APPELLATE TRIBUNAL INLAND REVENUE, DIVISION
BENCH-I,
ISLAMABAD
MA(Stay) No.1045/IB/2023
(Tax Year, 2015)
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Sprint Oil and Gas Services FZC B-5, Sector
I-10/3, Islamabad. |
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Appellant |
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VS |
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Commissioner Inland Revenue LTO, Islamabad. |
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Respondent |
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Appellant
by: |
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Mr. Waheed Shehzad Butt, Advocate & Khurram
Shehzad, ITP |
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Respondent
by: |
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Mr. Khan Faisal, DR |
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Date of
hearing: |
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30.10.2023 |
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Date of
order: |
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21.11.2023 |
O R D E R
M. M. AKRAM (Judicial
Member): The titled appeal along with the application
of stay have been filed by the appellant taxpayer against the Order in Appeal
No.512/2023 dated 23.05.2023 passed by the learned Commissioner Inland Revenue
(Appeals-I), Islamabad for the tax year 2015 on the grounds as set forth in the
memo of appeal.
2. The brief facts culled out from the record
are that the taxpayer is a branch office engaged in the provision of oil field
services in Pakistan. Return of income for the tax year 2015 was filed which
constituted a deemed assessment order in terms of section 120 (1) of the Income
Tax Ordinance, 2001 (“the Ordinance”).
Subsequently, it was observed that such deemed assessment was erroneous as well
as prejudicial to the interest of revenue necessitating amendment under section
122(5A) of the ordinance. Resultantly, the deemed assessment was amended under
section 122(5A) of the Ordinance vide order dated 24.06.2021 resulting in a balance
refund to the tune of Rs.130,582,755/-. However, further examination revealed
that such an amended assessment was still erroneous as well as prejudicial to
the interest of revenue. In light of the above, a show-cause notice was issued
on 29.04.2022. In response, the appellant filed a reply/rebuttal dated
16.05.2022 wherein the legality of the proposed invocation of section 122(5A)
of the Ordinance was challenged on the basis of exhaustive arguments advanced
by the AR of the appellant which have been reproduced on pages 1 to 18 of the
impugned order. After due consideration of the same, a rebuttal/rejoinder was
issued to the appellant by the assessing officer vide correspondence dated
06.06.2022 where the legality of the proposed action under section 122(5A) of
the Ordinance was established in detail. In response, the AR of the appellant
furnished a reply/rebuttal dated 11.06.2022. After due consideration, the same
order under section 122(5A) of the Ordinance was passed on 24.06.2022 wherein
demand was raised to the tune of Rs.48,415,813/-. Felt aggrieved, the appellant
preferred an appeal before the learned CIR(A) who vide order
in appeal No.512/2023 dated 23.05.2023 modified the order passed by the Additional
Commissioner Inland Revenue. Still
feeling aggrieved by this order, the appellant has now come up before this
Tribunal and has assailed the impugned appellate order on a number of grounds.
3. This case came up for hearing on 30.10.2023.
3. The learned AR for the appellant relying upon the
recent judgment of the Hon’ble Supreme Court in the case of Ajmal Ali
Sheraz, M/s Sheraz Restaurant, Peshawar and another Vs CIR, Zone-1, RTO,
Peshawar bearing CA No.51 of 2020 dated 03.10.2020 read with review
petition filed in the said appeal reported in 2023 SCP 299 contended that the
original amended order passed under section 122(5A) is illegal and void
ab-initio as the order of delegation of powers to the assessing officer issued
by the concerned Commissioner IR under the provision of section 210 of the
Ordinance was neither notified in the official gazette nor available on the web
portal of the FBR. Further contended that the limitation provided in clause (b)
of sub-section (4) of section 122 of the Ordinance had become barred by time
after the expiry of 31.12.2020. In support, he placed reliance on PTCL 2022 CL
544, 2013 PLD 627, 2019 PTD 1619 and 2013 PTD 547. He explained that the
appellant follows a special tax year (commencing on 1st January 2014
and ending on 31st December 2014). Based on the audited accounts for
the income year ending on 31.12.2014 the appellant filed its return for the tax
year 2015 on 30.09.2015 and the first financial year of the appellant ends on
31.12.2015. Therefore, the limitation prescribed (five years) in section 122
for the amendment of deemed/amended assessment would start from 01.01.2015 and
end on 31.12.2020. In support, he read section 74(10) which provides that the
financial year shall include a special tax year or a transitional tax
year commencing during the financial year. Further reliance was placed on the
case titled Dowell Schlumberger (Western) S.A Vs Federation of
Pakistan etc bearing W.P No.1183 of 2018 vide order dated
14.03.2018. He also provided a chart of different
provisions of the Ordinance wherein the words “financial year” have been used
in a different context. He, therefore, concluded that the impugned amended
order dated 24.06.2022 is barred by time. Notwithstanding the aforesaid and in
addition thereto, the learned AR argued that in aggregate five-year period has
been provided for amendment of deemed/amended assessment from the end of the
financial year in which the deemed order was passed or amended order was issued
by the Commissioner. He then read out subsection (4) of section 122 ibid and
stressed that the words “within the later of” are used in the said subsection
which means that the limitation is five years only and not more than that. On
merits, the learned AR stated that both the authorities have erred in law in
disallowance of initial depreciation claimed by the appellant under section 23
of the Ordinance. He apprised that in the preceding tax years of the appellant,
this tribunal has accepted the plea of the appellant and allowed the initial
depreciation under section 23 vide ITA No.1082/IB/2019 and ITA No.1256/IB/2019
in respect of the tax year 2013. It has been stated that in terms of section
124A of the Ordinance, the lower authorities were bound to follow the law laid
down by this tribunal. As far as the allocation of head office expenses
incurred for the purposes of the business activities of the PE are concerned,
he contended that as per section 105(2) of the Ordinance, the appellant is
entitled to claim such expenses. He explained that it is for the appellant to
claim the benefit of the double taxation treaty or forgo the treaty and process
his case under domestic law. Reliance was placed on 2010 PTD 2012.
Department contentions
4. On the contrary, the learned DR contended that the present
action taken by the assessing officer is very much within the limitation period,
and therefore the stance of the learned AR for the appellant that the impugned
amended order dated 24.06.2022 is time-barred is misconceived and not
maintainable. He stated that as per the wordings of Section 122(4) of the
Ordinance the department has the authority to amend an assessment within a
period of five years plus one year, which is what exactly the department has
done and thus the action of the department was in accordance with law. He,
further stated that the issue confronted to the appellant was raised for the
first time and the legislature has given full powers to the department to amend
the assessments, within the limitation period, as many times as deemed
necessary and the impugned amended order has been issued within the limitation
provided under the law, therefore, the submission of the learned AR for the
appellant that it is barred by time is incorrect. On merit, he has supported the
order of the learned CIR(A) and submitted that the impugned order passed by the
learned CIR(A) is a speaking order and there is no infirmity in the impugned
order.
5. We have heard the
arguments advanced by the parties and perused the record available with us.
POINTS OF DETERMINATION
In order to examine the language of subsections (2) and (4) of
section 122 of the Ordinance and from the arguments advanced by the parties,
the following moot points have arisen:-
i. Whether
the recent judgment delivered by the Hon’ble Supreme Court in the case titled Ajmal
Ali Sheraz, M/s Sheraz Restaurant, Peshawar and another Vs CIR, Zone-1, RTO,
Peshawar bearing CA No.51 of 2020 dated 03.10.2020 read with review
petition filed by the department in the said appeal reported in 2023 SCP 299
would apply in pending cases with retrospective effect?
ii. Whether under the facts and in the circumstances of the case,
the period of limitation prescribed in subsections (2) and (4) of section 122
of the Ordinance would start separately in respect of the taxpayers having a
special tax year or normal tax year, as the case may be?
iii. Whether under the facts and in the circumstances of the case, the
impugned order passed by the assessing officer on 24.06.2022 is barred by limitation
as provided under subsection (4) of section 122 of the Ordinance?
iv. Whether the appellant was entitled to claim initial depreciation
allowance under section 23 of the Ordinance?
v. Whether the
department rightly disallowed the allocation of head
office expenses?
MOOT POINT NO.1
Whether the recent
judgment delivered by the Hon’ble Supreme Court in the case titled Ajmal
Ali Sheraz, M/s Sheraz Restaurant, Peshawar and another Vs CIR, Zone-1, RTO,
Peshawar bearing CA No.51 of 2020 dated 03.10.2020 read with review
petition filed by the department in the said appeal reported in 2023 SCP 299
would apply in pending cases with retrospective effect?
6. Learned AR has relied on the recent
judgment passed by the Hon’ble Supreme Court of Pakistan in the case of CIR, Zone 1, RTO, Peshawar v. Ajmal Ali
Shiraz, Civil Review Petition No. 426 of 2022, dated
27-09-2023 to contend that the delegation of power on the Officer was illegal
as the Jurisdiction Order has neither been published in the official gazette
nor on the website of FBR. This contention is without force because firstly,
the Supreme Court did not give any such direction. It was simply an expectation
on the part of the Supreme Court voiced in para 7 that this good practice would
be followed for future purposes without stating any penal consequence. Clearly,
the words direct and expect are neither interchangeable nor
cut from the same cloth. Secondly, the delegation was declared invalid by the Supreme
Court for the reason that there was no delegation of power by CIR to DCIR with
respect to the amendment of assessments under section 122 of the Ordinance,
which is not the case here. Even otherwise, the delegation order issued under
section 210 of the Ordinance predates the Supreme Court’s judgment. In the case
of PMDC
v. Muhammad Fahad Malik, (2018 SCMR 1956), it was held that
the judgment of the Supreme Court operated prospectively unless expressly
declared to be retrospective. There was no direction given by the Supreme Court
with retrospective effect. Merely, an expectation was communicated. Based on
this expectation, if order and proceedings are annulled, it will lead to
large-scale evasion of tax for instance, various cases will become time-barred
if show-cause notices are annulled on this score. Such a consequence is neither
stated nor intended in the judgment of the Supreme Court. It is a well-settled
principle of law that any interpretation that leads to large-scale evasion of
tax has to be avoided. Reliance is placed on the judgment titled DH
Travels v. Commissioner Enforcement, 2018 PTD 657 [Lahore].
Hence, this contention is without force and the ratio decidendi of the above case does not apply to the facts and
circumstances of this case.
MOOT POINT
NO.2
Whether
under the facts and in the circumstances of the case, the period of limitation
prescribed in subsections (2) and (4) of section 122 of the Ordinance would
start separately in respect of taxpayers having a special tax year or normal
tax year, as the case may be?
7. The learned AR for the appellant contended
that the taxpayer follows a special tax year commencing on 1st
January and ending on 31st December. The appellant filed its income
tax return for the tax year 2015 (income year started on 01.01.2014 and ending
on 31.12.2014) on the due date on 30.09.2015 which was treated to be an
assessment order under section 120(1)(b) of the Ordinance. However, later on, the
deemed assessment was first amended under section 122(5A) of the Ordinance on 24.06.2021
well within the prescribed limitation contemplated in subsection (2) of
section 122 of the Ordinance. Further examination of the assessment record
revealed that the aforesaid amended order was still erroneous in so far as
prejudicial to the interest of revenue and therefore, required further
amendment under section 122(5A) ibid. Accordingly, a show cause notice under
section 122(9) read with section 122(5A) of the Ordinance was issued on
29.04.2022 which culminated in the passing of the impugned amended order dated 24.06.2022.
According to the learned AR, the show cause notice and the amended order are
barred by limitation in as much as it has been issued after a lapse of five
years. It was contended that under subsection (2) and (4) of section 122 of the
Ordinance, the assessment order cannot be amended after the lapse of five
years. It was contended that the appellant follows a special tax year
therefore, the limitation for amendment of assessment would start from 01.01.2015
and end on 31.12.2020. Learned AR also contended that under
section 2(68) of the Ordinance, Tax Year means the tax year as defined in
subsection (1) of section 74 of the Ordinance and means in relation to a person
to include a Special Tax Year or transactional year that the person is
permitted to use under section 73 of the Ordinance. He also invited our
attention to subsection (10) of section 74 ibid and contended that under the
said subsection, reference to a financial year unless the context requires
otherwise, include a Special Tax Year or transactional year commencing during the
financial year. He, therefore, concluded that the impugned amended order dated
24.06.2022 had become barred by time after the expiry of 31.12.2020. In
support, he placed on record an un-reported judgment of the Hon’ble Islamabad
High Court titled Dowell Schlumberger (Western) S.A Vs Federation of
Pakistan, etc bearing W.P No.1183 of 2018 vide order dated
14.03.2018.
Due consideration has been given to the
arguments advanced by the learned AR for the appellant but with respect, we are
not impressed with the submissions of the appellant. To properly appreciate the
moot point, it would be expedient to reproduce hereunder the relevant
provisions of law:-
Section
2(68)
“tax year” means the tax year as defined in sub-section (1) of section
74 and, in relation to a person, includes a special year or a transitional year
that the person is permitted to use under section 74;
Section 74. Tax
year.— (1) For the purpose of this Ordinance and subject to this section,
the tax year shall be a period of twelve months ending on the 30th day of June
(hereinafter referred to as ‘normal tax year’) and shall, subject to subsection
(3), be denoted by the calendar year in which the said date falls.
(2)………………
………………..
(10) In
this Ordinance, a reference to a particular financial year shall, unless
the context otherwise requires, include a special tax year or a
transitional tax year commencing during the financial year.
………………….
Section
121.Best judgment assessment.— (1) Where a person fails to
(ab)………………….
(2)………….
(3) An assessment
order under this section shall only be issued within six years after the
end of the tax year or the income year to which it relates:
Provided that where
notice for furnishing a return of income under sub-section (4) of section 114
is issued in respect of one or more of the last ten completed tax years in
pursuance of proviso to sub-section (5) of section 114 an assessment order
under this section shall only be issued within two years from the end of
tax year in which such notice is issued.
Section 122. Amendment
of assessments.— (1) …………………..
(2) No order under
sub-section (1) shall be amended by the Commissioner after the expiry of five
years from the end of the financial year in which the Commissioner has
issued or treated to have issued the assessment order to the taxpayer.
(3)………………….
(4) Where an
assessment order (hereinafter referred to as the “original assessment”) has
been amended under sub-section (1), 3, or (5A), the Commissioner may further
amend, as many times as may be necessary, the original assessment within the
later of —
(a) five years
from the end of the financial year in which the Commissioner has issued
or is treated as having issued the original assessment order to
the taxpayer; or
(b) one year
from the end of the financial year in which the Commissioner has issued
or is treated as having issued the amended assessment order to
the taxpayer.
(5)…………………..
……………………..
The
expression “Financial Year” has not been defined in the Ordinance. However, as
per the scheme of the Ordinance the “Financial Year” means the year beginning on the 1st July and
ending on the 30th June next following (which is the financial year in
common parlance). A similar definition of the “Financial Year” has been given
in section 2(19) of the General Clauses Act, 1897. The language of sections
121(3) and 122(2) & (4) is clear and unambiguous. Both sections deal with
different periods of limitation for an ex-parte order and amendment(s) in
assessment orders. The only difference is that both sections have a different
reference/starting point for calculating the period of limitation. In
subsection (3) of section 121, the limitation for an ex-parte order begins from
the end of the tax year or the income year to which it relates, thus, the
starting point of the limitation is the end of the tax year or the income year
to which it relates. Hence, the limitation under the said section is dependent
on the tax year or income year. In subsections (2) and
(4) of section 122 ibid the period begins from the end of the financial year in
which the Commissioner has issued or has treated as having been issued the
original assessment order to the taxpayer while in sub-section (4)(b) the
period of one year begins from the end of the financial year in which the
Commissioner has issued or has treated as having been issued amended assessment
order. Thus, the starting point of the limitation in
the said provision is the end of the financial year in which the
return of income was filed by the taxpayer. Hence, the limitation is dependent on
the end of the financial year in which the return is filed irrespective
of the fact whether the taxpayer follows a special tax year or a normal tax
year. The Hon’ble Supreme Court in a case titled Additional
Commissioner Inland Revenue, Audit Range, Zone-I and others versus Messrs Eden
Builders Limited and others, (2018 SCMR 991), in respect of
amendment in section 122(2) of the Ordinance observed as under:-
"From
the ratio of the above judgment it can be seen that the law of limitation in so
far as it regulates the period in which one party can avail a remedy against
another is not to be lightly disturbed as the certainty created by limitation
is necessary for the success of trade and business, the more so when that
limitation governs tax matters. In the matters in hand, the respondents, at the
time of filing their tax returns were aware that these tax returns may be
amended in terms of section 122(5A) of the I.T.O. 2001 at any time up to five
years from the date of filing of the tax return itself. Thus, their planning in
terms of their possible amended and/or revised tax liability would extend for a
period of five years from the date of filing of their respective tax returns.
After the said five years were up, they could be sanguine that their tax return
was now final and they could no longer be burdened with an additional demand.
This means that a right related to the law of limitation came to vest in the respondents
on the date of filing of their respective returns in terms of the provisions of
the original section 122(2). However, the effect of the amendment brought
about through the Finance Act, 2009 was to change the original date of
commencement of limitation. Instead of limitation commencing on the date of
filing of the tax return, 30-12-2008 in the case of the appellant in C.A.
2148/2016, the limitation was now to commence on the last day of the financial
year in which the Commissioner has issued or treated to have issued the
assessment order to the taxpayer, which in this particular appeal ibid would
have been 1.7.2009. This means that the goalposts themselves were
changed by the amendment. It was not that the period of limitation was enhanced
to for example 6 years. On the contrary, post-amendment too. the limitation
period remained five years. Instead, the amendment to section 122(2) of the
I.T.O., 2001 changed the commencement date for when the limitation would begin
to run. And this was not permissible as certain rights had already come to vest
in the respondents on the date on which they had filed their tax returns under
the original section 122(2) ibid."
In
the instant case, the appellant filed an income tax return for the tax year
2015 (income year 01.01.2014 to 31.12.2014) on 30.09.2015 (during
financial year 01.07.2015 to 30.06.2016), which was treated to be an assessment
order in terms of section 120(1)(b) of the Ordinance. The above-deemed
assessment order could have been amended as per section 122(2) of the Ordinance
and its limitation commenced on 01-07-2016 and the said order could be amended
within five years up till 30.06.2021 instead of 31.12.2020 claimed by the
appellant. As stated above, the limitation under section 122(2) of the
Ordinance starts from the end of the financial year beginning on the 1st of July and ending on the 30th
of June next following (which is the financial year in common
parlance) in which the Commissioner has issued or treated to have issued
the assessment order to the taxpayer which means that the limitation starts
from the end of the financial year in which the return was filed. Thus, the
limitation is dependent on the filing of a return by the taxpayer irrespective
of the fact that the taxpayer follows a normal tax year or a special tax year. Therefore,
the contention of the learned AR that the appellant has a special tax year, the
limitation starts from 01.01.2015 and ends on 31.12.2020 is misconceived and
not tenable in the eye of law. How the limitation could have been started
without filing of income tax return? Under the provision of section 122(2) of
the Ordinance, the filing of a return of income is the mandatory requirement for
the purposes of limitation. The reliance of the learned AR on section 74(10) is
also misconceived. It is settled law that a definition in a statute is
declaratory though normally the definitions provided for in the definition
clauses are to be read into the provisions of the Ordinance while interpreting
the defined terms/words if the contents of the provisions of the Ordinance
indicate otherwise, the definition clause cannot override the main provision of
the statute. In the instant case, section 74(10) of the Ordinance makes it
explicit by providing that “unless the context otherwise requires,”. Reliance may be placed on the
judgment titled Syed Muhammad Haider Zaidi and others Vs Abdul Hafeez
and others, (1991 SCMR 1699).
For what has been discussed above, the limitation in the instant case would start from the end of
the financial year in which the Commissioner has issued or treated to have
issued the assessment order to the taxpayer, which in this particular appeal
ibid would have been started on 01.07.2016 and expired on 30.06.2021. Thus, the
limitations prescribed in subsections (2) and (4) of section 122 have no
concern with the tax year whether the taxpayer follows a special tax year or a
normal tax year.
MOOT POINT NO.3
Whether under
the facts and in the circumstances of the case, the impugned order passed by
the assessing officer on 24.06.2022 is barred by law as provided under
subsection (4) of section 122 of the Ordinance?
8. The
contention of the learned AR for the appellant is misconceived inasmuch as
Section 122(4) ibid provides for two different situations i.e. in respect of
amendment of an original assessment order, and further amendment
of an amended assessment order, with a further rider by using the
word "within the later of". The learned DR contended that the
Department has altogether a limitation of (6) six years in aggregate for making
amendments to the assessment order and further amendments as many times as may
be necessary, and the period of six years is to be counted from the end of the
financial year in which a return has been filed and in this case the return is
for the tax year 2015, therefore, the five year period would start from
01.07.2016 to 30.06.2021 and thereafter, from 01.07.2021 to 30.06.2022 and
therefore, the impugned amended order dated 24.06.2022 is well within the
period of limitation as provided in Section 122(4)(b) of the Ordinance. It is a
matter of admitted fact that the return of income for the tax year 2015 was
filed by the appellant on 30.09.2015 which is deemed to be an assessment order
by virtue of Section 120(1)(b) of the Ordinance. Thereafter, an amended
assessment order was passed on 24.06.2021 by exercising powers under Section
122(5A) of the Ordinance. Subsequently, on 29.04.2022 a show cause notice was
issued by exercising powers under Section 122(5A) and (9) of the Ordinance on
the ground that the said order i.e. the original assessment order, amended
thereafter, is also erroneous and prejudicial to the interest of revenue for
the reasons so stated in the show cause notice which are not relevant for the
present purposes. It is only the question of limitation of the impugned further
amended order which is under consideration. To have a better understanding of
the controversy at hand, the relevant provisions of section 122 are reproduced
above. In terms of Section 120 of the Ordinance, where a taxpayer has
furnished a complete return of income (other than a revised return under Section
114), the Commissioner shall be taken to have made an assessment of taxable
income for that tax year, and the return shall be taken for all purposes of
this Ordinance to be an assessment order issued to the taxpayer by the
Commissioner on the day the return was furnished. Similarly, the said
assessment order can be further amended in terms of Section 122 wherein,
various reasons and occasions have been provided for making amendments in the
original assessment order; however, for the present purposes, it is only
subsection (4) and subsection (5A) which needs consideration. The first
amendment in the assessment order was made in terms of subsection (5A) which
provides that subject to subsection (9), the Commissioner may, after making, or
causing to be made, such inquiries as he deems necessary, amend, or further
amend, an assessment order, if he considers that the assessment order is
erroneous insofar as it is prejudicial to the interest of revenue. Subsection (4) of
section 122 of the Ordinance provides that where an assessment order
(hereinafter referred to as the original assessment) has been amended under
subsection (1), (3), or (5A), the Commissioner may further amend as many times
as may be necessary, the original assessment within the later of five years
from the end of the financial year in which the Commissioner has issued or is
treated as having issued the original assessment order to the taxpayer; or one
year from the end of the financial year in which the Commissioner has issued or
is treated as having issued the amended assessment order to the taxpayer. Now
the precise issue as raised herein is to the effect of whether the amended
assessment order issued under Section 122(5A) ibid can further be amended after
a period of five years? The appellant’s case is that it cannot be done,
whereas, the Department's case is that since there are two periods of
limitations in subsection (4), therefore, the amended assessment order can
further be amended within a period of an aggregate of (6) six years. When the
relevant provision of subsection (4) is minutely examined, it appears that
though it may not have been worded properly; however, the intention of the
legislature is clear to the effect that firstly a deemed assessment order or an
original assessment order can be amended and once it has been amended it can
further be amended as many times as may be necessary within the later of the
two periods of limitations provided under subsections 4(a) and 4(b). This issue in somewhat
similar facts and circumstances came up before a learned Division Bench of the
Lahore High Court in the case reported as Commissioner Inland Revenue
v. Ch. Muhammad Akram (2013 PTD 1578) and also reported as (PLD
2013 Lahore 627) wherein, in a Tax Reference the following two questions were
raised on behalf of the Applicant which reads as under:-
"1) Whether on the facts and circumstances of
the case, the Tribunal was justified to annul the order passed under section
122(4) of the Income Tax Ordinance, 2001 by misconstruing the provisions of
subsection (4) of section 122 of the said Ordinance?
2) Whether on the facts and circumstances of
the case, the Tribunal was justified to ignore the phrase "within the
later of" for calculation of the time limit for amendment of assessment as
provided under subsection (4) of section 122 of the Income Tax Ordinance,
2001?"
9. In that case the original assessment order
of the taxpayer was made on 29.02.2007 and on filing of the return under
Section 120 of the Ordinance, 2001, it was deemed to be an assessment order.
Subsequently, the taxpayer filed a revised return under Section 114 (which is
also deemed and treated as an amended assessment order under Section 122(3)(a) )
ibid, and the original assessment order stood amended on 26.04.2008 in terms of
Section 122(3) of the Ordinance, 2001. Thereafter, the assessment order was
further amended on 12.01.2010 and in an Appeal before the Appellate Tribunal,
it was held that the further amendment was time-barred in terms of Section
122(4)(b) of the Ordinance, 2001 against which the Reference was filed before
the Lahore High Court. The Hon’ble Division Bench of the Lahore High Court
speaking through Syed Mansoor Ali Shah, J as his lordship then was, has been
pleased to interpret the word, "later of" in the following manner:-
"7. It has been argued by the learned
counsel for the respondent assessee that the timelines given in section 122(4)
(a) and (b) are distinct and separate and apply to two different sets of
situations i.e., amendment of the original assessment order, and amendment of
an amended assessment order. The argument of the learned counsel for the
respondent assessee is misconceived and is a result of a misreading of the
legal provision. The language of section 122(4)(a) and (b) is clear and
unambiguous. Both timelines deal with different periods of limitation for
amendment(s) in assessment orders. The only difference is that both timelines
have a different reference/starting point for calculating the period of
limitation. In subsection (a) the period begins from the end of the financial
year in which the Commissioner has issued or has treated as having been issued
the original assessment order to the taxpayer while in sub-section (b) the
period of one year begins from the end of the financial year in which the
Commissioner has issued or has treated as having been issued amended assessment
order. Subsection (a) does not imply that only the original assessment order
can be amended for the first time within a period of five years. In fact, on
the contrary, it refers to the "original assessment order" as a
reference point for the commencement of the period of limitation. Therefore, an
original assessment order can be amended any number of times within a period of
five years from the end of the financial year in which the Commissioner has
issued or treated as having issued the original assessment order. Similarly, in
subsection (b) the start of the timeline of one year is from the end of the
financial year in which the Commissioner has issued or is treated as having
issued the amended assessment order. Theoretically, it is also possible that
the two timeframes overlap for a certain period of time depending on the facts
and circumstances of each case. The petitioner department has the option to
invoke the available timeline, hence the term "later of" in
subsection (4) of section 122. The importance of the term "later
of" needs to be underlined. This term indicates that both the timelines
under subsections (a) and (b) are available to the petitioner department and
the department has the option to place reliance on the timeline which expires
later in time.
8. In the present set of circumstances, the
original assessment order is dated 29-02-2007, therefore, the period of 5 years
under section 122(4)(a) expires on 29.02.2012. Therefore, the amendment brought
about on 12-01-2010 comfortably falls within the above timeline. In this case,
the timeline provided in section 122(4)(b) is not available to the petitioner
department as more than one year has lapsed between the last amended assessment
order (i.e., 26-04-2008) and the last assessment order (i.e., 12-01-2010)."
10. The above observations clearly spell out the
intention of the legislature as contemplated in Section 122(4) ibid, and the
two different limitation periods provided therein, and we are fully in
agreement with such observation of the Hon’ble Lahore High Court. In the
instant case, the deemed assessment order was first amended on 24.06.2021
within the period of five years contemplated in subsection (2) of section 122
ibid. The said amended order was further amended on 24.06.2022 keeping in view
clause (b) of subsection (4) of section 122. Therefore, in this case, the
timeline provided in section 122(4)(b) is available to the department as one
year has not lapsed from the last amended original assessment order dated
24.06.2021. Thus, the impugned amended order was passed well within the time. Section
122(4) (a) and (b) are distinct and separate and apply to two different sets of
situations i.e., amendment of the original assessment order and
amendment of an amended assessment order. The argument of the
learned counsel for the appellant taxpayer is misconceived and is a result of a
misreading of the legal provision. The language of section 122(4)(a) and (b) is
clear and unambiguous. Both timelines deal with different periods of limitation
for amendment(s) in assessment orders. The only difference is that both
timelines have a different reference/starting point for calculating the period
of limitation. In subsection (a) the period begins from the end of the
financial year in which the Commissioner has issued or has treated as having
been issued the original assessment order to the taxpayer while
in sub-section (b) the period of one year begins from the end of the financial
year in which the Commissioner has issued or has treated as having been issued amended
assessment order. The
importance of the term "later of" needs to be underlined. This term
indicates that both the timelines under subsections (a) and (b) are available
to the revenue department and the department has the option to place reliance
on the timeline which expires later in time. Therefore, if the interpretation
as advanced on behalf of the appellant is accepted as correct, then clause (b)
of subsection (4) of section 122 would be redundant. It is settled that while
interpreting the law, a specific provision of any statute, which is independent
in nature, cannot and should not ordinarily be held to be redundant, especially
on the touchstone of another independent provision of the same statute; rather
all possible efforts should be made to apply and adhere to the rules of
purposive and harmonious construction so that the allegedly conflicting
provisions should be reconciled and saved. It is also settled law that the statute
was the edict of the legislature and the language employed in the statute was
determinative of the legislative intent, whereas, redundancy could not be
attributed to statutory provisions or part thereof. Reliance may be placed on
the judgment titled Pakistan Television Corporation Ltd. v.
Commissioner of Inland Revenue, Legal, (PLD 2017 SC 718). Every
word used by the legislature must be given its true meaning and provisions
contained together in a harmonious manner. It is not legal to apply one
provision of law in isolation from the other provision as no surplusages or
redundancy can be attributed to the legislative organ of the state. Reliance is
placed on Collector of Sales and Central Excise (Enforcement) v. Mega
Tech (Pvt.) Limited, (2005 SCMR 1166). Thus, the answer to the
above question is in the negative against the appellant taxpayer.
ON MERIT
MOOT POINT NO.4
Whether
the appellant was entitled to claim an initial depreciation allowance under
section 23 of the Ordinance?
11. The appellant claimed
the initial allowance on account of the addition in plant and machinery,
building and computer, hardware, etc. The department disallowed the same on the
ground that the appellant was involved in providing oil field services in
Pakistan. Initial allowance under section 23 of the Ordinance is allowed only
to manufacturers. The learned AR for the appellant apprised that in the preceding tax years of the appellant, this tribunal has
accepted the plea of the appellant and allowed the initial depreciation under
section 23 vide ITA No.1082/IB/2019 and ITA No.1256/IB/2019 in respect of the
tax year 2013. He, therefore, contended that in terms of section 124A of the
Ordinance, the department was obliged to follow the law laid down by this tribunal
on the issue unless it is not reversed by the higher courts.
The
controversy between the parties is in the interpretation of section 23 of the
Ordinance which provides for the deduction of
depreciation as an initial allowance to the eligible depreciable assets of the
person placed into service in Pakistan for the "first time in a tax
year" in accordance with the rate specified in Part II of the 3rd Schedule
to the Ordinance, against the cost of the assets. The stance of the department
is that the allowability of initial allowance is restricted only to persons
involved in manufacturing/commercial production. For proper appreciation of the
stance of the parties, the provision of section 23 is reproduced below
for ease of reference:-
23. Initial allowance: - (1) A person
who places an eligible depreciable asset into service in Pakistan for the
first time in a tax year shall be allowed a deduction (hereinafter
referred to as an "initial allowance") computed in accordance with
sub-section (2), provided the asset is used by the person for the
purposes of his business for the first time or the tax year in
which commercial production is commenced, whichever is later.
(2) The amount of the initial allowance of a person shall be
computed by applying the rate specified in Part II of the Third Schedule
against the cost of the asset.
(3) The rules in section 76 shall apply in determining the cost of
an eligible depreciable asset for the purposes of this section.
(4) A deduction allowed under this section to a leasing company or
an investment bank or a modaraba or a scheduled bank or a development finance
institution in respect of assets owned by the leasing company or the investment
bank or the modaraba or the scheduled bank or the development finance
institution and leased to another person shall be deducted only against the
leased rental income derived in respect of such assets.
(5) In this section, "eligible depreciable asset"
means a depreciable asset other than –
(a) any road transport vehicle unless the vehicle is plying for
hire:
(b) any furniture, including fittings;
(c) any plant or machinery that has been used previously in
Pakistan; or
(d) any plant or machinery in relation to which a deduction has been
allowed under another section of this Ordinance for the entire cost of the
asset in the tax year in which the asset is acquired.
(e) immovable property or structural improvement to the immovable
property."
12. It is settled that depreciation
is always an allowable deduction while computing taxable income under the head
of income from a business or profession under the tax laws enacted in the
country from time to time. It was allowed u/s 10(2)(vi) under the Income Tax
Act, 1922; under section 23(1)(v) of the Income Tax Ordinance, 1979, and now
under sections 22 and 23 of the Income Tax Ordinance, 2001, under the heading
"Deduction: Special Provisions". A bare perusal of the aforesaid
provisions of law relating to depreciation deduction shows that it is a
non-cash, expenditure allowable in a tax year for a depreciable asset used for
deriving income from business chargeable to tax. It is thus, a mandatory
statutory deduction to be claimed by the taxpayer. The depreciable asset has
been mentioned in 22(15) of the Ordinance, and the following are the assets on
which the depreciation under section 22 of the Ordinance, is allowed under the
3rd Schedule of the Ordinance, at the prescribed rates:-
I.
Building (all types)
II. Furniture (including
fittings) and machinery and plant (not otherwise specified), motor vehicles
(all types), ships, technical or professional books.
III. Computer hardware
including printer, monitor and allied items, machinery and equipment used in
the manufacture of I.T. products, aircraft, and aero engines.
IV. In the case of
mineral oil concerts, the income of which is liable to be computed in
accordance with the rules in Part-I of the Fifth Schedule.
V. A ramp built to provide access to persons with disabilities not exceeding Rs.250,000 each.
In addition to the normal
depreciation allowable u/s 22 of the Ordinance, the deduction of depreciation
as initial allowance u/s 23 of the Ordinance subject to certain limitations and
restrictions, has also been made admissible to the taxpayer on the addition of
assets in the fixed business assets during the tax year.
13. In the instant case,
undisputedly, the plant and machinery, building, and computer
hardware/equipment were purchased during the tax year under consideration and
used for the first time for his business by the appellant. The Assessing
Officer while passing the order under section 122(5A) of the Ordinance has
disallowed the claim of initial depreciation emphasizing that initial allowance
is available only to the manufacturer and not to the service provider. The
learned Commissioner Appeals has affirmed the interpretation applied by the
Assessing Officer. According to the principles of interpretation of statutes,
the provision should not be interpreted in isolation rather the complete
provision should be read to understand the intent of the legislature for a
particular purpose. The legislature has used the words "placed into
service" with the words "for the first time" for the purposes of
allowance of initial depreciation u/s 23 of the Ordinance. To arrive at the
correct interpretation and for understanding the purpose of this allowance the
entire sub-section (1) is to be read in conjunction. Sub-section (1) starts as
"A person who places an eligible depreciable asset into Pakistan for the
first time". Thus, the words "places" & "into
service" are also of significance and are to be read with the words
"for the first time" and thus when read in conjunction, "the
eligible depreciable asset placed into service for the first time" would
mean "the point in time when the asset is put to use for the first
time". The words placed-in-service, therefore, in the context of this
provision have been used to determine the starting point of depreciation i.e.
date of purchase of the asset and its use for the purposes of business for the
first time by the taxpayer. To elaborate further, let’s break down the key
component of the provision of subsection (1) of section 23 ibid:
i. “Used for the purposes of his business
for the first time”: This part suggests that the asset (e.g., machinery,
equipment, etc) is considered for tax purposes when it is first put into use in
the course of business operations. The term “business” is
defined in subsection (10) of section 2 of the Ordinance which says that “business
includes any trade, commerce, manufacture, profession, vocation or adventure or
concern in the nature of trade, commerce, manufacture, profession or vocation,
but does not include employment.” In the said definition the word “includes”
has been used which bears both its extended statutory meaning and its ordinary,
popular and natural sense, whenever that would be properly applicable.
Therefore, it is clear that the term “business” generally entails an economic
activity conducted commercially for profit and is not limited to manufacturing
and production.
ii. “The tax year in
which commercial production is commenced”
This indicates that if the asset is used for the first time in the
process of commercial production, the tax implication (deduction of initial
allowance) will be based on the tax year in which that production begins.
iii. “whichever is later”
This phrase clarifies that the relevant time point for the deduction
of the initial allowance is the later of the two events mentioned above. In
other words, if the asset is first used for business purposes in a tax year,
that tax year will be the starting point for accounting purposes. However, if
the asset is first used in the tax year when commercial production starts, then
that later time point will be considered.
It can be seen that the provision of section 23(1) is used to determine when an asset becomes eligible for deduction of initial allowance. It establishes the starting point for calculating the initial allowance with the use of the asset in business activities as defined in section 2(10) of the Ordinance. The intention of the legislature is to ensure that businesses can account for the tax impact of their investments in assets when those assets are actively contributing to the operation of the business or production. The initial allowance is an incentive to encourage the taxpayer but if the interpretation of the department is applied for section 23 of the Ordinance, it would deprive the investors from the incentive of initial allowance on investment in the IT assets for the purposes of a business in Pakistan and use it for the first time after it is purchased. Moreover, section 23(5) of the Ordinance, provides only the assets for exclusion from the definition of the term "eligible depreciable assets". Thus, the computer hardware/allied items are included in the definition of the term "eligible depreciable assets" and, therefore, the appellant is entitled to claim an initial allowance under section 23 of the Ordinance. In accordance with the principles of interpretation of fiscal statutes, as has been established by the Hon'ble Supreme Court of Pakistan as well as the Hon'ble High Courts, we are of the view that plain language of section 23 of the Ordinance, when read in its entirety and in conjunction with the words/phrases used therein, the provision, of section 23 does not exclude from its preview, the plant & machinery, computer hardware/equipment if purchased by the person in a tax year in Pakistan for business purposes and place into service for the first time in a tax year. It is also well settled that if the provision is capable of two or more interpretations, the one which favours the taxpayer would be adopted.
14. In
continuation to the foregoing, the initial allowance claim for computers and
computer hardware is justified and in accordance with the intent of the
legislature. In this respect, reference may be given to Circular No. 01 of 2006
dated July 1, 2006, issued by the FBR wherein it has categorically separated
computer hardware from plant and machinery for charging of depreciation
allowance only. Following is the extract from the aforesaid circular dated July
1, 2006;
“Depreciation
allowance @ 10% is admissible in the case of machinery and plant in addition to
initial allowance of 50% across the board. However, computer hardware including
printers, monitors and allied items are allowed normal depreciation @ 30%. This
concession is due to the fast obsolescence of I.T. items. The machinery
producing IT products is also depreciated or becomes obsolete fastly as
compared to other machinery. Therefore, to encourage this sector depreciation
allowance @ 30% will be admissible to machinery and equipment used in the manufacture
of IT products.”
In
view of the above, it can be seen that computers and allied equipment are
nothing but a sub-category of plant and machinery.
15. Further under section 124A of the Ordinance,
it is mandatory on the part of the concerned Commissioner Inland Revenue to
follow the question of law decided by a High Court or the Appellate Tribunal
notwithstanding the fact that he has preferred an appeal against the decision
of the High Court or made an application for reference against the order of the
Appellate Tribunal, as the case may be, unless and until the decision is not
reversed or modified by the higher authorities. It is a well-established
principle of law that if the statute authorizes a person for exercise of
discretion to advance the cause of justice, the power is not merely optional
but it is the duty of such person to act in the manner it is intended. Reliance
is placed on the judgment of the Hon’ble Supreme Court of Pakistan titled Abu Bakar
Siddique and others Vs Collector of customs, Lahore and others,
2004 PTD 2187. The word “may” used in section 124A of the Ordinance
is to be construed as mandatory in view of the dictum laid down by the Hon’ble
Supreme Court in the aforereferred judgment. Section 24A of the General Clauses
Act also requires that power under section 124A of the Ordinance shall be
exercised for the advancement of the purpose of the enactment that is to avoid multiplication
of litigation on the same question of law. In the instant case admittedly, a
similar issue has already been decided by this Tribunal therefore, the
assessing authority had to follow the judgment of this tribunal in terms of
section 124A of the Ordinance which he did not comply with. Resultantly, both
authorities below have erred in law in disallowing the initial allowance under
section 23 of the Ordinance. Therefore, the answer to the above question is in
the affirmative in favour of the appellant taxpayer.
MOOT POINT NO.5
Whether the department rightly disallowed the allocation of head office expenses?
16. It has been alleged in the impugned order
that the appellant has been claiming head office expenses on a proportionate
basis without regard to incurring of actual expenditure in respect of Pakistan
PE and without any proof/evidence as regards the nature of head office expenses
claimed to the tune of Rs.302,040,220/-. As per subsection (3) of section 105,
only executive or general expenditure incurred outside Pakistan for the Pakistan
branch is to be allowed. Further, section 105(2) of the Ordinance restricts the
head office expenditure attributable to Pakistan PE by the same ratio as the turnover
of Pakistan PE to worldwide turnover. It has been stated on behalf of the
appellant that head office expenses were claimed by a branch in due compliance
with the provisions of section 105(2) of the Ordinance. It was explained that
worldwide common head office expenditures were apportioned on the basis of
respective turnovers of different branches, a mechanism provided for in section
105 of the Ordinance. Besides,
it was contended that such an amount was certified by statutory auditors of the
head office to have been worked out on the basis of a proportionate formula
based on respective turnovers of different branches. In this respect, the
learned AR for the appellant has placed on record the following calculation
with supporting evidence such as a certificate showing the total world
turnover, total head office expenses and the ratio thereof, certificate of
expenditure issued by the auditor:
|
Head |
UAE-AED |
Conversion Rate |
USD |
|
Salaries and Benefits |
4,293,479.92 |
3.675 |
$
3,889,382.29 |
|
Rent and Depreciation |
106,824.25 |
3.675 |
$
29,067.82 |
|
Training and Development |
245,021.00 |
3.675 |
$
66,672.38 |
|
Traveling and Vehicle Running |
117,973.04 |
3.675 |
$
32,101.51 |
|
Utilities and Communication |
105,369.27 |
3.675 |
$
28,671.91 |
|
Printing, Stationery and Office
Supplies |
33,341.50 |
3.675 |
$
9,072.52 |
|
Legal and Professional Services |
184,820.35 |
3.675 |
$
50,291.25 |
|
Business Promotions |
32,532.00 |
3.675 |
$
8,852.24 |
|
Miscellaneous Expenses |
80,108.11 |
3.675 |
$
21,798.13 |
|
|
5,199,469.44 |
|
$
4,135,910.05 |
|
|
|
|
|
|
World Turnover |
A |
US$ |
$ 29,781,499.00 |
|
|
|
|
|
|
HEAD OFFICE COMMON EXPENSES |
B |
US$ |
$
4,135,910.00 |
|
|
|
|
|
|
Ratio |
C= B / A x 100 |
|
13.89% |
|
|
|
|
|
|
Pakistan Turnover |
D |
PKR |
2,174,515,626 |
|
[As per Note 17 of the Accounts] |
|
|
|
|
|
|
|
|
|
Expenses Claimed in Pakistan Branch |
E = D x C |
PKR |
302,040,220 |
|
[As per Note 20 of the Accounts] |
|
|
|
In order to analyse the matter on hand, it would be quite relevant and pertinent to quote the provision of sub-section (3) of section 105 of the Ordinance, which is as under.
“105. Taxation of permanent
establishment in Pakistan of a non-resident person.
…………………..
(3) In this section, “head office
expenditure” means any executive or general administration expenditure incurred
by the non-resident person outside Pakistan for the purposes of the business of
the Pakistan permanent establishment of the person, including
(a)
any rent,
local rates and taxes excluding any foreign income tax, current repairs, or
insurance against risks of damage or destruction outside Pakistan,
(b) any salary paid to an employee employed by the head office outside Pakistan:
(c) any traveling expenditures of such employee, and
[
(d) any other expenditures which may be prescribed.”
It is quite clear from the above that only "executive" or "general administration expenditure can be allowed as head office expenditure which includes salaries, rent, local rates, taxes other than foreign income tax, repair expenses, insurance against damages, traveling expenses etc. The detail of expenses provided by the taxpayer shows that the said expenditures can be considered as "executive" and "general administration expenses. Thus, it is proved beyond any doubt that the above-referred head office expenditures claimed by the taxpayer are strictly as per the provisions of section 105(2) read with section 105(3) of the Ordinance. Accordingly, the same is allowed in terms of section 105 of the Ordinance. As a result, the appeal of the appellant is accepted on this issue.
17. For what has been discussed above, the appeal of the appellant is disposed of in the manner stated above. The stay application is also disposed of accordingly.
18. This order consists of
(28) pages and each page bears my signature.
|
|
Sd/- (M. M. AKRAM) JUDICIAL MEMBER |
|
Sd/- (IMRAN
LATIF MINHAS) ACCOUNTANT MEMBER |
|
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