APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I,
ISLAMABAD
ITA No.307/IB/2024
(Tax Year, 2018)
(Tax Year, 2019)
(Tax Year, 2021)
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M/s
Utility Stores Corporation of Pakistan Limited, Plot 2039, Utility Stores
Corporation Building, F-7, 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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Malik
Muhammad Sarwar, Advocate |
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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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21.05.2024 |
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Date
of Order: |
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21.05.2024 |
ORDER
M. M. AKRAM (Judicial Member): The appellant taxpayer has filed the
titled appeals against the impugned appellate orders, all dated February 19,
2024, issued by the learned Commissioner of Inland Revenue (Appeals-V),
Islamabad, for the tax years 2018, 2019, and 2021 on the grounds as set forth
in the memo of appeals. Since the facts and issues involved in all these
appeals are identical, therefore, these are being decided through this common
order.
2. Brief facts leading to these appeals are
that the appellant, a Government-controlled juridical entity incorporated under
the repealed Companies Ordinance, 1984, filed returns of income for the tax
years 2018, 2019, and 2021 by declaring taxable income of Rs.4,448,745/-,
Rs.2,818,052/- and Rs.440,744/- for the tax years 2018, 2019 and 2021,
respectively. The returns so filed by the appellant were treated to be assessment
orders under section 120(1)(b) of the Income Tax Ordinance, 2001 ("the
Ordinance"). Upon examining these deemed orders, it was found that the
appellant did not offer for tax the subsidy received from the Federal
Government, which was presumed to be exempt under Clause (102A) of Part 1 of
the Second Schedule to the Ordinance, for the tax years in question.
Consequently, show cause notices were issued under section 122(9) read with
section 122(5A) of the Ordinance, inter alia challenging the appellant's
claim of exemption for the subsidy. The notice asserted that there was no
evidence to satisfy the two requirements of Clause (102A): that the amount was
received as a subsidy from the Government of Pakistan and that it was granted
for implementing orders of the Federal Government. It was argued that the
subsidy was not directly given to the appellant but that the Utility Stores
acted as a conduit to distribute the subsidy to the end users. Therefore, the
subsidy should be added to the taxable revenue. The appellant responded to the
show cause notices, but the Assessing Officer rejected their reply. After
thorough deliberation, the Assessing Officer concluded that the subsidy received
from the Federal Government should be included in taxable income and accordingly
added the subsidy amount in the declared turnovers for all the tax years for
the purpose of charging the minimum tax under section 113 of the Ordinance.
Aggrieved with the impugned amended assessment orders, the appellant preferred
the appeals before the Commissioner Inland Revenue (Appeals) [CIR(A)],
who modified the amended assessment orders but upheld the Assessing Officer's
treatment on account of the subsidy. Still dissatisfied, the appellant has now
brought the case before this forum, contesting the impugned orders on several
grounds.
3. The case was heard on May 21, 2024. In all
these appeals, the appellant's Authorized Representative (AR) focused his
arguments on the subsidy provided by the Federal Government, which the
Assessing Officer had subsequently added to the total turnovers declared by the
appellant in its income tax returns, thereby applying the minimum tax under
section 113 of the Ordinance. The AR contended that the subsidy received from
the Federal Government is exempt under Clause (102A) of Part-1 of the Second
Schedule to the Ordinance. He also referred to the definition of income as per
section 2(29) of the Ordinance. Additionally, the AR cited a judgment by the
Honourable Supreme Court in an appeal filed by the Department against the
judgment bearing I.T.R. No. 18 of 2013 from the Honourable Islamabad High
Court, in the appellant's own case. The Honourable Supreme Court confirmed the
Islamabad High Court's decision, ruling that the subsidy from the Government of
Pakistan does not fall within the definition of income and is not subject to
tax. The Supreme Court further clarified that even in the absence of Clause
(102A), tax liability does not automatically arise. He, therefore, requested
that the appeal on this issue be accepted.
4. In
contrast, the learned Departmental Representative (DR) strongly argued that the
specific issue of whether the subsidy granted by the Federal Government can be
added in the turnover for the purpose of charging minimum tax under section 113
of the Ordinance has already been decided in favor of the respondent department
by various High Courts of Pakistan. Reliance is placed on the judgments titled M/s.
Cotton Export Corporation of Pakistan (Pvt.) Ltd., Karachi. Vs. the
Commissioner of Income Tax, Companies-III, Karachi, bearing inter alia Income Tax Case No.10 to 89
which was decided on 28.09.2023, CIR
v. M/s QESCO (2022 PTD 1844) and Commissioner Inland Revenue vs M/s Gujranwala Electric Power
Co. (GEPCO), (2024 PTD 440). She, therefore,
argued that, in light of the aforementioned judgments, the appellant's appeals
must be dismissed.
5. We have heard the parties and perused the
record. Before delving into the issues raised in these appeals, it is pertinent
to outline the history, purpose, and objectives of the appellant company.
Utility Stores Corporation, a state-owned enterprise established in 1971, aims
to provide basic food items at prices lower than the prevailing market rates to
the underprivileged people of Pakistan. The organization operates under the
Ministry of Industries & Production. To achieve its goal, the Federal
Government periodically announces subsidies for specified food items. These
grants/subsidies are intended solely to benefit the underprivileged population,
and the advantages are passed on to them. The Federal Board of Revenue (FBR)
has periodically included these subsidies as part of the organization's income.
However, this issue has been consistently resolved in favor of the taxpayer
organization across various forums, including the Commissioner (Appeals),
Appellate Tribunal, High Court, and Supreme Court. It is important to note that
the subsidy received by the taxpayer company directly affects purchases by
reducing costs, thereby enabling the company to sell items at lower prices.
Despite this, for the tax years 2018, 2019, and 2021, the department has
imposed turnover tax under section 113 of the Ordinance by including the amount
of the subsidy in the company's "Turnover."
Initially,
in the tax year 2006, the Revenue Department asserted that the subsidy/grant
provided by the Federal Government constituted part of the appellant's income
and was therefore taxable. Consequently, proceedings were initiated under
section 122(5A) of the Ordinance for the tax year 2006. These proceedings
concluded with the Assessing Officer determining that the subsidy was part of
the taxable income and should be included in the declared taxable income for
that year. This issue ultimately reached the Supreme Court of Pakistan in the
appellant’s own case titled Commissioner Inland Revenue, Islamabad vs.
M/s Utility Store Corporation of Pakistan, bearing Civil Appeal
No.169 of 2017. In an order dated October 3, 2022, the Supreme Court
unequivocally held that the grant/subsidy from the Government of Pakistan, in
the case of the appellant, does not fall within the definition of income and
cannot be subjected to tax. The relevant extracts of the judgment are
reproduced below:
“This
appeal assails the order of the learned judges of the High Court passed in ITR
No.18/13, wherein they had upheld the judgment of the appellate Tribunal Inland
Revenue (“the tribunal”)/. The Tribunal and the High Court had held that
the grant given by the Federal Government to the respondent could not be
treated as income for the purpose of the Income Tax Ordinance, 2001
(“the Ordinance”)………………….
6. As regards the
contention of the learned counsel for the appellant about the date of the
applicability of clause (102A) inserted in the Second Schedule of the
Ordinance, which was in the year 2006, and that it would apply prospectively,
agreeing therewith would still not entail the taxable liability of the
respondent with reference to earlier periods. The said insertion in the Second
Schedule which pertains to exemptions and tax concessions issues pursuant to
section 53 of the Ordinance and merely because an exemption or tax concession
was not specifically mentioned therein would not automatically create the
respondent's tax liability under the Ordinance. The Commissioner Inland Revenue
has to rely upon the charging section of the Ordinance which creates the
liability. The insertion of the said clause (102A) reveals the intent of the
Legislature, which was to forestall needless issuance of notices, as was done
in the instant case. We are not inclined to take a view different from
the one concurrently taken by the Tribunal and the High Court. Therefore, this
appeal is dismissed.” (Emphasis supplied)
6. In
light of the aforementioned judgment by the Hon’ble Supreme Court of Pakistan,
the parties agree that grants or subsidies received from the Federal Government
do not fall under the definition of "income" as itemised in section 2(29)
of the Ordinance. The learned CIR(A), in issuing the impugned orders for the
relevant tax years, explicitly stated:
“I
have accorded due consideration to the matter at hand. Being a subordinate appellate
forum, I am constrained to follow the ratio decidendi settled in the Civil
Appeal No.169 of 2017 of the Hon’ble Supreme Court in the case of the appellant
itself wherein it has been held unequivocally that grant/subsidy from the Government
of Pakistan in case of the appellant does not fall within the definition of
income and cannot be subjected to tax. Accordingly, the stance of the appellant
is accepted on this count.”
However,
the department's stance conversely is that the term "turnover" is
defined in section 113(3) of the Ordinance to include any amount exempt from
tax within the gross receipt for calculating turnover tax. It is clarified that
certain incomes, although exempt from tax under Part-I of the Second Schedule,
are not exempt from turnover incidence as per Part-IV of the same Schedule. For
example, Clause (11A) of Part-IV of the Second Schedule specifies incomes that
are excluded from the scope of section 113 of the Ordinance. However, subsidies
in general and M/s Utility Stores Corporation, in particular, are not listed
therein. Thus, according to the department, the legislature's intent is clear:
subsidies should be included in the turnover tax, even if they are not
considered part of the taxpayer's income, as upheld by the Hon’ble Supreme
Court in the appellant’s own case mentioned above. The Hon’ble Lahore High
Court, in resolving a similar issue in the case of Commissioner Inland
Revenue vs M/s Gujranwala Electric Power Co. (GEPCO), (2024 PTD
440), delivered a judgment after a thorough discussion on the matter. The
court, taking into account the judgments of both the Sindh High Court and the
Balochistan High Court, held that:
“16. In conclusion, it is held that the
amount recovered from consumers as well as the subsidy amount constitute
revenue receipts cumulatively liable to tax and comprised in the definition of
‘turnover’ in section 113 of the Ordinance. The questions of law are answered
in favour of the department and against the taxpayers (applicants in some
reference applications).
7. Giving this
backdrop, the following question
arises for determination by this Tribunal:
Can any receipt that does not fall within the definition of
"Income" as specified in section 2(29) of the Ordinance be taxed
under any other provisions of the Ordinance?
The scheme of the Income Tax
Ordinance, 2001 is that certain receipts are not to be taken as income at all
while, in respect of certain receipts, there is an exemption from tax on
fulfilling certain conditions and, in respect of certain other incomes, certain
concessions or deductions are given. There is a basic dichotomy between
receipts which are not taxable at all and receipts which are taxable but
subject to exemption on fulfilling certain conditions. All receipts by a
taxpayer cannot necessarily be deemed to be its income for the purpose of
income tax and the question of whether any particular receipt is income or not
depends on the nature of the receipt and the true scope and effect of the
relevant taxing provision. Under the Ordinance only those receipts amounting to
income are assessable. We have already noted above that the Hon’ble
Supreme Court has already held that the receipt i.e grant/subsidy received from
the Federal Government does not come within the definition of the term
“Income”. Hence, a receipt which from its inception is not the income under
section 2(29) of the Ordinance cannot come within the charging provision of section
4 of the Ordinance. To put it differently, what cannot be taxed directly cannot
be taxed indirectly. On the second proposition that the receipt which is not
chargeable to tax under the charging provision of section 4 of the Ordinance
cannot be brought to tax under section 113 of the Ordinance for the purpose of
minimum tax on turnover. The first and foremost condition for taxing an income
is that such a receipt should be first held as an income under the charging
sections and if it is not an income then same cannot be brought to tax under
the minimum tax provision also.
8. The very
object of the provisions of section 113 of the Ordinance is to tax such persons
which are making huge profits but are managing their affairs in such a way as
to avoid payment of income tax, as a result of various tax concessions and
incentives and for that purpose, the minimum tax on turnover is determined
under the said section. Section 80D of the replead Income Tax Ordinance, 1979,
and Section 113 of the Ordinance are in pari materia. The purpose of levy of
minimum tax was discussed in the case titled M/s Elahi Cotton Mills
Ltd. and others v. Federation of Pakistan, (PLD 1997 SC 582 = 1997
PTD 1555), in the following words:
“42.
We may again point out that the NTRC, which mostly comprised the
representatives of the business community representing various trade
associations, in its report of December 1986, quoted hereinabove in para. 17,
highlighted the corruption obtaining in Government and semi-government
departments and so also the dishonest tendency on the part of the tax-payers to
evade the payment of lawful taxes by using unfair means. In such a scenario,
the Legislature is bound to adopt a modern and progressive approach with the
object of eliminating leakage of public revenues and to generate revenue which
may be used for the running of the State and the welfare of its people. The
imposition of minimum tax under section 80-D is designed and intended to
achieve the above objectives. The rate of half per cent, of minimum tax adopted
under section 80-D seems to be on the basis of the minimum rate of tax suggested
by the Exports Enhancement Committee. In our view, the above provision falls
within the legislative competence under Entry 47 read with Entry 52. The
approach of this Court while interpreting the Constitution should be dynamic,
progressive, and oriented with the desire to meet the situation effectively
which has arisen keeping in view 'the requirement of an ever-changing society.
Applying the above rule of interpretation, we do not find any infirmity in the
impugned section 80-D of the Ordinance.”
Thus, the legislature never intended to bring tax
in such events which otherwise are not taxable at all under the provisions of
the Ordinance and such a provision cannot be so interpreted so as to tax any
receipt. Reliance may be placed on the judgment titled Sutlej Cotton
Mills Ltd Vs Asstt. CIT, [1993] 45 ITD 22 (Cal.), wherein it was
held that a particular receipt which is admittedly not an income cannot be
brought to tax under the deeming provision of section 115J of the Income Tax Act,
1961 as it defies the basic intention behind the introduction of a provision
of section 115J.
9. It is axiomatic that under
the Ordinance only those receipts which are in the nature of income can
alone be subject to tax and such a nature of income should fall within the
charging section as provided under the Ordinance. All the receipts by a
taxpayer would not necessarily be deemed to be income of the taxpayer for the
purpose of income tax and the question of whether the particular receipt is
income or not will depend upon the nature of the receipt as well as the scope
and effect of the relevant taxing provision. The Supreme Court of India in the
case of Parimisetti Seetharamamma Vs CIT, [1965] 57 ITR
532 (SC) has observed as under:
"By sections 3 and 4 the Indian Income-tax Act, 1922, imposes a general
liability to tax upon all income. But the Act does not provide that whatever is
received by a person must be regarded as income liable to tax. In all cases in
which a receipt is sought to be taxed as income, the burden lies upon the
department to prove that it is within the taxing provision. Where, however, a
receipt is of the nature of income, the burden of proving that it is not
taxable because it falls within an exemption provided by the Act, lies upon the
assessee. Where the case of the assessee is that
a receipt did not fall within the taxing provision, the source of the receipt
is disclosed by the assessee and there is no dispute about the truth of that
disclosure, the income-tax authorities are not entitled to raise an inference
that the receipt is assessable to income-tax on the ground that M/s.
Batliboi Limited the assessee has failed to lead all the evidence in support of
his contention that it is not within the taxing provision.”
10. In light of the aforementioned discussion
and following the judgment of the Honorable Supreme Court of Pakistan in the
appellant’s own case, it has been determined that the grant/subsidy received
from the Federal Government does not fall within the scope of
"income" and, therefore, is not subject to tax under any other
provisions of the Ordinance. Consequently, the appellant’s appeals are accepted
to this extent, and the impugned orders of the CIR(A) are accordingly modified.
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-SD- (M. M.
AKRAM) JUDICIAL MEMBER |
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-SD- (IMRAN
LATIF MINHAS) ACCOUNTANT MEMBER- |
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