed capital gain tax under section 37 of the Ordinance
by invoking sections 108/109 to recharacterize the transaction for lack of any
economic substance. Invoking section 109 without sub-section is just a literal
compliance only, however, in the instant case, there is actual abuse of law and
the appellant has intentionally designed such scheme to avoid tax;
·
provisions
of section 109 of the Ordinance are applicable and the action of the department
is supported by the well settled principles relating to tax avoidances schemes,
where companies undertake such transactions in order to avoid tax and General Anti Avoidance Rule [“GAAR”] is there to prevent such schemes. The related
principles settled through the cases laws of English jurisdiction, referred to
by AR, lends credence to the Department’s case, rather than supporting the case
of the appellant;
·
a huge liability
existed at the time of transfer in the balance sheet of the appellant company [to
which the AR responded that such liabilities was set off at the time of
transfer and net assets were transferred as identified in the submissions on
page 6 of the CIR(A) order]; and
·
while Stora
Enso has exited from the BSPL on 18-09-2017, and holding of appellant in BSPL
again became 100%, Stora Enso still holds 7% shareholding in appellant company.
13. We have given due consideration to the facts of case, the rival submissions and the case laws cited at bar. In our view, the fundamental issue before the Bench is to determine as to how the provisions extending any benefit, incentive or advantage etc. to a taxpayer need to be construed when juxtaposed with anti-avoidance provisions stipulated in section 109 of the Ordinance. In this respect, some line needs to be drawn and contours need to be defined as otherwise, the learned AR has rightly pointed out, the department could deny any benefit or advantage simply by resorting to section 109 of the Ordinance, which cannot be the intention of the legislature. Thus, the core issue involved in this case is as to whether the transactions relating to transfer of its assets executed by the appellant company with its wholly owned subsidiary BSPL, claimed as tax neutral under section 97 of the Ordinance and subsequent induction of a foreign joint venture partner i.e. Stora Enso, attract the mischief of the provisions of section 109 of the Ordinance?
14. Before proceeding on to discuss the
legality of the departmental action, it would be appropriate to briefly discuss
the rationale and objective of prescribing anti-avoidance provisions in a
taxing statute as is the case under section 109 of the Ordinance. In
terms of these provisions of the statute, the legislature aims at enabling the
tax authorities, for the purpose of imposition of tax, inter-alia to
recharacterise or disregard transaction(s), the underlying objective for
entering into which, remains avoidance or reduction of tax liability otherwise
arising under the law. This concept of tax avoidance and re-characterisation
had remained subject matter before Courts in UK for decades, and even before
when it was made part of the statute expressly through legislation in on or
around year 2013. The Courts had been examining this concept, in detail, on
many occasions. In such cases, the courts in UK have established certain tests to
ascertain as to whether any recharacterisation is required to tackle a tax
avoidance scheme. In the case of ‘Duke of West Minister’ [1936] 19 TC
490, the acceptability of literal interpretation in tax avoidance matters was
endorsed by the House of Lords and it was held that “every man is entitled, if
he can to order his tax affairs so that the tax attaching under the appropriate
acts is less than it would be otherwise”. A seminal change in this
conception was introduced through the ‘Ramsey case’ in 1981 handed down in the
case of WT Ramsay Ltd Vs IRC [1981] STC 174 where matter
of ‘tax avoidance’ was examined in a much broader sense than in earlier cases.
The position post, Ramsey case, in relation to tests to be applied for
unwinding/identifying a scheme of tax avoidance are as under:
(i) The transactions or series of transactions
should be pre planned/pre-ordained. This can be examined by ignoring the steps
if these are self-cancelling, considering the scheme as a whole for determining
the tax consequences;
(ii) The object of the scheme is to avoid tax;
(iii) The transactions do not have any independent
status i.e. in order to treat transactions as a composite, the constituent
steps must be interdependent in such a way that one cannot exist without the
other; and
(iv) The composite transaction (all the transactions taken as a whole) is substantially different from the legal form of each transaction.
15. Such
principles were more or less again affirmed by the Lords in IRC
Vs Burmah Oil Ltd, (1982) STC 30, in which it was held that for
‘Ramsey’ principle to apply in a tax avoidance scheme there must be (i) series
of pre-ordained transactions; and (ii) into which steps are inserted that have
no commercial purpose other than tax avoidance. Lastly, in case of Furniss vs Dawson dated
February 9, 1984 (1984 STC 153), such principles were again reaffirmed
by the House of Lords, though Ramsay principle, which had hitherto been founded
on ‘self-cancelling schemes’ etc. was extended to both tax deferral and
avoidance. While applying the Ramsay principle to the facts it was held by the
House of Lords that the capital gains tax deferral claimed by taxpayer by
interposing a sale/exchange of shares with another entity in another
jurisdiction lacks any economic objective/substance other than tax avoidance,
as if in case a direct sale was made such gain was taxable, and thus, such
arrangement constituted a ‘tax avoidance scheme’. Thus, the tax avoidance scheme
criteria already settled in Ramsay judgement were slightly redefined as:
(i)
Pre-ordained
series of transactions (or one single composite transaction); and
(ii) Steps inserted which have no commercial (business) purpose (as distinct from a business effect) apart from avoidance (or deferral) of a liability to tax.
16. The
principles discussed above, abundantly clarify that the anti-avoidance
provisions can only be invoked when the only or predominant intention remained
avoiding the incidence of tax. We now dilate on the provision of local law
governing the anti-avoidance schemes. In this respect, before proceeding any
further, implications of the provisions of section 109 of the Ordinance, what
constitutes a ‘tax avoidance scheme’ in terms of these legal provisions as well
as the case laws issued by Courts in tax jurisdiction of various developed
nations (inter-alia including that referred above) and how such provisions are
to interact with the relevant statutory provisions, which are under dispute,
has been very thoroughly, elaboratively and eloquently discussed and examined
in the judgement of the honourable Sindh High Court reported as 2018 PTD
114 in the case of M/s IGI
Insurance, as also relied upon by AR. The issue involved therein
was the rejection of exemption claimed under Clause 110 of Part I of the Second
Schedule on the controlled sale and re-purchase of sales of listed entities
held by IGI Insurance since inception, through exercise of powers under section
109 of the Ordinance. The argument that such gain was to be subjected to tax
subsequently and the objective was to increase capital costs was rejected by
department. The High Court, after an elaborate discussion on the international
laws relating to GAAR as well as
the related precedents settled by Courts of other developed jurisdictions had
given a judgement on the exercise of the powers incorrectly exercised under
section 109 of the Ordinance. In this
perspective, paragraph 77 of the judgement
is relevant wherein principles governing the application of provisions section 109
of the Ordinance have been discussed.
Thus, it would be very apt to consider the relevant findings laid given
by the Court in this regard. In this respect, para 77 of the said judgement is
relevant, which is reproduced below for ready reference:
“77. It
would be convenient to pause here and summarize the rather extended legal
analysis and discussion carried out in paras 35 to 76 above. We emphasize that
this summary is not intended to be self-contained, and must be read in the
light of, and conformably with, the actual analysis and discussion. Thus, e.g.,
any view. observation or conclusion not included in the summary is not for that
reason to be ignored or regarded as subordinate. All points noted above must be
construed and applied appropriately and given their due place, by reading the
judgment as a whole. Subject to the foregoing, the analysis may be summarized
as follows:--
(A)
Generally:
a.
A distinction must be drawn between permissible tax
planning (i.e., tax mitigation· or minimization) and impermissible tax planning
(i.e., tax avoidance). A GAAR is concerned only with the latter and not the
former. Tax mitigation or minimization is lawful and outside the scope of a
GAAR.
b.
On account of the foregoing distinction, one major
difficulty in applying any particular GAAR is how and where to draw the line
between tax mitigation and tax avoidance. This is an acute problem faced by
courts in all jurisdictions.
c.
A GAAR, must necessarily be given a purposive
interpretation. In other words the Court must ascertain its object and spirit
and apply the provision accordingly. This is the correct approach to all such
provisions, and section 109 is no exception.
d.
If the general interpretative approach to tax
legislation in the jurisdiction concerned is also purposive, then the· two
approaches are in harmony and aligned, and the GAAR can be given its due
effect. However, if the general interpretive approach is literal, strict and
formalistic, then the two approaches are incompatible, may be inconsistent and
even clashing. In such a jurisdiction there would be a formidable difficulty in
giving the GAAR its due and proper effect, since the GAAR must at some point
necessarily interact with specific provisions of the tax code. In such a
jurisdiction, the scope and application of the GAAR would be circumscribed and
could be compromised, perhaps even fatally so.
e.
The general interpretive approach to tax legislation in
Pakistan is based on the Rowlatt, J formulation. The tax jurisprudence of this
country still adopts the literal, strict and formalist approach in contrast to
the other jurisdictions here considered, where a purposive approach has been
adopted. Thus, there is a clear difficulty in applying section 109 to the
specific provisions of the 2001 Ordinance, in the former's interaction with the
latter. While section 109 must be given a purposive approach, it must always be
remembered that the specific provisions with which it interacts in relation to
any particular set of facts and circumstances are to be interpreted and applied
in terms of the orthodox and established tax jurisprudence, and not otherwise.
How this dichotomy is best addressed will emerge gradually, as (or rather if)
more cases come before the Court.
(B)
With reference to section 109:
f.
The general interpretive approach to the section at
large is as follows: The question is whether section 109, construed
purposively, is intended to apply to the transaction, viewed realistically.
This aspect is fundamental and must be kept in mind at all times when
considering the section, including its various components and parts.
g.
The term "transaction" is not defined. It must
be construed broadly and its scope and effect determined objectively. The
detailed description given in the paras above as to what is meant by
"transaction" must be kept In mind, and applied as appropriate, but
it is not intended to be exhaustive.
h.
In discovering and drawing the line between
"good" tax planning (mitigation) and "bad" tax planning
(avoidance)---a distinction fundamental to a proper appreciation and
application of section -109---the most practical approach is to list (without
being exhaustive or conclusive) those factors which, if found in or in relation
to a transaction, would indicate that it is the sort of transaction that is
sought to be caught by the section. It is only a transaction that falls in such
category that can be regarded as tax avoidance. A number of those factors have
been listed and considered herein above.
i.
The various clauses of subsection (1) of section 109 can
only be applied in the context of a tax avoidance scheme. Equally,
consideration of such a scheme is not limited to clause (a), but the other two
clauses can also be invoked in appropriate cases.
j.
The term "purpose" as used in section 109 can
mean either or both of (depending on the facts and circumstances of the
transaction being considered) the effect sought to be achieved, i.e., the end
in view, as well as the end actually accomplished or achieved.
k.
"Purpose" has to be determined objectively and
not subjectively. However, due recognition must be given to the fact that
section 109, unlike the GAAR provisions in the other jurisdictions here
considered, refers not simply to the purpose of the transaction, but rather to
the purpose of a person in entering into the transaction. Thus, while in the
other jurisdictions the motive or purpose of the persons who ate party to the
arrangement, scheme, etc. has been held to be irrelevant, such a truncation is
not possible in the context of section 109.
l.
Keeping the foregoing in mind, the proper approach to
determining the "purpose" is as follows. (It must be kept in mind
that the entire enquiry and exercise is, at all stages, objective and not
subjective.) In the first instance, the Department may consider the transaction
alone without having regard to the person who entered into the transaction. In
other words, the purpose of the former may be equated with the latter. Such a
conclusion can only be provisional. The Department must issue a proper show-cause
notice in this regard, which can be part of a larger notice. It would then be
open to the taxpayer (without limiting his defense) to show, inter alia, any,
some or all of the following, whether together or in the alternative. (i) the
Department has misconstrued or misunderstood the transaction; (ii) the purpose
of the transaction, even while looking at the transaction alone, was something
other than, and not, tax avoidance; or (iii) the purpose of the person in
entering into the transaction was not tax avoidance. If the taxpayer is able to
do so, then this would trump any conclusion arrived at provisionally by the
Department.
m.
The notice to be issued by the Department
must state that the purpose as therein identified is the sole purpose, unless
the Department contends that it is one of two or more purposes, in which case
some indication, to the extent possible, is to be given of what the Department
considers to be the other non-tax avoidance purpose(s). If the notice is silent
in any of these respects, the taxpayer would be entitled to assume that the
Department's case is that there is only one purpose, as set out therein, The
taxpayer would be entitled to show, as the case may be, (i) that there is more
than one purpose or (ii) that the non-tax avoidance purpose(s) are not as
indicated by the Department or (iii) that the tax avoidance purpose as claimed
by the Department is not a "main" purpose.
n.
If the taxpayer is able to show that the tax
avoidance purpose is "merely incidental", then it is not a
"main" purpose of a transaction. If a purpose is necessarily linked,
without contrivance, to some non-tax avoidance purpose in such manner that the
former can be regarded as a natural concomitant of the latter, then the tax
avoidance purpose is "merely incidental". Equally, if a tax
avoidance. purpose is subordinate or subsidiary to a concurrent legitimate
(i.e., non-tax avoidance) purpose, then it is also "merely
incidental". The. tax avoidance purpose cannot in such circumstances be a
"main" purpose.
o.
Subject to the foregoing sub-para, and
without at all attempting to be exhaustive or conclusive, a good working
description of a "main purpose" of a person in entering into a
transaction being tax avoidance is as follows. If tax avoidance is a significant
or actuating purpose which has been, or could have been, pursued as a goal in
itself, then the purpose can be regarded as a "main" purpose.
p. If there is only one purpose which is claimed to be tax avoidance, then the foregoing sub-paras will still apply, though mutatis mutandis.”
17. It follows from a careful and keen reading
of the above analysis carried out by their lordships of Sindh High Court that
key considerations in dealing with matter involving invocation of
anti-avoidance provisions are inter-alia as below:
(i) A distinction
must be drawn between ‘tax mitigation’ and ‘tax avoidance’. A GAAR [which in
case of Pakistan law is section 109] is concerned only with the latter as tax
mitigation is lawful, though in specific cases it is often difficult to draw a
line between the two. A GAAR
(including section 109), must necessarily be given a purposive interpretation
and thus Court must ascertain its object and overall spirit and apply the
provision accordingly and there is no exception to this rule.
(ii) If the general interpretative approach to
tax legislation in the relevant jurisdiction, like Pakistan, is literal, strict
and formalistic then in such jurisdiction a formidable difficulty would be
faced in giving the GAAR its due effect, since GAAR must needs to applied
purposively, and hence at some point GAAR could be significantly compromised. While
section 109 must be given a purposive approach, the specific provisions
interacting with it in relation to any particular set of facts/ circumstances
are to be interpreted as per the orthodox/ established tax jurisprudence.
(iii) In drawing the line between ‘tax mitigation’
and tax avoidance vis-à-vis the provisions of section 109, a practical approach
is to list those factors in relation to the transaction (e.g. whether the
transaction or series of transactions appear ingenuine, contrived, artificial,
self-cancelling, without any economic purpose/substance etc.) which would
indicate that it is the sort of transaction that is sought to be captured by
these provisions. It is only a transaction that falls in such category that can
be regarded as tax avoidance.
(iv) The expression "purpose" as used
in section 109 can mean either or both of (depending on individual facts/
circumstances of transaction) the effect sought to be achieved, i.e., the end
in view, as well as the end actually accomplished or achieved. The said
expression has to be determined objectively and not subjectively and secondly,
it refers not simply to the purpose of the transaction, but rather to the
purpose of a person in entering into the transaction. Thus, while in the other
jurisdictions the motive or purpose of the persons who are party to the
arrangement, scheme, etc. has been held to be irrelevant, such a position is
not possible with reference to section 109; and
(v) The proper approach to determining the "purpose" is that it must be kept in mind that the entire enquiry and exercise is, at all stages, objective and not subjective. If the taxpayer is able to show that the tax avoidance purpose is "merely incidental", then it is not a "main" purpose of a transaction. If a purpose is necessarily linked, without contrivance, to some non-tax avoidance purpose in such manner that the former can be regarded as a natural concomitant of the latter, then the tax avoidance purpose is "merely incidental". Equally, if a tax avoidance purpose is subordinate or subsidiary to a concurrent legitimate (i.e., non-tax avoidance) purpose, then it is also "merely incidental and not the "main" purpose.
18. It
is manifestly clear that no hard and fast rules or principles could be laid
down where a provision of law is required to be construed purposively. Each and
every case needs to be considered on its own facts and circumstances. The
qualification and disqualification would always remain dependent on facts and
circumstances of each case. We now proceed with applying the above
authoritatively, unambiguously and unequivocally settled principles on the
facts of the present case. In this regard, it would be in the fitness of things
if the contentions of the authorities below as recorded in their respective
orders, and reproduced above, are also kept in consideration. In the
present case, it is patently clear that the transfer of assets was necessitated
owing to certain very pertinent business reasons. All documents on record,
including, intimations to regulatory authorities and shareholders loudly and
clearly depicted the underlying main purpose and objective of the complete
transactions i.e., proceeding with inclusion of a joint venture partner well
before the actual transaction affecting transfer of assets. As is evident from
the amendment order and other assessment records, appellant has made strategic
investments in various projects and in certain cases also engaged foreign
partners in various business ventures. The primary purpose of subject transfer
was also predominantly to bring foreign investment & foreign expertise in
one of the lines of appellant’s business i.e., Paper & Board and Corrugated
business and for this reason, existing business was restructured by way of hive
down of relevant assets into BSPL with subsequent induction of a Joint Venture
partner (i.e., Stora Enso) therein. Thus, we fully concur with the learned AR’s
view that the overarching purpose of the transaction was nothing but business/
economic consideration ultimately aimed at enrichment of business and
shareholder value and was not meant wholly and exclusively for avoidance of any
tax, as has been asserted by department. While the department has tried to make
out a case that the series of events i.e., from the date of announcement of
transfer of assets to BSPL till issuance of equity to Stora Enso, constituted
‘pre-ordained transactions’ aimed at avoidance of tax in terms of the
judgements of UK jurisdiction, it has failed to appreciate the position that it
is a considered view of Courts that only such transaction can attract GAAR
application, whose main objective is avoidance of tax, which we have no doubts
in our minds, is not the case here. The claim of tax neutrality under section
97 of the Ordinance, it is apt to be noted, was only, at best, ‘incidental’ to
achievement of appellant’s main business purpose. Accordingly, in terms of
ratio decidendi of the order of the Sindh High Court this transaction,
holistically speaking, is not hit by the mischief of section 109 of the
Ordinance.
19. The assertion of revenue that in a series of transactions where any one individual transaction results into non imposition of tax otherwise leviable under the statute, mischief of section 109 of the Ordinance is fully applicable is, in our view, not only seriously flawed but also offends the principles settled by their lordships in order of Sindh High Court referred supra. If this was considered to be permissible, or for that matter, intent of legislature then practically all provisions extending any benefit, incentive, advantage etc. would become meaningless and redundant. Every such claim could then be disputed on notions and hypothesis. In terms of scheme envisaged in the statute benefits/concessions stipulated in sections 95, 96, 97, 97A or for that matter under sections 59AA or 59B of the Ordinance, cannot be denied without undertaking complete analysis through a purposive approach, as eloquently deliberated in the judgement cited supra. To elaborate, every action by taxpayers to undertake business re-organizations or to make them eligible for any tax mitigation/ concessions etc., could not be, per se, dragged in the provisions of section 109 of the Ordinance, until and unless the analysis of facts/circumstances & underlying objectives indicate that principal purpose thereof is tax avoidance. If this process could be allowed to be bypassed or short circuited, the ultimate result would be that the entire super structure of law setting out benefits and advantages etc. would crumble. This, we consider, is obviously neither the legislative intent nor a purposive interpretation of the statutory provisions. It is in this background that it is a considered view of Courts that ‘tax mitigation’ and ‘tax avoidance’ need to be necessarily differentiated whilst applying the GAAR provisions and it is only in case of the latter that these come into play and that too in circumstances where the primary purpose of executing the transaction, and not the incidental purpose is ‘tax avoidance’. The entire edifice built by revenue while invoking provisions of section 109 of the Ordinance in the present case is self-contradictory when at one hand the department treats transfer under section 97 of the Ordinance as hit by the mischief of section 109 of the Ordinance and in the same breath concedes that the transaction would have been tax neutral had the objective of transaction been achieved under section 97A of the Ordinance. It is not understandable as to how, according to revenue, invocation of section 97A of the Ordinance would have cleared the transaction from the scope of section 109 of the Ordinance when the ultimate objective of transfer of assets had stood at par as is under current circumstances.
20. In
our view, disputing the tax neutrality claimed under section 97 of the
Ordinance in the present case through invocation of section 109 of the
Ordinance is seriously misconceived and contrary to scheme of things envisaged
in section 97 of the Ordinance. One cannot lose sight of the scope and
objective of section 97 of the Ordinance. In terms of these provisions, tax
liability relating to transfer of assets is postponed until beneficial interest
in assets is disposed outside the ‘wholly owned group’ of companies. It is a
provision for deferral and postponement of tax liability and not tax exemption
until a particular event occurs. It is an undisputed fact that in the present
case, the appellant even after equity participation by a foreign shareholder
continued to retain beneficial interest in the transferred assets in the same
proportion as was held prior to execution of transfer. The beneficial interest
neither diluted nor transferred and equity participation by foreign shareholder
resulted into addition of separate assets in the joint venture company.
Accordingly, on this tangent too, we consider, the revenue misdirected itself
by challenging tax neutrality claimed under section 97 of the Ordinance as no
disposal or transfer of subject assets had taken place outside the wholly owned
group. The provisions of section 109 of the Ordinance could have been
considered to be applicable in the first place if beneficial interest in the
transferred assets had been diluted and only then matter could have proceeded
under section 109 of the Ordinance, subject to fulfillment of other principles
settled in the judgement cited supra. Accordingly, we are satisfied that claim
of tax neutrality under section 97 of the Ordinance in this case is bona fide
and the revenue erred in invoking section 109 of the Ordinance in the instant
case.
21. Looking
the issue from another angle and briefly set out the relevant chronological events
as below.
Chronological
relevant events
|
|
Date |
Event |
|
1. |
September
16, 2005 |
Bulleh
Shah Packaging (Pvt.) Ltd. incorporated (the “BSPL”) as a fully owned
subsidiary of Packages Ltd. (the “PL”) |
|
2. |
October
08, 2007 |
Registered
with FBR |
|
3. |
March 21, 2012 |
Decision of BOD of the PL to
transfer fixed asset to BSPL |
|
4. |
September
15, 2012 |
Asset
transfer agreement between the PL and the BSPL |
|
|
November
15, 2012 |
Joint
venture agreement between M/S Stora Enso and PL set a set date of
commencement of operations during first quarter of 2013. |
|
5. |
October
25, 2012 |
Disclosure
to PSX of the above JV agreement reflecting its intention to subscribe 35%
shareholding of the BSPL |
|
6. |
December
31, 2012 |
Disclosure
in the Companies’ financial statement as on 31 December 2012 |
|
7 |
March
18, 2013 |
Lease
agreement BSPL Karachi Factory signed |
|
8. |
March
25, 2013 |
Meeting
of BOD of BSPL to increase authorised share capital of the company from Rs.
100K to 15 Billion. |
|
9. |
April
1, 2013 |
Transfer
of asset from PL to BSPL |
|
10. |
April
1, 2013 |
709,718,016
shares issued to Packages Ltd. against transfer of assets and cash |
|
11. |
May
31, 2013 |
382,155,855
shares issued to Stora Enso OYJ |
The facts of the case as stated above are
that the BSPL was fully owned subsidiary of the PL; however, it was on 21 March
2012 that it decided to transfer its fixed asset to BSPL, which ultimately
happened on 01 April 2013. In its return the PL claimed this transfer as a
non-taxable event under Section 97 of the Ordinance. However, the revenue claimed
that this transaction was a sham transaction aiming to avoid tax. The basis
remains the events that had followed subsequent to the date of decision of the
PL to transfer its asset by PL to its wholly owned subsidiary; that is the
BSPL. In this regard the revenue alleges that the asset transfer agreement
between PL and BSPL, was finalized on 15 September 2012, and it was within a
short span of time since then, that is, on 15 November 2012 that the Joint
Venture agreement was signed between the PL and a non-resident company namely
M/S Stora Enso which amongst other’s agreed to subscribe to 35% share holdings
of the BSPL. It is alleged that under the facts of the case the asset transfer
agreement is merely an eye wash to avoid the levy of capital gain under section
37 of the Ordinance and the original intention was to build the confidence of
the forthcoming JV partner to secure the investment from them. It is alleged
that this was always the plan that the JV partner would invest in BSPL and had
they done it prior to transfer of agreement the PL would never had had the
benefit of Section 97 and would have been subject to levy of capital gain tax
on transfer of assets to a company which would not have been fully owned
subsidiary. In order to establish the intention of the PL and BSPL allegedly
aiming to avoid the tax by way of transfer of asset under the share transfer
agreement dated 15 September 2012, the assessing officer and the CIR(A) have
relied upon number of circumstantial pieces of evidence in the form of events
occurring between 15th September, 2012 to the issuance of shares in the name of
JV Partner on 31st May, 2013. However, in our opinion, under the
facts of the case, this conclusion is unsafe, when there is evidence available
of the fact that though the agreement to transfer assets of 15th September,
2012 was made merely two months prior to the Joint venture agreement of 15th
November, 2012, however, the original decision to transfer the assets was made
by the PL in the meeting of Board of Directors on 21st March, 2012,
which is not in such a closer proximity to the JV agreement to raise any doubt
about the intention of the PL behind the transfer of its assets to the BSPL. We
note that neither of two forums below had given due and fair consideration to
the facts and circumstances of the case and have arrived on the conclusion by
picking a chunk of events which is supportive to their pre-determined
conclusion. It is pertinent to point out here that the initial burden to prima
facie prove that the intention of the PL at the date of decision of the BOD on
21st March, 2012 to transfer assets to BSPL was to avoid the
incidence of Capital Gain Tax, and the idea of the JV partnership had already
been conceived in the background by then. Nevertheless, we are unable to find
any such evidence at all, to support such conclusion. All the evidence, that
the DCIR and the CIR(A), have relied upon in arriving at their respective
conclusions had been based on the facts subsequent to the date of the actual
date of execution of the asset transfer agreement.
In view of the foregoing, we find that the revenue has failed to discharge its initial burden to prove that the purpose behind the transaction of transfer of asset by appellant PL to its wholly owned subsidiary BSPL was to avoidance or reduction of tax liability under the provisions of the Ordinance.
22. For what has been discussed above and respectfully following the principles settled by the honourable Sindh High Court as well as the other precedents of the UK jurisdiction, we consider that transaction under consideration does not attract the mischief of section 109 of the Ordinance. We have no doubts in our minds that appellant’s claim of tax-neutrality under section 97 of the Ordinance was bona fide, lawful and departmental action on this account was based on gross mis-appreciation of facts/ circumstances and a completely whimsical interpretation of the related statutory provisions. Accordingly, addition made in appellant’s taxable income and consequential tax imposed on this account is deleted and orders of authorities blow are vacated on this point. The grounds succeed. Since the main issue stands decided in appellant’s favour, we do not consider it necessary to adjudicate the Grounds of appeal Nos. 4 to 6 taken by the appellant.
(B) GROUND NO. 7 – MINIMUM TAX CARRIED FORWARD
23. The AR of the appellant submits that the matter has favourably been remanded back by the Commissioner (Appeals) to the assessing officer to be decided in the light of the decision handed down by this Tribunal in ITA. No 2670/LB/2016 dated 02.03.2017 issued in the case of M/s D G Khan Cement Limited. Therefore, he did not press this Ground of appeal. This matter is, therefore, adjudged as not pressed.
(C) GROUND NO. 8 – DISALLOWANCE OF PROVISIONS FOR DEFINED
BENEFIT PLAN
24. Brief
facts are that appellant’s claims on account of the provisions for ‘approved’
staff retirement benefit funds aggregating to Rs 259.305 million [comprising of
provisions of. pension fund & gratuity fund amounting to Rs.189.946 million & Rs.69.359 million
respectively] were considered as
un-ascertained liability and thus held in-admissible under section 34(3) of the
Ordinance. The CIR(A), whilst upholding such action held that the deduction on
account of provisions for ‘staff retirement benefits’ cannot be allowed on ‘provision’
basis, rather it can only be allowed on actual payment basis, the same being
based on the findings handed by learned CIR(A)’s predecessor in appellant’s own
in case in certain previous years.
25. Learned AR contends that the appellant is following accrual basis of accounting under section 32 read with section 34(3) of the Ordinance whereby for any amount to be treated as “payable” by a taxpayer the following conditions need to be fulfilled (i) all the events that determine the liability have occurred (i.e., rendering of employment services); and (ii) the amount of such liability can be ascertained with reasonable accuracy, both of which are met in the instant case. Learned AR explains that under the accrual basis of accounting ‘determination of amount’ of liability with reasonable accuracy is made once the events determining the liability have occurred and that the aforesaid amounts are recorded in the financial statements when liability / asset is ascertained, the ‘actuarial valuation report’ issued by an independent actuary, vouching for such reasonable accuracy/ basis. Learned AR has also informed that subject provisions were recorded in financial statements strictly in compliance with the provisions of relevant International Accounting Standards; that are also accorded due legal sanctity by virtue of the provisions of Rule 32 of the Income Tax Rules, 2002. Learned AR also highlights that expenditure claimed on account of provision for gratuity etc. has also been held by higher Courts to be admissible expense in case of taxpayers maintaining books on the basis of accrual basis of accounting. Accordingly, he contends that subject claim is not hit by the mischief of provisions of section 32 & 34 of the Ordinance.
26. Learned AR lastly submits that while the provisions of section 21(e) of the Ordinance prescribe disallowance of contributions being made to un-approved funds and thus not applicable in appellant’s case ab initio (as subject pension/gratuity funds are approved by Commissioner), section 21(f) of the Ordinance also deals with disallowance of “contributions” to all funds unless “effective arrangements” are in place to deduct tax under section 149 of the Ordinance. Therefore, he argues that mischief of these provisions is also not attracted in case of subject ‘provisions’.
27. On the other hand, learned DR supported the orders of authorities below and reiterated the departmental position advanced therein and prayed that the same is not interfered into.
28. We have
gone through the orders of the authorities below as well as rival submissions. It
is observed that the issue of deduction of ‘gratuity’ on the basis of
‘provision’ has been adjudicated by the Honourable Division Bench of Lahore
High Court in favour of revenue in the case titled as Commissioner Inland Revenue, Zone-IL LTU, Lahore Vs M/s Monnoowal
Textile Mills Ltd reported as 2019 PTD 1811. A somewhat similar
question was posed before the Hon'ble Division Bench of Lahore High Court and
following findings were recorded by the honourable Court:-
"20. In brief the Judgments referred by the learned counsel for the
respondent taxpayer, some of which are also relied upon by the Appellate
Tribunal may be authorities with respect to their facts and circumstances and
laws discussed therein, but same have had no bearing/ relevance with regard to
the questions of law proposed for our opinion and determination in this case.
It is notable that none of the judgments/ referred had discussed and
interpreted section 21(e) of Ordinance, 2001 and its peculiarity, when compared
with section 24(g) of the repealed Ordinance. Therefore/ mere provisioning of
gratuity payments – payable in future subject to the happening of contingency -
under mercantile method of accounting would not constitute compliance of
section 21(e) of Ordinance, 2001
and allow deductions claimed in this behalf.
21. In view of the aforesaid, we opine that Appellate Tribunal was not justified to hold and declare that mere provisioning for gratuity payments constitute allowable/ admissible deductions, in terms of section 21(e) of Ordinance, 2001. Our answer to the question of law, therefore, is in Negative. This reference application is decided in favour of the department and against the respondent taxpayer."
29. Respectfully
following the findings laid down by the honourable Lahore High Court, we
confirm the findings of the learned CIR(A) and the appeal filed by the
appellant taxpayer on this ground stands dismissed. The appellant is, however,
entitled to claim as deduction, the actual payments made on account of gratuity
and pension benefits during the year, as already directed by learned CIR(A).
30. The
appeal of the appellant stands decided in the manner and to the extent
indicated above. Order accordingly.
31. This
order consists of (30) pages and each page bears my signature.
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