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)

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)

ITA No. 25/KB/2016	ITA No. 1355/KB/2015
Tax Year – 2010	Tax Year – 2012
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 2 2 2 2 2	21,22 & 23 / 2016 24 & 25 / 2016 1354 / 2015 1355 / 2015 1356 / 2015 1357 / 2015	2009 2010 2011 2012 2013 2014	Department Department Department Department Department Department
2	Net or Gross provision of debt for the working of 1% / 5% of Advances.	3 3 3 3	1354 / 2015 1355 / 2015 1356 / 2015 1357 / 2015	2011 2012 2013 2014	Department Department Department 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 4 4 4 4	24 & 25 / 2016 1273 / 2015 1274 / 2015 1275 / 2015 1276 / 2015	2010 2011 2012 2013 2014	Department Bank Bank Bank Bank
4	Provision against diminution in value of the investment.	3 4 4 4 4 4	21,22 & 23 / 2016 24 & 25 / 2016 1354 / 2015 1355 / 2015 1356 / 2015 1357 / 2015	2009 2010 2011 2012 2013 2014	Department Department Department Department Department Department
5	Provision against other assets.	5 5	1273 / 2015 1275 / 2015	2011 2013	Bank 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 5	24 & 25 / 2016 1354 / 2015	2010 2011	Department Department
8	Un-realized loss on foreign exchange contract under sec 34(3).	4 6	21,22 & 23 / 2016 24 & 25 / 2016	2009 2010	Department Department
9	Bad Debts directly written off.	5 5 4 7	21,22 & 23 / 2016 1503 / 2015 1506 / 2015 1354 / 2015	2009 2009 2010 2011	Department Bank Bank Department
10	Allocation of expenses to capital gains and dividend income.	4 4 4 4 4 2 & 3 2 & 3 2 &3 2 & 3 2 & 3	563 / 2016 564 / 2016 565 / 2016 566 / 2016 567 / 2016 669 / 2016 670 / 2016 671 / 2016 672 / 2016 673 / 2016	2009 2010 2011 2012 2013 2009 2010 2011 2012 2013	Bank Bank Bank Bank Bank Department Department Department Department Department
11	WWF	8 7 8 2 6 8 5	1503 / 2015 1506 / 2015 1273 / 2015 26 / 2016 1274 / 2015 1275 / 2015 1276 / 2015	2009 2010 2011 2012 2012 2013 2014	Bank Bank Bank Department Bank Bank Bank
12	Amendment of assessment under section 122(5A).	2 & 3 2 & 3 2 to 4 2 & 3	563 to 567 / 2016 1503 to 1507 / 2015 115 to 118 / 2016 1273 to 1276 / 2016	2009 to 2013 2009 & 2010 2010 to 2013 2011 to 2014	Bank Bank Bank 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 5 to 8 2 5 to 8 2 5 to 8 2 5 to 8	175 / 2016 115 / 2016 176 / 2016 116 / 2016 177 / 2016 117 / 2016 178 / 2016 118 / 2016	2010 2010 2011 2011 2012 2012 2013 2013	Department Bank Department Bank Department Bank Department Bank
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 6	1506 / 2015 1354 / 2015	2010 2011	Bank Department
18	Adjustment of Capital losses.	5 7	1274 / 2015 1275 / 2015	2012 2013	Bank Bank
19	CWIP written off - disallowed under sec 21(n).	2	1527 / 2015	2011	Bank
20	Refund Adjustment.	7 6 4 6 6	1503 /2015 1506 / 2015 1507 / 2015 1273 / 2015 1275 / 2015	2009 2010 2010 2011 2013	Bank Bank Bank Bank Bank
21	Consequential WWF & 4A Surcharge.	9 3 7	1273 / 2015 1527 / 2015 1274 / 2015	2011 2011 2012	Bank Bank 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 21^st 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	130	25	(pre 7th Sch)
Reversal			(20)	(30)	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:

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.

53. On the other hand, the learned DR supported the orders passed by the assessing officer and subsequently confirmed by the learned CIR(A).

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 28^th 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

M. M. Akram Reported Judgements

Pages

Tuesday, February 1, 2022

M/s. Bank Alfalah Ltd., Karachi. Vs The CIR, Legal Zone, LTO, Karachi.

APPELLATE TRIBUNAL INLAND REVENUE (PAKISTAN)
SPECIAL BENCH, KARACHI

WWF

8
7
8
2
6
8
5

1503 / 2015
1506 / 2015
1273 / 2015
26 / 2016
1274 / 2015
1275 / 2015
1276 / 2015

2009
2010
2011
2012
2012
2013
2014

Bank
Bank
Bank
Department
Bank
Bank
Bank

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Pages

Tuesday, February 1, 2022

M/s. Bank Alfalah Ltd., Karachi. Vs The CIR, Legal Zone, LTO, Karachi.

APPELLATE TRIBUNAL INLAND REVENUE (PAKISTAN)SPECIAL BENCH, KARACHI

WWF

8782685

1503 / 20151506 / 20151273 / 201526 / 20161274 / 20151275 / 20151276 / 2015

2009201020112012201220132014

BankBankBankDepartmentBankBankBank

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APPELLATE TRIBUNAL INLAND REVENUE (PAKISTAN)
SPECIAL BENCH, KARACHI

8
7
8
2
6
8
5

1503 / 2015
1506 / 2015
1273 / 2015
26 / 2016
1274 / 2015
1275 / 2015
1276 / 2015

2009
2010
2011
2012
2012
2013
2014

Bank
Bank
Bank
Department
Bank
Bank
Bank