APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I,
ISLAMABAD
ITA No.2582/IB/2022
(Tax Year 2018)
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Capital
Foods (Private) Limited, 15-E, Naseerabad, Peshawar Road, Rawalpindi. |
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Appellant |
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Vs |
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Commissioner
Inland Revenue, |
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Respondent
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Appellant
By: |
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Mr.
Anwar-ul-Haq, ACA |
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Respondent
By: |
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Ms.
Sobia Mazhar, DR |
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Date
of Hearing: |
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11.01.2023 |
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Date
of Order: |
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11.01.2023 |
ORDER
M.
M. AKRAM (Judicial Member): The titled appeal has
been filed by the appellant taxpayer against the impugned Appeal Order No. 464/2022
dated 25.11.2022 passed by the learned Commissioner Inland Revenue (Appeals-IV),
Islamabad for the tax year 2018 on the grounds as set forth
in the memo of appeal.
2. Brief facts giving rise to the instant
appeal are that the appellant is engaged in the business of manufacturing and
sale of bakery items. During the scrutiny of the return of income and audited
financial accounts for the tax year 2018 it transpired that the appellant has
claimed “sales tax consumed” as part of the cost of sales which was not
admissible under the law. Further, the taxpayer adjusted WWF against the refund
for the tax year under consideration whereas the same cannot be adjusted from an
income tax refund. On the aforesaid basis, the Additional Commissioner IR (Add
CIR) observed that the assessment deemed to be finalized under section
120(1)(b) of the Income Tax Ordinance, 2001 (‘the Ordinance”) was
erroneous in so far as prejudicial to the interests of revenue. Notice under
section 122(9) read with section 122(5A) of the Ordinance was issued on
02.04.2021 for compliance by 12.04.2021. In response to the notice, the
taxpayer applied for adjournment which was allowed till 28.04.2021. A reminder
was issued on 27.08.2021 for compliance by 01.09.2021. In response to the
notice, the taxpayer submitted an online reply which was found unsatisfactory
by the Add CIR. Proceedings were finalized whereby income was assessed at
Rs.26,477,405/- against declared at Rs.13,090,581/-. A tax liability of
Rs.1,032,395/- was created.
Being
aggrieved, the appellant taxpayer
filed an appeal before the learned Commissioner Inland
Revenue (Appeals), Islamabad
who vide appeal Order No. 464/2022 dated 25.11.2022 confirmed
the order passed by the Additional Commissioner Inland Revenue.
Aggrieved with this order, the taxpayer has preferred an appeal before this
forum and assailed the impugned orders
on a number of grounds.
3. This case came up for hearing on 11.01.2023.
The learned AR for the appellant contended that the appellant is involved in the
manufacturing and sales of food items and such items are partly taxable and
partly exempt from sales tax under section 13 of the Sales Tax Act, 1990. The
sales tax paid on purchases was partly adjusted against taxable goods and
partly claimed input tax non-attributable to taxable supplies to the tune of
Rs.13,601,488/- as cost of sales in the accounts to reach the realistic cost of
sales and actual gross profit of the taxpayer. Thus, it is an allowable business
expense under the law. He contended that the provision of section 21(a) of the
Ordinance does not apply in the instant case. He explained that according to
the said section, only the tax paid or payable on the profit or gain of the
business is an inadmissible deduction whereas the sales tax paid on purchases
is not a tax on profit and gain of the business and as such does not come
within the ambit of clause (a) of section 21 of the Ordinance. He, therefore,
pleaded that the disallowance of sales tax paid on purchases is unsustainable
in law. On the other hand, the learned DR appeared on the behalf of the
Department opposed the submissions of the appellant and contended that the
order passed by the learned CIR (A) is a speaking order and there is no infirmity
in the impugned order.
4. We have heard and perused the relevant
record as well keeping in view the facts of the case and the law relevant
thereto. The submissions made on behalf of the appellant have substance. The
only issue involved in the instant case is whether sales tax paid on purchases
is a deductible business expense if it is not passed on to the end consumer.
The assessing officer disallowed the expense under the garb of section 21(a) of
the Ordinance. To resolve the controversy, it would be advantageous for better
understanding to reproduce the relevant provision of section 21 of the
Ordinance: -
“Section 21. Deduction not allowed. – Except
as otherwise provided in this Ordinance, no deduction shall be allowed in
computing the income of a person under the head “Income from business” for-
(a) any
cess, rate or tax paid or payable by the person in Pakistan or a
foreign country that is levied on the profits or gains of the business
or assessed as a percentage or otherwise on the basis of such profits or gains;”
(Emphasis supplied)
It can be seen from a bare reading of the above provision
of law that only the tax paid or payable by a person that is levied on the
profits or gains of the business is not allowed to be deducted as a business
expense. The sales tax paid on purchases is not a tax paid or payable on
profits and gains rather it is a business expense before arriving at the
taxable profit, therefore, it does not come within the ambit of clause (a) of
section 21 reproduced above. Sales Tax and Excise Duty are deductible expenses
where that are to be absorbed by the business; otherwise, these are passed on
to the consumer. Now the sales tax is levied on sales or purchases of goods by
traders and not upon the profits and gains made by them from the business.
Sales tax is payable irrespective of any profit being earned and without such
payment, the business of buying and selling cannot be carried on. Hence, it is
exclusively for the purpose of business. It is, therefore, deductible as a
business expense under section 20 of the Ordinance before arriving at the
taxable profit. Reliance may be placed on S.R.V. G. Press Co Vs Commissioner
of Excess Profit Tax (CEPT), (1956) 30 ITR 583 and A.V.
Thomas & Co Ltd Vs CIT, (1986) 159 ITR 431. Thus, the appellant
had rightly claimed the sales tax as part of the cost of sales which was not
passed on to the end consumer. Therefore, the addition made to this account is
deleted and the orders passed by the lower authorities are annulled. As a
result, the appeal of the appellant is accepted.
Sd/-
(M. M. AKRAM)
JUDICIAL MEMBER
Sd/-
(MUHAMMAD IMTIAZ)
ACCOUNTANT
MEMBER
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