APPELLATE TRIBUNAL
INLAND REVENUE (PAKISTAN)
SPECIAL BENCH, KARACHI
|
ITA No. 1503/KB/2015 |
ITA NO.564/KB/2016 |
ITA NO.1274/KB/2015 |
|
Tax Year – 2009 |
Tax Year – 2010 |
Tax Year – 2012 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
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ITA No. 1504/KB/2015 |
ITA No. 116/KB/2016 |
ITA NO.566/KB/2016 |
|
Tax Year – 2009 |
Tax Year – 2011 |
Tax Year – 2012 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 1505/KB/2015 |
ITA No. 1527/KB/2015 |
ITA NO.567/KB/2016 |
|
Tax Year – 2009 |
Tax Year – 2011 |
Tax Year – 2013 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 1506/KB/2015 |
ITA No. 1273/KB/2015 |
ITA No. 1275/KB/2015 |
|
Tax Year – 2010 |
Tax Year – 2011 |
Tax Year – 2013 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 1507/KB/2015 |
ITA No. 565/KB/2016 |
ITA No. 118/KB/2016 |
|
Tax Year – 2010 |
Tax Year – 2011 |
Tax Year – 2013 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 115/KB/2016 |
ITA No. 117/KB/2016 |
ITA No. 1276/KB/2015 |
|
Tax Year – 2010 |
Tax Year – 2012 |
Tax Year – 2014 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
M/s.
Bank Alfalah Ltd., Karachi. ……………………… Appellant
V e r s u s
The
CIR, Legal Zone, LTO, Karachi. ……………………… Respondent
Appellant
by : Mr. Asif
Haroon, FCA
Respondent
by : Mr. Abdus Salam, DR
|
ITA No. 23/KB/2016 |
ITA No. 670/KB/2016 |
ITA No. 672/KB/2016 |
|
Tax Year – 2009 |
Tax Year – 2010 |
Tax Year – 2012 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 21/KB/2016 |
ITA No. 1354/KB/2015 |
ITA No. 1356/KB/2015 |
|
Tax Year – 2009 |
Tax Year – 2011 |
Tax Year – 2013 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 22/KB/2016 |
ITA No. 176/KB/2016 |
ITA No. 178/KB/2016 |
|
Tax Year – 2009 |
Tax Year – 2011 |
Tax Year – 2013 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 669/KB/2016 |
ITA No. 671/KB/2016 |
ITA No. 673/KB/2016 |
|
Tax Year – 2009 |
Tax Year – 2011 |
Tax Year – 2013 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 24/KB/2016 |
ITA No. 26/KB/2016 |
ITA No. 1357/KB/2015 |
|
Tax Year – 2010 |
Tax Year – 2012 |
Tax Year – 2014 |
|
u/s 122(5A) |
u/s 122(5A) |
u/s 122(5A) |
|
|
|
|
|
ITA No. 175/KB/2016 |
ITA No. 177/KB/2016 |
|
|
Tax Year – 2010 |
Tax Year – 2012 |
|
|
u/s 122(5A) |
u/s 122(5A) |
|
|
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|
|
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ITA No. 25/KB/2016 |
ITA No. 1355/KB/2015 |
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Tax Year – 2010 |
Tax Year – 2012 |
|
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u/s 122(5A) |
u/s 122(5A) |
|
The
CIR, Legal Zone, LTO, Karachi. …………………………. Appellant
V e r s u s
M/s.
JS Bank Ltd., Karachi. …………………………… Respondent
Appellant
by : Mr. Abdus
Salam, DR
Respondent
by : Mr. Asif Haroon, FCA
Date
of Hearing : 27-01-2022
Date
of Order : 01-02-2022
O R D E R
M. M.
AKRAM, JUDICIAL MEMBER: The titled cross-appeals have been filed by the appellant taxpayer
bank and the revenue department against the impugned Appellate Orders passed by
the Commissioner Inland Revenue (Appeals), Karachi for tax years 2009 to 2014. The
facts of the case and the issues involved in all these appeals are the same,
identical and interlinked, therefore, we intend to dispose of all these appeals
through this common order. The issues involved in all these appeals are summarized
in the following manner for determination:
|
S. No. |
ISSUES |
GOA No. |
ITA No. |
Tax Year |
Appellant |
|
1 |
Computation
of 1% / 5% on Gross Advances or Net Advances. |
2 |
21,22 & 23 / 2016 |
2009 |
Department |
|
2 |
Net or Gross
provision of debt for the working of 1% / 5% of Advances. |
3 |
1354 / 2015 |
2011 |
Department |
|
3 |
Reversal of advances
(other than substandard provision) - Claimed by the Bank by reducing the
unabsorbed limit of 1% / 5% (Post seventh schedule). |
3 |
24 & 25 / 2016 |
2010 |
Department |
|
4 |
Provision against diminution
in value of the investment. |
3 |
21,22 & 23 / 2016 |
2009 |
Department |
|
5 |
Provision against
other assets. |
5 |
1273 / 2015 |
2011 |
Bank |
|
6 |
Dividend income
taxable at the reduced rate specified under rule 6 and not under section
18(4). |
6 7 8 5 |
21,22 & 23 / 2016 24 & 25 / 2016 1354 / 2015 1355 / 2015 |
2009 2010 2011 2012 |
Department Department Department Department |
|
7 |
Disallowance of accrued
markup on account of non-Withholding under section 21(c). |
5 |
24 & 25 / 2016 |
2010 |
Department |
|
8 |
Un-realized loss on
foreign exchange contract under sec 34(3). |
4 |
21,22 & 23 / 2016 |
2009 |
Department |
|
9 |
Bad Debts directly
written off. |
5 |
21,22 & 23 / 2016 |
2009 |
Department |
|
10 |
Allocation of
expenses to capital gains and dividend income. |
4 |
563 / 2016 |
2009 |
Bank |
|
11 |
WWF |
8
|
1503 / 2015 |
2009 |
Bank |
|
12 |
Amendment of
assessment under section 122(5A). |
2 & 3 |
563 to 567 / 2016 |
2009 to 2013 |
Bank |
|
13 |
Surcharge under sec 4A. (i)
Not applicable under the Seventh Schedule (ii) Proration of income |
7 |
1273 / 2015 |
2011 |
Bank |
|
14 |
Ijara Lease (cross
appeals) |
2 |
175 / 2016 |
2010 |
Department |
|
15 |
Loss on termination
of lease. |
4 |
1503 / 2015 |
2009 |
Bank |
|
16 |
1/4th Exemption on
gain on sale of Warid Shares. |
6 |
1503 / 2015 |
2009 |
Bank |
|
17 |
Loss on sale of
securities. |
5 |
1506 / 2015 |
2010 |
Bank |
|
18 |
Adjustment of Capital
losses. |
5 |
1274 / 2015 |
2012 |
Bank |
|
19 |
CWIP written off -
disallowed under sec 21(n). |
2 |
1527 / 2015 |
2011 |
Bank |
|
20 |
Refund Adjustment. |
7 |
1503 /2015 |
2009 |
Bank |
|
21 |
Consequential WWF
& 4A Surcharge. |
9 |
1273 / 2015 |
2011 |
Bank |
2. This case came up for hearing on 27.01.2022.
The learned AR for the taxpayer Mr. Asif Haroon, FCA argued the case at some
length. He also placed on record the issue-wise summary of all the appeals along
with supporting case laws relied upon by him. On the contrary, the learned DR Mr.
Abdus Salam was also heard on all the issues.
3. We have heard the learned representatives
of both parties at length and have perused the records available with us.
However, to keep the order simple and for the sake of brevity, we discuss
relevant legal and factual arguments put forth by both the parties and decide
the issue after examining the impugned orders, submissions of both sides, and
case laws cited. The above appeals are decided in the following manner:
LEGAL
GROUND RELATING TO POWER OF ADDITIONAL COMMISSIONER TO AMEND THE ASSESSMENT
UNDER SECTION 122(5A) OF THE ORDINANCE
Tax Year 2009 to 2013 – Ground No. 2 & 3 [ITA NO. 563 to 567 /KB/2015]
Tax Year 2009
& 2010 – Ground No. 2 & 3 [ITA NO. 1503 to 1507 /KB/2015]
Tax Year 2010
to 2013 – Ground No. 2 to 4 [ITA NO. 115 to 118/KB/2016]
Tax Year 2011 to 2014 – Ground No. 2 & 3 [ITA NO. 1273
to 1276/KB/2016]
4. In all these grounds, the learned AR for the appellant has taken an
objection for invoking the provisions of section 122(5A) of the Income Tax Ordinance,
2001 (hereinafter referred to as “the
Ordinance”) that the returns so filed by the appellant were treated to be
an assessment orders for all the tax years issued by the Commissioner Inland
Revenue in terms of section 120(1)(b) of the Ordinance, therefore, according to
him, the provision of section 122(5A) had to be invoked by the Commissioner
Inland Revenue himself and not by the Additional Commissioner IR (Add CIR).
This issue is no longer res-Integra. Reliance may be on the case titled Pakistan
Tobacco Company Ltd, Islamabad Vs Additional Commissioner, Unit-II, LTU, Islamabad, (2013 PTD 747). This judgment was subsequently upheld by the
Hon’ble Supreme Court of Pakistan in CP No.1664-1665/2009 dated 11.09.2009.
Thus, this contention of the learned AR is not sustainable in law. Further
contended that the issuance of notices under section 122(5A) of the Ordinance
by the Add CIR does not align with the law laid down by this Tribunal in the
case reported as (2016) 113 Tax 53 wherein it was observed that fishing and roving
inquiry in the garb of section 122(5A) is to be seen in the context of two
mandatory prescribed conditions referred to in the said provision. However,
while arguing the case, the learned AR had not referred any portion of the show
cause notice which was contrary to the law laid down by this Tribunal in the
foregoing judgment. Therefore, this contention of the AR is baseless, uncalled
for, and without merit is rejected.
COMPUTATION
OF 1% / 5% ON GROSS ADVANCES’ OR ‘NET ADVANCES’
Tax Year 2009 - Ground No. 2 [ITA Nos. 21, 22 & 23 /KB/2016]
Tax Year
2010 – Ground No. 2 [ITA Nos. 24 & 25/KB/2015]
Tax Year 2011
- Ground No. 2 [ITA No. 1354/KB/2015]
Tax Year 2012
- Ground No. 2 [ITA No. 1355/KB/2015]
Tax Year 2013
- Ground No. 2 [ITA No. 1356/KB/2015]
Tax Year 2014 - Ground No. 2 [ITA No. 1357/KB/2015]
5. The AR argued that the claim of taxpayer
bank of the 1% / 5% of “gross advances” is strictly in accordance
with Rule 1(c) of the Seventh Schedule to the Ordinance which clearly stipulates
that deduction should be allowed on 1% / 5% of "total advances".
The relevant part of Rule 1(c) of the Seventh Schedule is reproduced below:
“Provisions for advances
and off-balance sheet items shall be allowed up to a maximum of 1% of total
advances, and provisions for advances and off-balance sheet items shall be
allowed at 5% of total advances for consumers and small and medium enterprises
(SMEs) (as defined under the State Bank Prudential Regulations) provided a certificate
from the external auditor is furnished by the banking company to the effect that
such provisions are based upon and are in line with the Prudential Regulations.
Provisioning in excess of 1% of total advances for a banking company and 5% of total
advances for consumers and small and medium enterprises (SMEs) would be allowed
to be carried over to succeeding years:”
The AR further submitted that Income Tax Ordinance, 2001 and
Income Tax Rules, 2002 as well as the Circulars issued thereunder do not define
the term ‘Total’. In the absence of any specific definition following three
sources are available to determine the definition of any term under the law
viz:
(i) ordinary dictionary meaning;
(ii) any other compatible law; and
(iii) reference of the term in another context of the taxation law.
Dictionary meaning of the term ‘total’ has been defined as
under:-
As per Chambers
21st Century Dictionary
Total means
“The whole or complete
amount”
Black’s Law Dictionary
Total means
1. Whole; not divided; full; complete.
2. Utter; absolute.”
Similarly,
The Concise Oxford Dictionary provides “Total” means
“1. a product of addition.
2. an entire quantity: amount.”
It has been stated by the learned AR that
the Department method of computing 1% or 5% on ‘net’ advance has already been disapproved
by this Tribunal in taxpayer’s own case for the tax year 2013 through an order
dated 02-07-2015 bearing ITA No. 924/KB/2014 with the following observations:
“After having perused the relevant provision of law i.e. Sub-Rule-(1)(c) of the Seventh Schedule it is amend declared that as per this provision the advances of the balance sheet to be allowed while also learned CIR(A) has placed reliance on the reported judgment of (2012) 106 TAX 317 (Trib) (2013) 107 TAX 389 (Trib). In the above judgment, (ATIR) has allowed 1% provision on the gross advances. The learned D.R failed to rebut the above cases law relied upon by the CIR(A). In this way, we see no reason to deviate from the impugned findings it is, therefore, confirmed. Resulted in obvious departmental appeal fails.”
Besides above, the AR also referred to
the various other judgments of the ATIR including 109 TAX 85, 107 TAX 248, an
unreported judgment of Faysal Bank Ltd (ITA No.823/KB/2012), National Bank Ltd (ITA
No.394/KB/2006), UBL (ITA No. 324/KB/2011) and My Bank (ITA No.389/KB/2015). The
relevant extracts of some judgments relied upon by learned AR are reproduced as
under:
109 TAX 85:
“From the
above, it is evidently clear that assertion of the Additional Commissioner that
while allowing provisions as per Rule l(c), only balance sheet items are to be
taken into account is misconceived and against the expressed provisions of Rule
l(c). Due weightage has to be given to the off-balance sheet items as well.
The learned CIR (A) has confirmed the treatment meted out by the Additional
Commissioner on the basis of certain earlier orders of his predecessor. The
learned AR has also produced a copy of this Tribunal decision reported as 2012
PTR l24(Trib) wherein in similar circumstances finding of the learned CIR(A)
has been confirmed by the Tribunal.
“As per Rule
1(c) provision for advances and off-balance sheet items is available up to a maximum
of 1 percent of “total advances”. It is directed that provision be computed
accordingly on the value of total advances of Rs. 249,886,703,000/- as per
accounts”.
We are therefore keeping in view the above decision finds no justification for disallowance of the claim.”
107 TAX 248:
“The bank worked out addition under rule l(c) of Seventh Schedule taking gross advances whereas department enhanced the addition by taking net advances. Learned Commissioner (Appeals) deleted the addition made by the department by directing to take the figure of gross advances. The learned AR argued that this issue has already been adjudicated by this Tribunal in favour of banks in (2012) 106 Tax 317 (Trib.) = 2012 PTR 12 (Trib.). Learned DR could not 'produce any contrary judgment on this issue. We, therefore by following our earlier judgment confirm the order of Commissioner (Appeals)”.
ITA No. 61/KB 2012 to 65/KB/2012 in
case of KASB Bank Limited:
We are of the
view that gross advances will be taken into account as the word used in Rule
1(d) is “total advances” as also held in paragraph 116 of the judgment referred
above as under:
As per rule
1(c) provisions for advances and off-balance sheet, items are allowable up to a
maximum of 1% of total advances. It is directed that provision be computed accordingly
on the value of total advances of Rs. 249,886,703,000 as per accounts at the
time of appeal effect.
…………………………………………………………………………………………
116. We have examined the order of CIR(Appeals) and relevant provisions of law. We find that observation of leaned CIR(Appeals) is in accordance with Rule 1(c) of Seventh Schedule that mentions “total advances”. We confirm the order of CIR(Appeals)”.
ITA 1040/KB/2011 & 60/KB/2012 in
case of National Bank of Pakistan:
“After hearing the arguments of both sides and perusal of the case laws relied upon, we are of the considered view that the other Divisional benches of this Tribunal have already settled this issue. We respectfully follow the earlier orders of different Divisional benches of this Tribunal. Therefore, the appeals of the taxpayer bank are allowed in each of the above tax years”.
ITA 823/KB/2012 in case of FBL:
21. In view of the above binding judgments of other
Divisional Benches of this Tribunal and bare perusal of law we find no hesitation
to hold that capping of 1 percent and 5 percent on net advance is not in
accordance with the rules prescribed. Accordingly, the taxpayer’s appeal on the
ground in each of the tax year is accepted and we direct to compute the claim
under Rule 1(c) at 1% / 5% of the gross advance.
ITA 324/KB/2011 in case of UBL:
In view of the above binding judgments of other Divisional Benches of this Tribunal and bare perusal of law, we find no hesitation to hold that capping of 1 percent and 5 percent on net advance is not in accordance with the rules prescribed. Accordingly, taxpayer’s appeal on the ground in each of the tax year is accepted and we direct to compute the claim under Rule 1(c) at 1% and 5% of gross advance…….
The learned AR also referred to the Circular No.3 of 2009
dated July 17, 2009, wherein it has been explained that:
“This schedule has been amended. In the light of amendments in
Rule (1), the banking companies would be entitled to make provisions for
advances and off-balance sheet items up to a maximum of 1% of total advances. These companies would
be under obligation to provide a certificate from the external auditor to the effect
that such provisions are based upon and are in line with the Prudential
Regulations of the State Bank of Pakistan. The banking companies would be
allowed to carry forward provisions in excess of 1% to the succeeding years.
57.1 If the provisioning
is less than 1% of the total advances,
then the taxpayer would be entitled to the actual provisioning for the year.
57.2 The
banking companies like other resident companies would be required to pay
minimum tax under section 113 of the Ordinance as per provision of the aforesaid
section.”
6. On the contrary, the learned DR however
supported the findings made in the amended order by the assessing officer.
Findings:
7. The rival arguments have been heard and record
pursued. By respectfully following the judgments quoted supra (which have not
been overruled yet), we hold that capping of 1 percent and 5 percent on net advance
is not in accordance with the rules prescribed. We, therefore, reject the treatment
accorded by the assessing officer and direct him to compute the claim under
rule 1(c) at 1% / 5% of gross advance as the appellant taxpayer cannot
be treated discriminately. Accordingly, the departmental appeals for the tax
years 2009 to 2014 are dismissed being devoid of merit.
NET OR
GROSS PROVISIONS FOR DEBT FOR THE WORKING OF 1% OR 5% OF ADVANCE
Tax Year 2011
– Ground No. 3 [ITA No. 1354/KB/2015]
Tax Year
2012 – Ground No. 3 [ITA No. 1355/KB/2015]
Tax Year
2013 – Ground No. 3 [ITA No. 1356/KB/2015]
Tax Year
2014 – Ground No. 3 [ITA No. 1357/KB/2015]
8. In
respect of the above grounds, the learned AR for the taxpayer apprised that in
order to work out a claim of 1% or 5% of advances in terms of Rule 1(c) of the
Seventh Schedule to the Ordinance, the Bank considered ‘net’ provision for bad
debts whereas Department considered ‘gross’ provision for bad debts for computing
the allowable provisions.
9. The
AR argued that computation of the charge for the year in the profit or loss
account in respect to provision for advances and off-balance sheet items cannot
be worked out without giving the effect of reversal. The AR further argued that
the Department’s analogy that reversals are required to be separately claimed,
therefore, gross provisions should be offered for tax has no basis. The AR
referred to the wording of the law, which refers to ‘provision’ for advances.
The term ‘provision’ if considered literally as well as in context, clearly
envisage that whatever the charge for provision for bad debt in the profit and
loss account (other than sub-standard), should be considered for computing allowable
limit. In the accounts, provision is accounted for net of reversal, hence the
same should be considered. The AR further dilated the issue with the help of a
hypothetical example and explained that the difference is only of timing
difference which will eventually be knocked off:
|
|
|
|
|
Bank’s treatment |
||||
|
2009 |
2010 |
2011 |
2012 |
Total |
||||
|
Provision |
A |
100 |
120 |
150 |
130 |
500 |
||
|
Reversals |
B |
(20) |
(30) |
(25) |
(30) |
(105) |
||
|
Net Provision (P & L) |
C=A-B |
80 |
90 |
125 |
100 |
395 |
||
|
Carry forward from last
year |
D |
- |
10 |
10 |
35 |
55 |
||
|
Advances |
E |
7,000 |
9,000 |
10,000 |
11,500 |
37,500 |
||
|
1 % of Advances (allowed
in tax computation) |
F=Ex1% |
70 |
90 |
100 |
115 |
375 |
||
|
Carry forward |
G=C+D-F |
10 |
10 |
35 |
20 |
75 |
||
|
Department's treatment |
||||||||
|
2009 |
2010 |
2011 |
2012 |
Total |
||||
|
Provision |
A |
100 |
120 |
150 |
130 |
500 |
||
|
Carry forward from last
year |
B |
- |
30 |
60 |
110 |
200 |
||
|
Advances |
C |
7,000 |
9,000 |
10,000 |
11,500 |
37,500 |
||
|
1 % of Advances (allowed
in tax computation) |
D= C x 1% |
70 |
90 |
100 |
115 |
375 |
||
|
Carry forward |
E = A+B-D |
30 |
60 |
110 |
125 |
325 |
||
|
On Totality Basis |
||||||||
|
Bank's treatment |
||||||||
|
Total Net Provision
(P&L charge) |
395 |
|||||||
|
Less: |
Carried forward provision
|
(20) |
||||||
|
Total expense allowed |
375 |
|||||||
|
Department's treatment |
||||||||
|
Total Gross Provision (Disclosed
in Notes) |
500 |
|||||||
|
Less: |
Carried forward provision
|
(125) |
||||||
|
Total expense allowed |
375 |
|||||||
10. In support of the above, the AR also placed
reliance on the recent judgment of this Tribunal dated 16-11-2021 passed in the
case of M/s. Soneri Bank Limited bearing ITA No.2101/LB/2012
wherein on similar grounds the Department’s appeal was disposed of.
11. On
the contrary, the learned DR opposed the argument of the AR and supported the decision of the assessing
officer.
Findings:
12. We
have considered the argument of both parties and the decision of Commissioner
IR Appeals. In our opinion, the basis provided in Rule 1(c) is a computational
method and a manner of allowing the claim, restricted to 1% / 5% of Advances.
Since the term used in the law is ‘provision’ which in the audited accounts is
always net of reversal; hence the Appellant’s basis appears to be correct,
which is also otherwise has a timing difference effect. Hence, CIR(A) has
rightly annulled the tax demand. In view of the foregoing and by following the above-referred
judgment of the ATIR, the appeals of the revenue department are dismissed being
devoid of merit.
DIVIDEND INCOME, TAXABLE AT REDUCED RATE
SPECIFIED UNDER RULE 6 AND NOT UNDER SECTION 18(4)
Tax Year 2009
– Ground No. 2 [ITA Nos. 21, 22 & 23/KB/2016]
Tax Year 2010
– Ground No. 7 [ITA Nos. 24 & 25/KB/2016]
Tax Year 2011
– Ground No. 8 [ITA No. 1354/KB/2015]
Tax Year 2012
– Ground No. 5 [ITA No. 1355/KB/2015]
13. On the said
issue, all the appeals have been filed by the department. It has been contended
by the taxpayer bank that the taxation of distribution from mutual funds by invoking
the provisions of Section 18(4) of the Ordinance read with Rule 9 @ 35% was against
Rule 6 of Seventh Schedule to the Ordinance. Under rule 6, dividend income was
subjected to tax at the rates specified therein. The Seventh schedule is all-encompassing
to compute the income of the banking company including dividend income and tax
payable thereon. The Department's reliance on referring to general provisions
of section 18 of the Ordinance is not as per law. Subsequent amendments in rule
6 through Finance Acts, 2011 and 2012, providing for taxation of dividend
received from asset management company (at 20%) and from money market and income
funds (at 25%) further confirms the Bank’s position/interpretation that section
18(4) of the Ordinance was not applicable on banks after the introduction of Seventh
Schedule; therefore, the addition was rightly annulled by the learned CIR(A).
In support, the AR for the taxpayer has placed reliance on the following
unreported decisions of this Tribunal:-
UBL in ITA No. 324/KB/2011 dated
15-04-2017
“79. The rival arguments have been heard and record pursued including
reported judgments cited by the learned AR of the appellant bank. As the circumstances
of the appellant bank are similar to the facts and circumstances of the said
case, therefore, respectfully. following the aforementioned judgments, we allow
the appeal filed by the appellant bank, and the Assessing Officer is directed to
re-calculate the dividend from mutual fund @ 10%. We have further noted that
post-Seventh Schedule, there were specific amendments made in the law to tax
income from the mutual fund at a corporate rate which means position prior to such
amendment was in favor of taxpayer bank.”
MY Bank in ITA No. 389/KB/2015 dated
08-04-2019
“20. The issue was also decided by the bench in
ITA No. 324/KB/2011 therefore we are following the same and decide the issue in
favor of the taxpayer.”
14. On the
contrary, the Learned DR on the other hand supported the decision of the
assessing officer and stated that the income of the banking company (which includes
dividend) was taxable under Rule 6 at the rate of 35%.
Findings:
15. We have heard the arguments advanced by rival
parties and also perused the relevant provisions of law along with reported judgments
cited by the learned AR for the taxpayer. We agree with the submissions of
learned AR that through Finance Act 2015, specific amendments were made in the Seventh
Schedule to tax income from the mutual fund at a corporate rate which means the
position prior to such amendments was in favor of the taxpayer bank. Since the circumstances
of the taxpayer bank are similar to facts and circumstances of the cases quoted
above, therefore, by respectfully following the aforementioned judgments, we reject
the Department’s appeals and the Assessing Officer is directed to re-calculate
the dividend from mutual fund @ 10% in the tax years under consideration.
DISALLOWANCE
UNDER SECTION 21(C) ON ACCOUNT OF ACCRUED MARKUP AND WAGES EXPENSE
Tax Year 2010
– Ground No. 5 [ITA Nos. 24 & 25/KB/2016]
Tax Year 2011 – Ground No. 5 [ITA No. 1354/KB/2015]
16. The learned AR for the taxpayer contended that
the assessing officer while amending the assessment of taxpayer for the tax
years 2010 and 2011 disallowed profit on debt under section 21(c) on account of
non-withholding of tax. The learned AR at the outset argued that the matter
does not come under the ambit of section 122(5A) in light of the larger bench judgment of this tribunal delivered
in the case of Meezan Bank Ltd reported as 113 TAX 53 and subsequently
followed in the case of MCB and many other judgments, wherein the Department itself
admitted that verification of expense for the purpose of taking action under
section 21(c) does not fall under the purview of section 122(5A) of the
Ordinance. Relevant extracts of the said judgment are reproduced below for ease
of reference:
113 Tax 53
“26. Similar situation exists in a portion of notice
for the tax year 2010 appearing at page 21 para 6.1 in the amended assessment order
of the officer. The proceedings were dropped under section 122(5A) by
holding that these cannot be taken up under this provision. We have observed
that portion of notice for the tax year 2013 appearing at page 33 para 9 of the
amended assessment order also does not meet the required criteria of twin mandatory
conditions and we hold that section 21(c) of the Income Tax Ordinance, 2001 is not
applicable in the situation where there is no proper evidence of tax deduction
available before the officer. In fact, the officer has himself stated in the
findings/inference that action under section 122(5A) cannot be taken in such a situation
and can only be taken under section 177.
27. We are of the firm view that the officer has formed the correct opinion in the above situations and this should be followed in all similar situations where twin mandatory conditions to invoke section 122(5A) of the Income Tax Ordinance, 2001 do not exist. We direct the respondent/department not to proceed under section 122(5A) in all such similar situations.”
MCB in MA (AG) No. 09/LB/18 in ITA No. 2162/LB/2017 dated 12-03-2018
“16. Respectfully following the above binding precedent, we hold that the
action of the Additional Commissioner of proceeding with addition under section
21(c) of the Ordinance through recourse under section 122(5A) of the Ordinance
is grossly unlawful and unjustified.”
My Bank in ITA No. 389/KB/2015 dated 8-4-2019
“29. Learned AR further stated that the instant issue has already been decided by the Hon’ble Sindh High Court in favor of taxpayers/banks reported as 2010 PTD 1772. Therefore, the decision of CIR(A) deleting the disallowance may please be upheld and dismiss the departmental appeal”.
17. Without prejudice to above, the learned AR argued
that the Assessing Officer has made ad-hoc disallowance under section 21(c) on
alleged non-withholding of tax on accrued profit on debt and wages expense without
providing any breakup of amount disallowed, whatsoever. The AR further submitted
that the banks as a usual practice under the accrual principles of accounting,
charge mark-up/interest expense, in respect of the customer's deposits to the
Profit and Loss Account at cut-off dates with a corresponding effect shown on
‘other liabilities’ being mark-up payable on maturity of such deposits. The mark-up/expense
is never actually credited into the individual accounts of the bank’s customers
or paid to account holders as at the balance sheet date. It was therefore shown
in ‘other liabilities’ to the Financial Statements.
18. The AR further asserted that the matter in
hand has also been decided by the Hon’ble Sindh High Court through a judgment
titled M/s United Bank limited Vs Deputy Commissioner Inland Revenue
and three others, (2010 PTD 1772), and the said judgment was also followed
by this tribunal in the case of M/s Faisal Bank Ltd. The
relevant extracts of the said judgments are reproduced hereunder:-
2010 PTD 1772 (SHC)
However, in our opinion,
the analogy between the provisions of the above section and section 158 of the
present Ordinance can be drawn from the word “receivable'' used in section
17(1)(a) of the Ordinance, 1979 and the phrase “to the account of recipient'', employed
in section 158 of the present Ordinance and thus the principle as laid down in
the above-cited judgment that in view of the word “receivable'' used under section
17(1)(a) of the Ordinance, 1979 income can only be charged under the head interest
on securities in the income year in which it is receivable by an assessee is
equally applicable to a case under section 158 of the present Ordinance, as in
terms thereof and in view of the above phrase used therein the petitioners become
liable to withhold deduct the tax in question and to deposit the same with the
State treasury only at the time of maturity of the deposit and when the same is
accordingly credited to the respective account of the customer/depositor. We would,
therefore, hold that the impugned demand, from the Income Tax Authorities, is
illegal, without any justification, and quash the impugned notices and set
aside the orders passed in pursuance thereof.
FBL in ITA No. 2162/LB/2017 dated 12-03-2018
We have heard both the parties and pursued the records. In view of the above binding decision of SHC, the addition made on account of non-withholding of tax are deleted. Further, the DR's argument that interest expense is allowable on a payment basis is also dismissed as the same is neither substantiated in the light of accrual basis of accounting, nor in accordance with the provisions of the Seventh Schedule.
19. On the
other hand, the learned DR argued that since the markup has been accrued it is
deemed as credited to the accounts of the customer. The learned DR frankly conceded
that the matter has already been decided in favor of the taxpayer by SHC, however,
the matter is now sub-judice before the Hon’ble Supreme Court.
Findings:
20. We have heard
the arguments of both sides and perused the relevant record. The submissions
made on behalf of the taxpayer have substance. The larger Bench of this
tribunal in the case of Meezan Bank Ltd cited supra inter alia observed that the
issue of examining details does not fall within the limited scope contemplated
in section 122(5A) of the Ordinance. Further, it is a settled principle that withholding
tax is applicable at the time of payment rather than when accrued which has also
been validated by the Hon’ble High Court. Hence, Department’s contention that
if the expense is allowable on accrued markup expense, withholding tax would also
be applicable on accrued balance is very illogical and rejected in various judgments.
As a result, the Department’s appeals failed on this account.
REVERSAL OF PROVISIONS AGAINST
NPL
Tax Year 2010
– Ground No. 3 [ITA Nos. 24 & 25/KB/2016]
Tax Year 2011
– Ground No. 4 [ITA No. 1273/KB/2015]
Tax Year 2012
– Ground No. 4 [ITA No. 1274/KB/2015]
Tax Year 2013
– Ground No. 4 [ITA No. 1275/KB/2015]
Tax Year 2014 – Ground No. 4 [ITA No. 1276/KB/2018]
21. The
above grounds relate to reversal out of the provision for bad debts (other than
sub-standard provision), the claim of which was restricted to 1 or 5 percent of
advances and resulted in double taxation.
22. The learned AR submitted that if these reversals in the profit and loss account were not claimed, it would be doubly taxed firstly on account of limiting the allowability of provisions at 1% or 5% of advances at one end and taxing the reversal thereof. This would be against the established principles of taxation and rules of prevention of double taxation specified in section 73 of the Ordinance; sub-section (1) of which is particularly applicable in this case. The AR through the following chart explained that by claiming post-seventh schedule reversals, the amount of provision carried forward has accordingly been reduced; hence there is no loss of revenue, as it is just a matter of timing difference, which if not allowed would result in double taxation.
|
REVERSAL OF POST SEVENTH SCHEDULE PROVISIONS – EXAMPLE |
|||||||||
|
|||||||||
|
Year |
Year |
|
|||||||
|
1 |
2 |
|
|||||||
|
Provisions |
A |
100 |
|
25 |
(pre 7th Sch) |
||||
|
Reversal |
(20) |
|
5 |
(post 7th Sch) |
|||||
|
80 |
100 |
|
|||||||
|
|||||||||
|
Brought forward |
B |
-
|
|
30 |
|
||||
|
|||||||||
|
Advances |
70,000 |
90,000 |
|
||||||
|
1% of Advance |
C |
70 |
90 |
|
|||||
|
Carried forward |
A
+ B - C |
30 |
70 |
|
|||||
|
|||||||||
|
Year 2 |
|
||||||||
|
|||||||||
|
Department |
Bank |
|
|||||||
|
|||||||||
|
Add back |
130 |
130 |
|
||||||
|
Allow |
90 |
90+5 (reversal) |
|
||||||
|
Carried forward |
70 |
65 (70 - 5) |
|
||||||
While
explaining the above example, the AR elaborated that Bank's view is that if
reversal of Rs. 5 is not allowed then Rs. 5 will be doubly taxed, firstly as
provision for Year 1 (to the extent of Rs. 30) and secondly as a reversal. As
per Bank, if reversal of Rs. 5 is allowed then carried forward will be Rs. 65.
As per Department, if reversal is not allowed, then carried forward will be Rs.
70. Therefore, the difference between Bank and Department position is of the timing
difference.
23. The
AR apprised that the issue has already been decided in favor of banks through
various decisions of this Tribunal. In support of his arguments, the AR placed reliance
on the decisions of ATIR reported as 2012 PTD 1055 and 109 Tax 85. The AR also
referred to the unreported decision of Faysal Bank in ITA
No. 823/KB/2012 dated April 5, 2017, and the judgment of Askari Bank
in ITA No. 451/IB/2018. For ready reference relevant extracts of the judgments
are reproduced as under:
Askari Bank Limited in ITA No. 451/LB/2018 dated 24-07-2019
The above principle was also followed later on
in the judgment reported as 109 TAX 85. It is also pertinent to mention here
that the same position was also accepted by the Department in the appellant's
own case for the tax year 2011 vide order dated 29.05.2013. Therefore, keeping
in view the forgoing reasons, the addition on account of reversal of provision
against non-performing loans amounting to Rs. 1,962.1 million for the tax year
under consideration is deleted.
Faysal Bank in ITA No. 823/KB/2012
43. We have considered the argument of both parties and the decision of commissioner appeals. We are of the opinion that if the claim of bad debts is restricted to 1% or 5% of the advance, the amount over and above these limits, being disallowed, be doubly taxed if reversal is not allowed in the tax year 2011. Hence, following the principles of taxation, we agree that the claim of reversals out of such provisions should be reduced from the carry-over amounts, which has been rightly done by the Bank.
2012 PTD 1055
We have examined the facts and case-law cited.
In this ease, the reversal has been taxed without any justification. The appellant-Bank
undisputedly claimed a total provision of Rs. 23,301,591,000 but reduced it to Rs.
18,893,580,000 meaning by difference representing reversals and recoveries was
offered for tax. The Department by disallowing amount of Rs. 23,301,591,000
(which included the reversal of Rs. 4,438,011,000) taxed it not only twice but
thrice as it added back an amount of Rs. 4,438,01,000 in total income. Following
our judgment in I.T.A. No.306/LB/2009 dated 8-8-2009, we delete this addition.
24. On
the contrary, the learned DR opposed the argument of AR and supported the decision of the assessing officer.
Findings:
25. Arguments of both
rival parties have been heard at length. After examination of facts and case
laws relied upon by the learned AR, we are persuaded with AR’s submission that
the issue beforehand has already been decided in favor of banking companies and
recently in the case of M/s. Askari Bank Ltd through the unreported judgment of
this Tribunal in ITA No. 451/LB/2018 for the tax year 2015. We, therefore,
following the judgment of the Tribunal on the issue direct the assessing
officer to delete the tax demand on account of reversal of provisions for bad
debts earlier disallowed under the Seventh Schedule. As a result, the appeals
filed by the department in respect of the tax year 2010 are dismissed being devoid
of merit, and the orders passed by the CIR(A) are maintained. The appeals filed
by the taxpayer on this account in respect of tax years 2011 to 2014 are
accepted and the orders passed by the lower authorities are annulled.
LEVY OF SURCHARGE UNDER SECTION 4A
Tax Year 2011
– Ground No. 7 & 9 [ITA No. 1273/KB/2015]
26. Brief culled out from record are that the assessing
officer through the amended assessment order has levied surcharge under section
4A of the Ordinance amounting to Rs. 1.655 million which was subsequently confirmed
by the learned Commissioner IR Appeals through its appellate order passed for the
tax year 2011.
27. The learned AR for the taxpayer argued at
the outset that Section 4A was not applicable on Bank as the taxation of Bank
is provided in Seventh Schedule, and unlike super tax levied under section 4B,
(the chargeability of which has also been made part of Seventh Schedule), surcharge
under section 4A was not made part of the Seventh Schedule, hence it was illegally
levied on the Appellant. In support of the arguments, the AR placed reliance on
a judgment passed by this Tribunal dated January 24, 2017, in ITA No. 697/KB/2012
wherein the Tribunal has held that Surcharge under section 4A is not applicable
on income covered under Fifth Schedule. On a similar basis, the AR argued that
surcharge is not applicable on Appellant Bank, being covered under the Seventh
Schedule.
28. Without prejudice and in addition thereto, the
learned AR further submitted that section 4A was inserted in the Income Tax Ordinance,
2001 vide Income Tax (Amendment) Ordinance, 2011 through which surcharge @ 15% was
levied on income during the period 15-3-2011 to 30-6-2011. The learned AR also argued
that the application of surcharge was to be made on income for the period March
15, 2011, to June 30, 2011 (falling in the tax year 2012) whereas the assessing
officer levied a surcharge on the prorated income for 3.5 months for the tax
year 2011.
29. The learned DR however supported the levy of
surcharge on the ground that section 4A applies to all the taxpayers, and banks
are no exception. Further, the SHC has confirmed the levy of surcharge which is
applicable in this case also.
Findings:
30. We have considered
the submissions of rival parties. We do not agree with the submissions of the learned
AR that the surcharge under section 4A ibid was not leviable on the cases that fall
under the Seventh Schedule to the Ordinance. This issue has already been decided
by this Tribunal in favor of the Department through various decisions including
the case of Faysal
Bank Limited through
judgment bearing ITA No. 823/KB/2012 dated 05-04-2017. Besides the aforesaid,
the matter of proration of income for the purposes of computation of surcharge
has also been decided by Supreme Court in the case titled FBR through
Chairman, Islamabad, etc Vs M/s Wazir Ali and Company, etc, (2020 PTD 1140). We, therefore, upheld the action of the assessing
officer and dismiss the appellant’s appeal on this ground.
CREDIT OF ADJUSTABLE WITHHOLDING TAXES AND REFUND ADJUSTMENT
Tax Year 2009
– Ground No. 7 [ITA No. 1503/KB/2015]
Tax Year 2010
– Ground No. 6 [ITA No. 1506/KB/2015]
Tax Year 2010
– Ground No. 4 [ITA No. 1507/KB/2015]
Tax Year 2011
– Ground No. 6 [ITA No. 1273/KB/2015]
Tax Year 2013 – Ground No. 6 [ITA No. 1275/KB/2015]
31. In the return
of income, the Bank has claimed adjustment of withholding taxes and refund
against the tax liability for the year, which was disallowed / short allowed by
the assessing officer through the amended assessment orders passed for these years.
In appeal, the CIR(A) has set aside the issue for re-examination. The AR stated
that Bank has already provided the supporting details during the earlier proceedings,
however, the appeal effect order has not been passed under section 124 of the
Ordinance in accordance with the directions of the learned CIR(A).
32. The DR
on the other hand supported the action of the taxation officer by stating that the
Bank’s claim of refund has been allowed/disallowed after examination of facts
and available details.
Findings:
33. We have heard
both the parties and perused the record. The learned CIR(A) has set aside the
issue for re-examination. We tend to agree with the findings of the learned CIR(A).
Therefore, the appeal is disposed of accordingly.
PROVISION
AGAINST OTHER ASSETS
Tax Year 2011
– Ground No. 5 [ITA No. 1273/KB/2015]
Tax Year 2013
– Ground No. 5 [ITA No. 1275/KB/2015]
34. The Department disallowed provision against
other assets amounting to Rs. 93.040 million and Rs. 130.504 million for tax years
2011 and 2013, respectively, under Rule 1(g) read with Section 34(3) of the Ordinance.
35. The AR submitted that under the Seventh Schedule,
any charge/expense in the accounts cannot be disallowed on the touchstone of
‘accrual basis’ of accounting or on account of being provisional in nature. The
Seventh Schedule specifies the adjustments allowed to be made to the profits
declared in the accounts, and except for the adjustments specified, no other
adjustments can be made. The adjustments specified do not include a provision
against other assets. Under the Seventh Schedule, expenditure cannot be disallowed
on the ground that the expenditure in the view of the assessing officer, is not
made under the accrual basis of accounting, being provisional in nature. If the
assessing officer was allowed to apply and test the applicability of section 34
under the regime of the Seventh Schedule, then it would have otherwise been
specifically stated. The explanation added under Rule 1(g) further confirms
that section 34 is otherwise not applicable under the Seventh Schedule. It is
also pertinent to mention that Rule 2(1) provides to disallow expenditure
outstanding for more than 3 years, which was otherwise not allowable under section
34(5) of the Ordinance. Further, the mechanism for allowing subsequent payment
is stated in sub-rule (2) of Rule 2, parametria to section 34(5A) and (6) of
the Ordinance. It is clear from these stipulations that the law in its wisdom
has referred to ‘certain’ [and not all] provisions of section 34, applicable under
the regime of Seventh Schedule, and for that purpose, specific rules have been
framed in the Seventh Schedule.
36. The AR also drawn attention towards judgments
of this Tribunal reported as 2012 PTD 1055, 2013 PTD 246, 109 TAX 85, 107 TAX
248 and unreported judgments in case of NBP (ITA No. 394/KB/2006), Faysal Bank
(ITA No. 823/KB/2012), UBL (ITA No. 324/KB/2011) and MCB (ITA No. 2162/LB/2017).
Relevant extracts in this respect are reproduced below for ready reference:
i.
109 TAX 85:
“The learned AR has rightly pointed out that Department
in its comments before the learned CIR(A) and the learned DR in his submissions
has admitted that in the decision reported as; 12 PTR 124 (Trib) and 2011 PTR
222 (Trib) the plea of the banking companies that accounts prepared for SBP for
the purposes of the schedule read with section 100A of the Ordinance have sanctity
and department is under obligation to accept those accounts. Respectfully
following the decisions of this Tribunal, we also hold that the respondent
Department is under obligation to accept the accounts prepared by the appellant
for the purposes of 7th Schedule of the Income Tax Ordinance, 2001”.
ii.
107 TAX 248:
10. Provision
against other assets
The learned AR submitted that this issue has also
been decided in favour of banks by this Tribunal in (2005) 91 Tax 484 (Trib.), ITA
No.1012 and 1014/IB/1995 dated 18-7-2006 and recently in (2012) 106 Tax 317 (Trib.)=(2012)
PTR 124 (Trib.). The DR repeated the arguments recorded by the Taxation Officer
and observations of the Commissioner of Appeals for Tax Years 2008 to 2010.
We have examined the case-law cited by the AR.
These cases mentioned by him apply squarely apply to controversy in hand. Accordingly,
by following our earlier judgments and reasons contained therein in detail, we
adjudicate this issue in favour of the bank.
iii. ITA No. 823/KB/2012 – Faysal Bank
“33. In furtherance to our views and considering the binding judgments stated supra relating to the banking industry which have not been overruled by the Superior courts to date, we direct to allow provisions against diminution in value of an investment and other assets. As per the law of justice and fair play discrimination cannot be made between the taxpayers having similar facts and circumstances in the same business covered under the Seventh Schedule…….”
37. The learned
DR stated that the officer has rightly disallowed the claim being provisional in
the absence of related supporting details which was rightly upheld by CIR(A).
Findings:
38. Submissions of both parties have been considered and record perused. The issue beforehand has already been decided in Bank’s favor through various judgments (quoted supra). We, therefore, following the above-referred judgments of the Tribunal decide the issue in favor of the taxpayer Bank.
PROVISION
AGAINST DIMINUTION IN VALUE OF INVESTMENT
Tax Year 2009
– Ground No. 3 [ITA Nos. 21, 22 & 23/KB/2016]
Tax Year 2010
– Ground No. 4 [ITA Nos. 24 & 25/KB/2016]
Tax Year 2011
– Ground No. 4 [ITA No. 1354/KB/2015]
Tax Year 2012
– Ground No. 4 [ITA No. 1355/KB/2015]
Tax Year 2013
– Ground No. 4 [ITA No. 1356/KB/2015]
Tax Year 2014 – Ground No. 4 [ITA No. 1357/KB/2015]
39. The deductions claimed under the head
‘provision for diminution in the value of investment’ were disallowed by the assessing
officer in terms of Rule 1(g) of the Seventh Schedule on a premise that such adjustments were made on account of the application of International Accounting Standards
[‘IAS’] 39 & 40. Later, on an appeal before CIR(A), the learned CIR(A) has
deleted the disallowance for the tax years under consideration; hence, these
appeals.
40. In this respect, the AR apprised that back
in April 2001, the International Accounting Standards Board [‘IASB’] adopted
IAS 39 & 40 to replace IAS 25 Accounting for Investments which was issued
in March 1986. This position was also confirmed by the Institute of Chartered
Accountants of Pakistan [‘ICAP’] to its members vide Circular No. 11/2001 dated
September 29, 2001, and subsequently, ICAP also withdrew TR-23 Accounting for
Investments. However, owing to the difficulties being faced by banking companies
and upon the recommendation of ICAP, the State Bank of Pakistan [‘SBP’] has deferred
the implementation of IAS 39 & 40 till further instructions through BSD Circular
Letter No. 10 dated August 26, 2002.
41. After the deferment of IAS 39 & 40, as
explained above, the SBP issued BSD Circular No. 10 of 2004 dated July 13, 2004
(still in the field) under which the banking companies are required to revalue
their investment portfolio. Thus, it was in terms of the said notification that
the diminution was charged to the profit & loss account and not due to the
application of IAS 39 or 40, which remained inapplicable on the banking
companies.
42. The learned AR submitted that this is a
settled issue in the banking companies that after the applicability of the
Seventh Schedule from the tax year 2009 onwards, the tax department is bound to
accept the balance of income as per audited accounts submitted to the State Bank
of Pakistan. The only additions/adjustments could be made as mentioned in Rule
1(a) to (h) of the seventh schedule. The accounts prepared for SBP for the
purpose of Schedule read with section 100A of the Ordinance have sanctity has
been upheld and reinforced time and again by superior authorities through
various decisions/judgments including 2012 PTD 1055 and 2012 PTR 124. Relevant
extracts of judgment 2012 PTD 1055 in this regard are reproduced below for
ready reference:
“The above
observations of Commissioner of Appeals are untenable. Section 100A read with
Seventh Schedule to the Ordinance is a special non-obstante provision that
overrides all other provisions as far as computation of income and tax payable
by the banking companies is concerned. Tax authorities are bound to accept the
audited accounts from the tax year 2009 in the case of banks subject to specified
additions and adjustments. This position of law has also been admitted and explained
by F.B.R in para 10 of its Circular No. 1 of 2007 dated 2-7-2007, Circular no.2
of 2008 dated 28-2-2008, Circular no .3 of 2009 dated 17-7-2009, and Circular
no. 8 of 2009 dated 25-9-2009. These instructions are strictly as per law having
binding force for all subordinate tax officials under sections 206 (2) and 214(1)
of the Ordinance. In the presence of unambiguous position of law and legally
binding instructions, the Deputy Commissioner was bound to accept the balance
of the income as per audited accounts subject to additions/adjustments
mentioned in rule 1(a) to (h) of the seventh schedule, on the basis of
misinterpretation of Rule 9 of the Seventh Schedule, as elaborated above, the authorities
below concluded that the seventh schedule is not a self-contained provision as
far as computation of income is concerned in the case of banking companies. We
disapprove of this interpretation and hold that for computation of income of the
banking companies, the Seventh Schedule to the Income Tax Ordinance, 2001 provides
a rule for computation of the profits and gains of a banking company and tax
payable thereon. From tax year onwards, a banking company's as disclosed in the
annual accounts furnished to the State Bank of Pakistan, subject to specified adjustments,
shall be taken as "income from business". Rule 9 in no way can be interpreted
to unsettle this requirement laid down by the legislature. It applies for
things not provided for in the Seventh Schedule”.
43. The AR also drawn attention towards the judgment
of Tribunal reported as 2012 PTD 1055, 2013 PTD 246, 109 TAX 85 and 107 TAX 248
and unreported judgments of Tribunal in case of NBP (ITA No. 394/KB/2006), Faysal
Bank (ITA No. 823/KB/2012), UBL (ITA No. 324/KB/2011) and MCB (ITA No. 2162/LB/2017).
Relevant extracts are reproduced from
the said judgments reproduced below for ready reference:
109
TAX 85:
“The learned AR has rightly pointed out that
Department in its comments before the learned CIR(A) and the learned DR in his
submissions has admitted that in the decision reported as; 12 PTR 124 (Trib)
and 2011 PTR 222 (Trib) the plea of the banking companies that accounts
prepared for SBP for the purposes of the schedule read with section 100A of the
Ordinance have sanctity and department is under obligation to accept those
accounts. Respectfully following the decisions of this Tribunal, we also hold that
the respondent Department is under obligation to accept the accounts prepared
by the appellant for the purposes of 7th Schedule of the Income Tax Ordinance,
2001”.
107 TAX 248:
We have examined the case law and arguments of
both sides. Case law relied on by learned DR relates to the position of law
prior to insertion of Seventh Schedule to the Ordinance. This Tribunal in
(2012) 106 Tax 317 (Trib.)=2012 PTR 124 (Trib.) confirmed addition under this
head for the years prior to insertion of the Seventh Schedule but allowed
impairment losses. However, in earlier judgments reported as 2012 PTD (Trib.]
1055 = 2011 PTR 222 (Trib.) and (2012) 106 Tax 317 (Trib.)=2012 PTR 124 (Trib.)
detailed discussion has been made with reference to the admissibility of this
deduction under the Seventh Schedule to the Ordinance. By following our earlier
judgments, we order the deletion of these additions as years involved are after
amendment in law rendering the decisions relied on by the Department as no
longer applicable.
ITA No. 823/KB/2012 – Faysal
Bank
“33. In furtherance to our views and considering
the binding judgments stated supra relating to the banking industry which have not
been overruled by the Superior courts to date, we direct to allow provisions against
diminution in value of an investment and another asset. As per the law of
justice and fair play discrimination cannot be made between the taxpayers
having similar facts and circumstances in the same business covered under the
Seventh Schedule…….”
44. The DR on the other hand referred to the un-reported
decision of the Tribunal in the case of M/s. Askari Bank dated 24-07-2019 in ITA
No. 452/IB/2018 wherein the ATIR confirmed the disallowance of provisions for diminution
in value of an investment being notional. The DR also referred to the amendment
introduced in Rule 1(g) through Finance Act, 2017 read as under:
Explanation.─ For removal of doubt, it is clarified that nothing in this clause shall be so construed as to allow a notional loss or charge to tax any notional gain on any investment under any regulation or instruction unless all the events that determine such gain or loss have occurred and the gain or loss can be determined with reasonable accuracy.
45. In response to the above, the AR rebutted
that in the case of M/s. Askari Bank the Tribunal confirmed the disallowance by
stating that in the absence of IAS 39 & 40, provisions of IAS 25 were still
applicable. The learned AR argued that the Hon’ble members of tribunal in case
of M/s. Askari Bank was not properly assisted about the applicability of IAS 25
as IAS 25 was replaced in March 1986 and IAS 39 and 40 are still not enforced
by SBP for Banks.
46. Regarding the departmental assertion that
such adjustment is covered by ‘Explanation’ introduced in Rule 1(g) through
Finance Act 2017, the AR submitted that the scope of such Explanation would be
subservient to Rule 1(g). That is, the same would be limited to the adjustments
arising out of the application of IAS 39 & 40. Had the intention of the
Legislature to give the ‘Explanation’ an overriding effect, such provisions
would have been introduced as a separate/distinct rule and not as an Explanation.
Findings:
47. The arguments of rival parties have been considered.
We have also perused the relevant judgments of Tribunal relied upon by the AR
and DR as well as the amendment made in Rule 1(g) to Seventh Schedule through
Finance Act, 2017 referred by the DR. There is no doubt that the issue through the
majority of decisions of Tribunal has been decided in taxpayer’s favor on the
ground that the provision is not based on the application of IAS 39 and IAS 40
as provided under Rule 1(g). In respect of contention of DR regarding the applicability
of IAS 25 as pointed in case of M/s. Askari Bank, the submissions of learned AR
that the said IAS 25 being replaced in March 1986 was also not applicable,
found in order. In support, the AR provided the copy of relevant extracts of
IAS along with a copy of relevant circulars issued by the Institute of Chartered
Accounts of Pakistan (ICAP) and State Bank of Pakistan, which have been placed
on record. Accordingly, the appeals of the department are rejected on the instant
issue.
UNREALIZED LOSS ON FOREIGN EXCHANGE
CONTRACT
Tax Year 2009
– Ground No. 4 [ITA Nos. 21, 22 & 23/KB/2016]
Tax Year 2010 – Ground No. 6 [ITA Nos. 24 & 25/KB/2016]
48. The learned AR for the taxpayer before the
learned CIR(A) agitated the additions made by the assessing officer on account
of unrealized loss on forward foreign exchange contracts amounting to
Rs.180.845 million and Rs.55.350 million in the tax years 2009 and 2010
respectively. The learned AR for the respondent taxpayer explained that under
the Seventh Schedule, any charge/expense in the accounts cannot be disallowed
on the touchstone of ‘accrual basis’ of accounting or on account of being provisional
in nature. The Seventh Schedule specifies the adjustments allowed to be made to
the profits declared in the accounts, and except for the adjustments specified
no other adjustments can be made. The adjustments specified do not include unrealized
exchange loss. Under the Seventh Schedule, expenditure cannot be disallowed on
the ground that the expenditure in the view of the assessing officer, is not made
under the accrual basis of accounting, being provisional in nature. If the
assessing officer was allowed to apply and test the applicability of section 34
under the regime of the Seventh Schedule, then it would have otherwise been specifically
stated. The explanation added under Rule 1(g) further confirms that section 34
is otherwise not applicable under the Seventh Schedule. It is also pertinent to
mention that Rule 2(1) provides to disallow expenditure outstanding for more
than 3 years, which was otherwise not allowable under section 34(5) of the
Ordinance. Further, the mechanism for allowing subsequent payment is stated in
sub-rule (2) of Rule 2, parametria to section 34(5A) and (6) of the Ordinance.
It is clear from these stipulations that the law in its wisdom has referred to
‘certain’ [and not all] provisions of section 34, applicable under the regime
of Seventh Schedule, and for that purpose, specific rules have been framed in
the Seventh Schedule.
49. In support of the submissions, the AR placed
reliance on the various judgments of the ATIR including 2013 PTD 246 and unreported
judgments in the case of the National Bank of Pakistan (ITA No. 394/KB/2006
dated November 24, 2016), Faysal Bank Limited (ITA No. 823/KB/2012 dated April
5, 2017) and United Bank Limited (ITA No. 324/KB/2011 dated April 15, 2017).
50. The learned DR on the other hand supported
the decision of the assessing officer by stating that the loss being notional
is not allowable under section 34(3) of the Ordinance and Rule 1(g) of the
Seventh Schedule to the Ordinance.
Findings:
51. The arguments of rival parties have been considered
and perused the available record. The submissions made on behalf of the
respondent taxpayer have substance. Undisputedly, the subject issue has already
been decided in the case of other banking companies through various decisions
of this Tribunal, we, therefore, respectfully following the said judgments is
maintained. As a result, the appeals filed by the department are dismissed on
this issue.
BAD
DEBTS DIRECTLY WRITTEN OFF
Tax Year 2009
– Ground No. 5 [ITA Nos. 21, 22 & 23/KB/2016]
Tax Year 2009
– Ground No. 5 [ITA No. 1503/KB/2016]
Tax Year 2010
– Ground No. 4 [ITA No. 1506/KB/2015]
Tax Year 2011 – Ground No. 7 [ITA No. 1354/KB/2015]
52. The issue involved is the disallowance
of Bad debts written off which were directly recognized as an expense through the
Profit & Loss Account (P&L) by the taxpayer. The learned AR for the
taxpayer reiterated that under Seventh Schedule the balance of income as per
P&L is taxable subject to certain adjustments specified in Rule 1(a) to
1(h). These adjustments do not include bad debt written off. The AR submitted that
the Additional Commissioner IR disallowed the bad debts charged and written off
during the respective years on the grounds that conditions set out in
provisions of section 29 of the Ordinance were not fulfilled. The AR explained that
general provisions of section 29 of the Ordinance were not applicable in the
case of a banking company being governed by special provisions of the Seventh
Schedule to the Ordinance. The AR vehemently argued that general provisions of
section 29 of the Ordinance ab initio do not apply to a banking company which
is evident from the provisions of the Seventh Schedule to the Ordinance as
permissible only under “transitional provisions”. According to the AR, in terms
of Rule 8A(1) of the Seventh Schedule, section 29 of the Ordinance remained applicable
only to such bad debts against which the provisions were created up to the tax
year 2008, and deduction against such provisions was neither claimed nor
allowed in the tax year during which they were created. In support, the AR
relied upon the decision of this Tribunal in the case of MCB Bank
Limited in the ITA No. 2162/LB/2017 dated 12-03-2018, wherein this
very principle has been upheld for the tax year 2013. It has also been stated
that under the Seventh Schedule legislature has provided only the mechanism of
allowability of Provisions under Rule 1(c). There is no provision Seventh
Schedule which deals with the allowability of bad debts which were directly
written off in P&L, which also shows the intent of law regarding
allowability of bad debt (which were directly written off) as an expense
without any condition.
Findings:
54. We
have given our earnest consideration to the rival submissions. The legal
position on the applicability of section 29 of the Ordinance in respect of bad
debts post-Seventh Schedule has already been dealt with in the decision of Tribunal
in the case of MCB Bank Limited in the ITA No. 2162/LB/2017
dated 12-03-2018 wherein it has been held that the
provisions of section 29 of the Ordinance were ab-initio not applicable in case
of the banking company for the tax year 2009 and onwards. Accordingly,
following the aforementioned decision, we have no hesitation in holding that
the provisions of section 29 of the Ordinance were ab initio not applicable in
case of the appellant banking company for the tax years 2009 and onwards,
therefore, the orders of the authorities below are vacated and the deductions claimed
by the taxpayer in respect of write-offs are allowed.
ALLOCATION OF EXPENSES TO CAPITAL GAINS AND
DIVIDEND INCOME
Tax Year 2009
– Ground No. 4 [ITA No. 563/KB/2016]
Tax Year 2009
– Ground No. 2 & 3 [ITA No. 669/KB/2016]
Tax Year 2010
– Ground No. 4 [ITA No. 564/KB/2016]
Tax Year 2010
– Ground No. 2 & 3 [ITA No. 670/KB/2016]
Tax Year 2011
– Ground No. 4 [ITA No. 564/KB/2016]
Tax Year 2011
– Ground No. 2 & 3 [ITA No. 671/KB/2016]
Tax Year 2012
– Ground No. 4 [ITA No. 565/KB/2016]
Tax Year 2012
– Ground No. 2 & 3 [ITA No. 672/KB/2016]
Tax Year 2013
– Ground No. 4 [ITA No. 566/KB/2016]
Tax Year 2013 – Ground No. 2 & 3 [ITA No. 673/KB/2016]
55. The taxpayer
Bank in the return of income filed for these years claimed entire expenses
against income from the business. The assessing officer through the amending
assessment order disputed the treatment carried out in return and apportioned
the expenses amongst business income, capital gain and dividend income under
section 67 of the Ordinance read with Rule 9 of the Seventh Schedule.
56. The
learned AR stated that under the Seventh Schedule there is a unique concept of
one Basket Income i.e. the entire income of a banking company is taxable as
business income as per Rule 6 of Seventh Schedule to the Ordinance. However,
under the same schedule special rates, which may be different from the general
rate can be applied for certain income (i.e. dividend and capital gain) being
the part of income (i.e. business income) computed under said Schedule as Section
100A provides that income and tax payable shall be computed as per rules in the
Seventh Schedule. In view of that, provisions of section 67 are not applicable
as section 67 requires apportionment of expenses where there is more than one
head of income whereas in the case of a banking company there is only one head
of income i.e. Business Income.
57. The learned AR further submitted that through
the Finance Act, 2014 specific amendment has been made in Rule 6 of Seventh
Schedule whereby the concept of allocation of expenses against dividend income
and capital gains was introduced. The introduction of these specific provisions
ratifies the Bank’s point of view that the concept of allocation of expenses
against dividend income and capital gains was not envisaged by the Seventh
Schedule prior to the Finance Act, 2014. After Rules (6A) and (6B) have been inserted
by the Finance Act, 2014, allocation of expenses has been permitted and that
too in respect of dividend income and capital gains only.
58. The AR also drew our attention towards judgments
of the Tribunal reported as 2012 PTD 1055, 2013 PTD 246, and unreported judgments
in the case of NBP (ITA No. 394/KB/2006) and MCB (ITA No.2162/LB/2017). Relevant
extracts in this respect are reproduced below for ready reference:
2013 PTD 246
"We are afraid that interpretation of department that such allocation
can be made under Rule 9 is untenable under the
law. Rule 6 of the Seventh Schedule specifically provides that all income
should be taxed in the case of banks under the head "Income from business". In the presence of this unambiguous provision of
law, resort to section 67 read with Rule
9 of the Seventh Schedule is legally untenable as held in 2011 PTR 222 [Tribl. The issue has already been decided in favour of banks
by Tribunal in 2011 PTR 222 (Trib), (2005) 91 Tax 484
(Trib.) 2005 PTD (Trib.) 2041 and by the
honorable Lahore High Court Lahore in 2006 PTD 2678. In view of factual position narrated above and cases cited and discussed above, we order the
deletion of allocation of expenses to dividend and capital gains for all the years
under appeal."
2012 PTD 1055
“We have
examined the arguments of both sides and cases quoted by them. We are afraid
that the interpretation of the department that such allocation can be made
under Rule 9 is untenable under the law. Rule 6 of the Seventh Schedule
Specifically provides that all income should be taxed in the case of banks
under the head “Income from business”. In the presence of this unambiguous provision
of law, resort to section 67 read with Rule 9 of the Seventh Schedule is
legally untenable as held in 2011 PTR 222 [Trib.]. The issue has already, been
decided in favour of banks by Tribunal in 2011 PTR 222 [Trib.], (2005) 91 Tax
484 (Trib.) 2005 PTO (Trib.) 2041 and by the honourable Lahore High Court Lahore
in 2006 PTO 2678. In view of factual position narrated above and cases cited
and discussed above, we order the deletion of allocation of expenses to
dividend and capital gains for all the years under appeal.”
NBP in ITA No. 1090 /KB/2011
dated 24-11-2016
“Having considered the rival arguments, we are of the view that in the absence of any contrary orders from the superior court, there is no reason to disagree from the earlier orders of the Tribunal in bank's own case. The appeals are accordingly allowed on this ground of appeal with the direction to the taxation officer not to allocate interest/mark-up on expense capital gain and administrative expenses in line with the ratio of the orders supra.”
MCB in ITA No. 2162 /LB/2017
dated 12-03-2018
“12. The learned counsel for the appellant submitted before us that (i) applicability of general provisions like section 67 of the Ordinance, in the case of banking companies governed by Seventh Schedule to the Ordinance, is unlawful being contradictory to rules of interpretation; (ii) the position having already been established at the level of this Tribunal, especially when no contradictory decision has been rendered by any appellate authority, abundantly proves that the action of the authorities below is grossly erroneous and unlawful; (iii) the subsequent amendment vide Finance Act 2014 resulting into insertion of substantive provisions, i.e. Rules 6A and 6B, in the Seventh Schedule to the Ordinance leaves no doubt that no allocation was legally permissible for tax years covered by provisions prior to such insertions; and (iv) even otherwise, subsequent amendment could have arguably supported the case of Revenue if legislature had imported in Seventh Schedule reference to section 67 of the Ordinance as against introducing an all-together new provision. The learned DR supported the orders of the authorities below and argued that common expenditure was highly apportioned by the learned Additional Commissioner in the amendment order.
13. We have given sincere consideration to the arguments of opposing parties and have keenly gone through the available record. In the admitted position that the tax year in the present case covered twelve months period starting from 01-01-2012 through 31-12-2012, there was no justification for authorities below to, directly or indirectly, invoke the provisions introduced in the statute effective 01-07-2014 to any prior period. It is a trite law that fiscal statutes are required to be construed strictly with no mandate available to add or subtract anything. The principle that substantive provisions, creating new charges and liabilities, could not operate retrospectively is well-settled for decades. The position settled by this Tribunal on the proposition under consideration in 2012 PTO 1055 and 2013 PTO 246 in fact stands reinforced when the law was subsequently modified to provide otherwise. Accordingly, we have no hesitation to conclude that addition was unlawful and misconceived. The same is therefore deleted.”
59. The learned
DR on the other hand supported the order passed by the assessing officer and
stated that the officer has rightly made an addition to the taxable income of the
Bank by strictly applying relevant provisions of the law.
Findings:
60. After
hearing the arguments of both sides and perusing the judgments relied upon by
the taxpayer. The submissions made on behalf of the taxpayer have substance.
The subject matter in appeals has already been decided by this tribunal in numerous
cases cited supra, we, therefore, by following the above judgments of this
tribunal inclined to maintain the order of the learned CIR(A). Order
accordingly. As a result, the appeals filed by the department are rejected.
IJARA LEASE
Tax Year 2010
– Ground No. 2 [ITA No. 175/KB/2016]
Tax Year 2010
– Ground No. 5 to 8 [ITA No. 115/KB/2016]
Tax Year 2011
– Ground No. 2 [ITA No. 176/KB/2016]
Tax Year 2011
– Ground No. 5 to 8 [ITA No. 116/KB/2016]
Tax Year 2012
– Ground No. 2 [ITA No. 177/KB/2016]
Tax Year 2012
– Ground No. 5 to 8 [ITA No. 117/KB/2016]
Tax Year 2013
– Ground No. 2 [ITA No. 178/KB/2016]
Tax Year 2013 – Ground No. 5 to 8 [ITA No. 118/KB/2016]
61. Brief facts
are that the assessing officer through the amended assessment orders disallowed
the depreciation on the Ijara lease by treating the Ijara arrangement as
Finance Lease, whereas Bank’s view is that Ijara is not a finance lease. The learned
CIR(A) did not agree with the Bank’s view and treated the Ijara lease as
Finance Lease. The CIR(A) however allowed the relief on the ground that if
Ijara is a finance lease then the principal amount of lease payment should not
be considered as income but as payment of a loan.
62. The AR apprised
that the Bank has filed an appeal on the ground of treating Ijara lease as
Finance Lease whereas the Department has filed an appeal on the ground of
CIR(A)’s directions to exclude the effect of principal amount from the gross rentals.
63. After
explaining the above facts, the AR stated that the
Department has through appeal effect orders dated December 15, 2015, passed under
section 124 of the Ordinance and has granted relief as per directions of CIR(A).
The AR further stated that since the issue
(net effect of disallowance) is of a timing difference only, the Bank without conceding
its legal position that Ijara is not a finance lease does not wish to further
press the grounds of appeal relating to the net effect of the disallowance in
this respect.
64. The Learned DR
on the other hand has no objection to the statement of the learned AR for the taxpayer.
Findings:
65. The taxpayer’s primary contention is that Ijara
is not a finance lease. Without conceding to that, the learned AR for the taxpayer
has agreed that if alternate relief as directed by CIR(A) is allowed then barring
timing difference only, there is no effect of tax incidence. We, therefore,
confirm the directions of the learned CIR(A) for not considering the repayment
of the principal amount of lease rental as income, if the department considers Ijara
as a finance lease. With the aforesaid observations, all the cross-appeals are
disposed of.
LOSS ON TERMINATION OF
LEASE
Tax Year 2009 – Ground No. 4 [ITA No. 1503/KB/2015]
66. In the tax year 2009, the Bank claimed a loss
of Rs. 43.8 million on pre-mature termination of lease assets. The said
adjustment of loss was disallowed by the Assessing Officer in terms of sub-rule
(3) of Rule 8A of Seventh Schedule, which was upheld by the learned CIR(A)
without appreciating that lease rentals offered during prior years were more
than the difference between the fair market value of the assets and tax WDV.
67. As per AR, the primary dispute between the
Department and the Bank is whether Section 77(4), reproduced below is applicable
on premature termination of the lease or not:
" Section 77(4).The consideration received by a scheduled bank, financial institution, modaraba, or leasing company approved by the Commissioner (hereinafter referred to as a “leasing company”) in respect of an asset leased by the company to another person shall be the residual value received by the leasing company on the maturity of the lease agreement subject to the condition that the residual value plus the amount realized during the term of the lease towards the cost of the asset is not less than the original cost of the asset."
68. The AR stated that in the above-mentioned provision,
the expression 'maturity" is used, which also covers the lease terminated
before the original term of the lease. The law has envisaged maturity of the lease
rather than the maturity of the original lease term. Under the agreement
between the lessee and the lessor, the lease can be matured before the original
lease term. Even otherwise, the intent/spirit of the law is also very clear
that the provisions of the Fair Market Value (FMV) could not apply in case of a
lease for the reason that the lessor being the scheduled Bank and the lessee
are independent persons and lease in substance is a financing transaction.
69. The DR on the other hand supported the order
passed by the officer and Commissioner IR Appeals.
Findings:
70. We have heard both the parties. It appears
from the available record that the subject leased asset was disposed of as a
result of premature termination of lease. The provisions of section 77(4) of
the Ordinance are applicable when the lease is terminated on maturity. The law
has conspicuously used the word “lease” and not the “lease term” while applying
the provisions of section 77(4) ibid. Having said that since the facts involved
are not clearly ascertained whether the subject asset was retrieved from the
defaulted lessee and disposed of later or the subject leased asset was disposed
of to the lessee at the residual value, we, therefore, remand back the issue
with the directions to ascertain the relevant facts and decide the matter as
per law after providing reasonable opportunity of being heard to the taxpayer.
1/4TH
EXEMPTION ON GAIN ON SALE OF WARID SHARES
Tax Year 2009 – Ground No. 6 [ITA No. 1503/KB/2015]
71. The Bank disposed of the shares of M/s Warid
Telecom after a holding period of more than one year and claimed accordingly
1/4th exemption which was disputed by the Department. The Appellant claimed the benefit of reduction of 1/4th of the
gain under Section 37 on the ground that since the Department also generally
applies the General provisions of the Ordinance (instead of Seventh Schedule)
on other issues, e.g. taxing dividend income under section 18(4) of the
Ordinance, Bank on without prejudice basis claimed the reduction under section
37. The AR stated that since now all the decisions of the higher appellate
forum agree in principle that the income computed under the Seventh Schedule
based on the Audited Accounts cannot be disturbed except for the specified
adjustments, therefore the appellant bank, on the aforesaid basis, does not
wish to further contest this matter.
Findings:
72. Since the AR of the Bank did not press the
above-ground hence, it is disposed of accordingly.
LOSS
ON SALE OF SECURITIES
Tax Year 2010
– Ground No. 5 [ITA No. 1506/KB/2015]
Tax Year 2011 – Ground No. 6 [ITA No. 1354/KB/2015]
ADJUSTMENT OF CAPITAL LOSSES
Tax Year 2012
– Ground No. 5 [ITA No. 1274/KB/2015]
Tax Year 2013 – Ground No. 7 [ITA No. 1275/KB/2015]
73. In respect of the above grounds of appeal, the
AR explained that the Bank’s claim of provision against investment in the tax
year 2009 under the Seventh Schedule to the Ordinance was disallowed by the
Department. The CIR(A) allowed the claim for which appeal effect has already
been allowed. However, Department has filed an appeal before ATIR against
CIR(A)'s directions [ITA No. 21, 22& 23 / 2016, ground of appeal No. 3 and
4].
74. Explaining further, the AR stated that in tax
years 2010, 2012, and 2013, Bank claimed net provision of alternate basis
(write off/realization). These alternate claims were also disallowed by the
Department and confirmed by the CIR(A), against which Bank has filed the
appeal. If the provision against investment is allowed in the tax year 2009 (which
has been allowed by ATIR in various other cases also) then the Bank's alternate
claim in tax years 2010, 2012, and 2013 would become redundant/infructuous.
Therefore, the appellant contended that if the department's appeal is dismissed
in the tax year 2009 and on that basis, Bank's alternate claim/appeal in tax years
2010, 2012, and 2013 would become infructuous. The Bank reserves the right to
contest the alternative grounds in tax years 2010, 2012, and 2013 if for any
other reason the provision is disallowed in the tax year 2009.
Findings:-
75. We have heard the parties and perused the
record keeping in view the contentions of the AR for the taxpayer. We are
inclined to allow the provision against investment supra amounting to Rs. 1,479
million in the tax year 2009 by following the judgments of this tribunal. Order
accordingly. As a result, the appeals filed by the taxpayers in respect of tax
years 2010 to 2013 have become infructuous.
CAPITAL
WORK IN PROGRESS (CWIP) WRITTEN OFF - DISALLOWED UNDER SEC 21(N) OF THE
ORDINANCE
Tax Year 2011 – Ground No. 2 [ITA No. 1527/KB/2015]
76. The appellant taxpayer has preferred the
appeal on this issue before this tribunal. The learned AR for the appellant
bank stated that in the tax year 2011, the Bank has charged off Rs. 99.423
million under the head of Administrative Expenses (Note 27 to the audited
accounts). The AR apprised that under an agreement of
lease dated 28th of June, 2006, the taxpayer obtained from Malik
Abdul Ahad, a lease of premises out of the property bearing No.5-C-II,
Gulberg-III, Lahore (Known as Ahad Arcade) for initially a period of 10 years
subject to extendable with mutual consent of the parties. Under the terms and
conditions of the lease, the lessee (that is to say the taxpayer), had the right
to establish/use the demised premises for Commercial Banking purposes,
including the functioning of a Branch/Office of the Bank. Under Clause 2(1) of
the lease agreement, the lessee was required to pay a rent of Rs.765,000/- per
month and the monthly rent of the demised premises was required to be increased
at the rate of 10% of the last paid rent after one year under Punjab Rent Restriction
Ordinance, 1959. Further, under the lease agreement, the bank had also a right
to construct and carry out improvements in the elevation of the demised
premises to suit its business requirements and to fix its logo/nameplate and a neon
sign on the face/side of the demised premises and to make internal partitions,
changes, and renovation, etc according to its business requirements at its own
cost. Acting under the lease agreement, the taxpayer invested a huge amount and
during the year under consideration, the taxpayer claimed such amount under the
head “capital work in progress written off” by treating it as revenue
expenditure for the reason that the lessor namely Malik Abdul Ahad had played a
fraud with the lessee bank by concealment of facts that he had already gifted
away some portion of the leased premises in favour of his real daughter Mst.
Ayesha Iqbal resultantly refused to provide such a portion of the leased premises
to the bank as per the lease agreement. The learned AR stated that the matter
is still sub-judice before the court. The learned counsel for the taxpayer contended
that undoubtedly the investment for establishing the office has been made but
no capital assets of enduring nature to the trade of the taxpayer have been
brought into existence. He asserted that the expenses incurred were wholly and
exclusively for the taxpayer’s business and were rightly claimed by the
taxpayer as revenue expenditure. The appellant claim was primarily
based on the amount charged in the P&L account and allowable under the
Seventh Schedule as the said charge does not fall in the exception provided
under Rule 1(a) to Rule 1(h) of Seventh Schedule to the Ordinance.
77. On the other hand, the claim of the department that the expenditure
was capital expenditure and was, therefore, not deductible under the law and
was rightly disallowed by the assessing officer under section 21(n) read with
rule 1(b) of Seventh Schedule to the Ordinance. The Commissioner IR (Appeals) affirmed
the disallowance.
Findings:
78. We have heard both the
parties and perused the record. The following question arises under the facts
and in the circumstances of the case for determination:
"Whether on the fact and in the circumstances of the case the Assessing Officer was right in holding that the expenses of Rs. 99.423 million are capital in nature and are not liable to be taken into account as deductible expenditure in arriving at the real income of the taxpayer for the assessment year under consideration?"
In
the instant case, it appears that the lessee was not the owner of the leased
premises. Right from inception, the
building was of the ownership of the lessor. Therefore, by spending the money,
the taxpayer did not acquire any capital asset. Therefore, to answer the
question and reach the proper conclusion, we have to see and discuss the
following case laws on Indian jurisdiction which relate to the present
controversy.
79. In
Lakshmi Sugar Mills Co. (P) Ltd V. CIT, (1971) 82 ITR 376
(SC) the Supreme Court was considering the case in which the appellant coming
before the Supreme Court contributed amounts for the construction and
development of roads between the various sugarcane-producing centers and the
sugar factories of the taxpayer. This expenditure was incurred under a
statutory obligation for the development of roads that were originally the
property of the Government and remained so even after the improvement had been
done. The court found in the context of the purpose for which the roads were
laid and expenses were incurred by the taxpayer for such roads that the expenditure
was not of a capital nature and had to be allowed as an admissible deduction in
computing the profit of the taxpayer’s business. The expenditure was incurred to
facilitate the running of its motor vehicles and other means employed for
transportation of sugarcane to its factories and was therefore incurred for
running the business or working it to produce profits without the taxpayer
gaining any advantage of an enduring benefit to itself as the road remained the
property of the State and were otherwise used by general public also.
80. In
CIT v. Associated Cement Cos Ltd, (1988) 172 ITR 257 (SC),
it was a case in which the taxpayer became a party to a tripartite agreement
whereby the taxpayer undertook to supply water to the municipality and provide
water pipelines, for that purpose the taxpayer was not to pay. The pipelines so
provided became the property of the municipality. The question arose whether
the amount spent to install water pipeline and accessories was revenue
expenditure for the taxpayer or capital layout. It was held that during the
previous year relevant to the assessment year 1959-60, the respondent spent a
sum of Rs. 2,09,459 towards installing water pipelines and accessories outside
the factory premises which belonged to and be maintained by the municipality.
The Tribunal held that the taxpayer did not become the owner of the pipeline
and accessories installed by him and the entire expenditure was allowable as
revenue expenditure. On a reference, the High Court affirmed that since the
installation of pipeline and accessories were the assets of the municipality
and not of the respondent, the expenditure did not result in bringing into
existence any capital asset for the company and the advantage secured by the
respondent by incurring the expenditure was absolution or immunity from
liability to pay municipal rates or taxes for 15 years, if these liabilities
had to be paid, the payments would have been on revenue account, and,
therefore, the advantage secured was in the field of revenue and not capital. The
Supreme Court affirmed these conclusions.
81. In
CIT v. Bombay Dyeing & M/g. Co. Ltd, (1996) 219 ITR
521 (SC) the Supreme Court was concerned with the question of whether the
amount spent by the taxpayer company for securing the construction of tenements
for the company's workers through the State Housing Board was a business
expenditure of revenue nature which could be allowed as deduction under section
37 of the Income Tax Act, 1961. The taxpayer company acquired no ownership
rights in the said tenements. The Tribunal held that the expenses incurred for
constructing the tenement for its workers through the State Housing Board, in
which the taxpayer did not acquire any property interest, did not result in acquiring
any capital asset by the taxpayer and since it was spent for the welfare of its
workers it was revenue expenditure and allowable under section 37. A reference to this question was
declined by the Tribunal. The High Court declined an application under section
256(2) by holding that no question of law arose. The Supreme Court held that
the High Court was justified in rejecting the application under section 256(2).
82. In
CIT v. Madras Auto Service Ltd, (1998) 233 ITR 468 (SC), the Supreme
Court recorded its agreement with principles laid down in Associated Cement
Companies Ltd's case (supra), Bombay Dyeing & M1g. Co. Ltd.'s case (supra),
L.H. Sugar Factory & Oils Mills (P) Ltd.'s case (supra). The principle was
applied in a case where the taxpayer obtained certain premises for 39 years.
Under the terms of the agreement, he was entitled to demolish the construction
of the leased premises and reconstruct the premises for its own business
requirement. On the construction of such premises, it was to become the
property of the lessor and the taxpayer was to pay the rent at a reduced rate
as detailed in the lease agreement. The taxpayer raised the new building at its
own cost and was running a business in the said building as a lessee. The
revenue has disallowed the claim of the taxpayer for deduction of the amount
for reconstructing the building by holding it to be a capital layout. However,
the Tribunal found in favour of the taxpayer that since the taxpayer has
acquired no interest by way of ownership right in the newly constructed
building, as under the lease agreement, it was to become the property of the
lessor. The amount spent by him for constructing the building must be held to
be revenue expenditure as a part of total lease money to be paid by him by a
different mode. The High Court affirmed the finding of the Tribunal. The
Supreme Court on appeal by the revenue while dismissing the appeal held that by
spending his money, the taxpayer did not acquire any capital asset.
83. From
the aforesaid judgments of the Indian Supreme Court, it is apparent that merely
because the amount spent has been used for construction of a building or
structure of permanent nature is not the decisive test for holding the expenses
to be capital out-lay or revenue out-lay. The two tests emerging from the
aforesaid decisions are that firstly where the building or construction of any
permanent structure is brought into existence is by itself not sufficient to
hold the expenses to be capital nature invariably. Where such construction does
not result in the acquisition of any capital assets to be the trade of taxpayer
or the property does not become the property of the taxpayer, it does not result
in the acquisition of capital assets of an enduring nature by the taxpayer.
Secondly, it is also clearly discernible that if such expenses are incurred for
the purpose of the business for deriving any benefit whether to preserve the
business or to facilitate the running of the business more smoothly or to make
business more profitable or to secure any other advantage for the taxpayer’s business
or incurring expenditure by seeking exemption from or reduction in incurring of
other expenses which would have been ordinarily allowable as revenue
expenditure of taxpayer’s business, such expenses are to be treated as having
been incurred wholly and exclusively for the business of the taxpayer and
revenue expenditure. Such expenses cannot be construed as capital expenses.
84. It
may be noticed that in all the aforesaid cases, the construction of permanent
nature has been brought into existence at the expenses of taxpayer whether by
laying roads, or construction of tenement for its workman or laying of water
pipelines for the benefit of securing absolution from payment of rates for 15
years or by constructing a new building by demolishing the old building, with a
reduction in lease monthly, the expenses have been held to be of revenue nature
because the property did not vest in the person who had laid out the expenses
and the expenses were motivated for the benefit of smooth carrying on of its
business activity.
85. For
what has been discussed above, we have no hesitation in concluding that in the
facts and circumstances which exist in the case, the expenses incurred by the taxpayer
towards establishing the branch/office of the bank were expenses wholly and exclusively
incurred for the purpose of the business of the taxpayer and was not in the
nature of capital expenditure. therefore, the same is allowable as revenue
expenses under the Ordinance. Accordingly, the assessing officer is directed to
allow the same to the taxpayer. Thus, the answer to the question is in the negative
against the department.
86. The
appeal of the appellant taxpayer is accepted on this count.
WORKERS WELFARE FUND (WWF)
Tax Year 2009
– Ground No. 8 [ITA No. 1503/KB/2015]
Tax Year 2010
– Ground No. 7 [ITA No. 1506/KB/2015]
Tax Year 2011
– Ground No. 8 & 9 [ITA No. 1273/KB/2015]
Tax Year 2011
– Ground No. 3 [ITA No. 1527/KB/2015]
Tax Year 2012
– Ground No. 2 [ITA No. 26/KB/2016]
Tax Year 2012
– Ground No. 6 & 7 [ITA No. 1274/KB/2015]
Tax Year 2013
– Ground No. 8 [ITA No. 1275/KB/2015]
Tax Year 2014 – Ground No. 5 [ITA No. 1276/KB/2015]
87. We
have heard the arguments of both parties and have also perused the record of
the case. By virtue of amendments made through Finance Acts 2006 and 2008 in
the WWF Ordinance, the appellant was liable to pay WWF. The vires of these amendments
were challenged before different High Courts by the taxpayers. The Full Bench of
the Hon’ble Sindh High Court in the case titled as M/s Shahbaz Garments (Pvt.)
Ltd Vs Pakistan (2013 PTD 969), after exhaustively examining the
law adjudged the impugned levy to be a tax and, therefore, validated the introduction
and enactment thereof through a Money Bill. The Hon’ble Lahore High Court, on
the other hand, in Pakistan Chrome Tannery’s case reported as (2011 PTD 2643) and M/s
Azgard Nine Ltd, v. Pakistan through Secretary and others” PLD 2013 Lahore 282,
has declared the impugned levy, made through the amendments in the WWF
Ordinance of 1971 vide the Finance Acts, 2006 and 2008 as a fee and not a tax,
and thus struck down the legislation as being ultra vires. The Peshawar High
Court, through judgment dated 29-05-2014 in Associated Industries Limited,
Amangarh Industrial Area, Nowshera and others v. Federation of Pakistan in W.P.
No. 1425/2010, after discussing in detail the judgments of the
Sindh High Court and the Lahore High Court and other precedent law, declared
the amendments made through Money Bills as ultra vires.
However, finally,
the amendments made through Finance Acts, 2006 and 2008 in the WWF Ordinance
were taken into consideration and dilated upon by the Hon’ble Supreme Court of
Pakistan in the case titled Workers Welfare Funds, M/s Human Resources Development,
Islamabad and others Vs East Pakistan Chrome Tannery (Pvt.) Ltd and others
(PLD 2017 SC 28) wherein the amendments were declared ultra vires. The relevant
extract of the judgment is reproduced hereunder:-
“22. As we have established from
the discussion above that none of the subject contributions/payments made under
the Ordinance of 1971, the Act of 1976, the Act of 1923, the Ordinance of 1968,
the Act of 1968, and the Ordinance of 1969 possess the distinguishing feature
of a tax, i.e. a common burden to generate revenue for the State for general
purposes, instead, they all have some specific purpose, as made apparent by
their respective statutes, which removes them from the ambit of a tax.
Consequently, the amendments sought to be made by the various Finance Acts of
2006, 2007, and 2008 pertaining to the subject contributions/ payments do not
relate to the imposition, abolition, remission, alteration, or regulation of
any tax, or any matter incidental thereto (tax). We would like to point out at
this juncture that the word ‘finance’ used in Finance Act undoubtedly is a term
having a wide connotation, encompassing tax. However, not everything that pertains
to finance would necessarily be related to tax. Therefore, merely inserting
amendments, albeit relating to finance but which have no nexus to tax, in a
Finance Act does not mean that such Act is a Money Bill as defined in Article
73(2) of the Constitution. The tendency to tag all matters pertaining to
finance with tax matters (in the true sense of the word) in Finance Acts must
be discouraged, for it allows the legislature to pass laws as Money Bills by
bypassing the regular legislative procedure under Article 70 of the Constitution
by resorting to Article 73 thereof which must only be done in exceptional
circumstances as and when permitted by the Constitution. The special
legislative procedure is an exception and should be construed strictly and its operation
restricted. Therefore, we are of the
candid view that since the amendments relating to the subject contributions/
payments do not fall within the parameters of Article 73(2) of the
Constitution, the impugned amendments in the respective Finance Acts are
declared to be unlawful and ultra vires the Constitution.”
88. In view of the foregoing, by respectfully
following the judgment of the Hon’ble Supreme Court of Pakistan, the appeals of
the appellant taxpayer are accepted and the orders passed by the lower authorities
are vacated/annulled on this issue.
89. For what has been discussed above, all the titled
appeals are disposed of in the manner stated above.
90. This order consists of (44) pages and each
page bears my signature.
-SD--
(M. M. AKRAM)
JUDICIAL
MEMBER
--SD—
(DR. TAUQEER IRTIZA)
ACCOUNTANT MEMBER
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