APPELLATE TRIBUNAL INLAND REVENUE, DIVISION
BENCH-I, ISLAMABAD
ITA No.1388/IB/2024
(Tax year 2019)
M/s
Paradise Real Estate (Pvt) Limited;
Corporate
Office-1, Bahria Town, Phase-1, Rawalpindi.
NTN:8923091 Appellant
Vs
The Deputy Commissioner,
Inland Revenue, Zone-III,
CTO, Islamabad. Respondent
Appellant
by: Mr.
Tanseer Bukhari, Advocate
Respondent
by: Mrs.
Naila Gul, DR
Date
of hearing: 21.04.2025
Date
of order: 12.05.2025
O R D E R
M. M. AKRAM (Judicial
Member): The present appeal has been transferred to this
Tribunal by the learned Commissioner Inland Revenue (Appeals-IV), Regional Tax
Office (RTO), Islamabad, on August 29, 2024. This transfer has been effected in
accordance with the provisions of Section 126A(4) of the Income Tax Ordinance,
2001 (“the Ordinance”), as the tax assessed in this case exceeds the
prescribed threshold of twenty million rupees. Accordingly, jurisdiction to
hear and decide the matter now vests with this Tribunal. The appellant has
challenged the order passed by the Deputy Commissioner Inland Revenue (DCIR),
Range-II, Zone-III, Corporate Tax Office (CTO), Islamabad, dated October 11,
2023, which was issued under Section 122(1) of the Ordinance for the Tax Year
2019. The grounds of appeal have been duly enumerated in the memorandum of
appeal filed by the appellant.
2. Case
History and Proceedings
The
brief facts of the case are that the appellant, M/s Paradise Real Estate
(Private) Limited (hereinafter referred to as “PREPL”), is a company
incorporated under the Companies Act, 2017. The principal business activity of
PREPL involves real estate marketing, including the sale and purchase of land,
plots, apartments, houses, plazas, multi-storied flats, malls, commercial
offices, shops, markets, and warehouses. Currently, PREPL is engaged in the
acquisition of land on behalf of Bahria Town (Private) Limited (hereinafter
referred to as “BTPL”), utilizing advances received under a mutual
agreement between the two parties. The acquired land is to be held by PREPL for
subsequent transfer at an appropriate time. Additionally, under the terms of
the agreement, PREPL is authorized to invest any unutilized funds in the form
of Term Deposit Receipts (TDRs), with the profits from such investments to be
distributed in accordance with the conditions set out in the agreement.
For the relevant tax year, the appellant filed its return
of income, declaring an income of Rs. 513,488,306. This return was treated as
an assessment order under Section 120(1)(b) of the Ordinance. Subsequently, the
case was selected for audit under Section 177 of the Ordinance by the
Commissioner Inland Revenue, CTO, Islamabad. The selection of the case
for audit was duly communicated to the department by the taxpayer through the
IRIS portal. Thereafter, a notice under Section 177(1) of the Ordinance was issued
on May 30, 2022, requiring compliance by June 13, 2022. This was followed by
further correspondences dated August 1, 2022, and November 1, 2022, regarding
the assumption of jurisdiction and reminders for compliance. In response, the
taxpayer submitted a reply on November 7, 2022. Upon examination of the records
and reply, certain issues were identified and were formally communicated to the
taxpayer through an Audit Report issued under Section 177(6) on March 7, 2023,
requiring a response by March 14, 2023. The taxpayer submitted its reply online
within the stipulated timeframe. The contents of the audit report were
subsequently incorporated into the order passed under Section 122(1), which
culminated in the issuance of the impugned order dated October 11, 2023.
3. Grounds
of Appeal
Aggrieved
by the aforementioned order, the appellant filed an appeal before the
Commissioner Inland Revenue (Appeals) on three principal grounds:
i. Disallowance of tax credit amounting to Rs.
119,588,216/-;
ii. Disallowance of facilitation charges of Rs. 30,000,000/-;
iii. Disallowance of donation expenses amounting to Rs. 38,000,000/-.
However, in light of the
assessed tax exceeding the threshold specified under the law, the appeal was
transferred to this Tribunal for appropriate adjudication.
4. Hearing
of the Appeal
The matter was taken up for hearing before this Tribunal
on April 21, 2025. During the course of proceedings, the learned Authorized
Representative (AR) of the appellant company advanced arguments challenging the
disallowances made in the impugned order, raising the following primary
contentions:
1.
Disallowance of Tax Credit – Rs.
119,588,216/- (Profit on Debt under Section 151)
The appellant vehemently contested the disallowance of tax
credit amounting to Rs.119,588,216/-, out of the total profit on debt income of
Rs. 170,840,308/-, on the grounds that the disallowance was unjustified. It was
submitted that the said disallowance was made by the Deputy Commissioner,
Inland Revenue (DCIR) solely on the basis of profit sharing between Bahria Town
(Pvt.) Ltd (BTPL) and the appellant. The AR contended that BTPL had duly
offered its share of profit, amounting to Rs.1,198,139,381/-, for taxation and
discharged the corresponding tax liability. This fact was duly disclosed under
Note No. 36.1 of Bahria Town’s audited financial statements for the year 2019 (Annexure
A of the written submissions). Additionally, a copy of Bahria Town’s income
tax return for the relevant tax year was placed on record as Annexure B.
It was further argued that all the taxes deducted under
Section 151 were duly reflected in the name of the appellant company, as
evidenced by the Computerized Payment Receipts (CPRs). Therefore, only the
appellant company was entitled to claim the tax credit, and Bahria Town (Pvt.)
Ltd. could not claim such tax deduction in its own name. The appellant
emphasized that there exists no provision under the Income Tax Ordinance, 2001,
that prohibits the appellant from claiming such tax credit, particularly when the
tax was duly deducted in its name and all relevant documentation substantiates
the claim.
2. Facilitation Charges – Rs. 30,000,000/-
Regarding the disallowance of facilitation charges
amounting to Rs.30,000,000/-, the AR submitted that the amount was paid under a
valid agreement to Bahria Town (Pvt.) Ltd., which duly declared it as
"other income" in its audited accounts for the year ended June 30,
2019, under Note No. 36.2 (Annexures A & B). It was further argued
that since the recipient had already offered the income to tax, the provisions
of Section 161 and the requirement for withholding tax did not apply in light
of Section 1B of Section 161 of the Ordinance. The agreement between the
appellant company and Bahria Town (Pvt.) Ltd. was also submitted as Annexure
C. The AR asserted that the transaction was genuine, duly substantiated by
contractual documentation and mutual declarations by both parties. Hence, the
disallowance made by the assessing officer was uncalled for and without legal
basis.
3. Donation – Rs. 38,000,000/-
On the issue of disallowance of tax credit under Section
61 of the Ordinance, in respect of a donation amounting to Rs. 38,000,000/-,
the appellant submitted that the payment was made to M/s Begum Akhtar Rukhsana
Memorial Welfare Trust, a duly approved non-profit organization under Section
2(36) of the Ordinance. A copy of the NPO's approval certificate was submitted
as Annexure D. The AR further explained that although the donation was
made through Bahria Town (Pvt.) Ltd., it was on behalf of the appellant
company, and all payments were executed through proper banking channels.
Relevant bank statements evidencing these transactions were also placed on
record as Annexure E. Accordingly, the AR contended that the assessing
officer was not justified in refusing the tax credit under Section 61, as all
legal and documentary requirements for claiming the donation had been fully
complied with.
5. On the contrary, the learned DR supported
the order of the assessing officer.
6. Findings
and Observations of the Tribunal
Upon a
thorough and meticulous examination of the available facts, supporting
documentary evidence, duly audited accounts, and the applicable legal
provisions, several critical issues have been identified that necessitate
immediate and careful reconsideration by the Assessing Officer. It is pertinent
to highlight that the statutory period prescribed under Section 122 read with Section
124 of the Ordinance, remains unexpired, thereby allowing sufficient time for
lawful reassessment proceedings.
Furthermore,
in view of the authoritative pronouncement of the Honourable Supreme Court in
the judgment reported as 2021 SCMR 1133, this Tribunal finds itself
constrained within the legal boundaries and is not empowered to travel beyond
the scope of the show cause notice or the subject matter specifically raised in
the appeal under adjudication. Consequently, invoking the
powers vested in this Tribunal under Sections 132(4)(b) and 132(4)(c) of the
Ordinance, the impugned order passed by the Assessing Officer is hereby set
aside. The case is remanded to the Assessing Officer with directions to
re-examine the matter afresh, duly taking into account the findings and legal
guidelines enunciated by this Tribunal hereinbelow, and thereafter to issue a
reasoned and lawful order in accordance with the law and principles of natural
justice.
A. Character and Legitimacy of the Agreement
Between M/s Bahria Town (Pvt) Ltd (BTPL) and M/s Paradise
Real Estate (Pvt) Limited (PREPL)
Finding:
The document titled “Agreement” dated
December 17, 2019, executed merely on a Rs. 100 stamp paper, lacks the necessary
legal formality and specificity to establish its enforceability or define the
relationship between the parties. Given the nature of the functions discharged
by M/s PREPL, as outlined in Note 1.2 of its audited accounts, and the scale of
transactions involved (notably the sum of Rs. 513,488,306 transferred during
Tax Year 2019), it is evident that the relationship is fundamentally one of service
provision. The retrospective application of the agreement from July 1, 2017,
further raises concerns about its authenticity and purpose. For ease of
reference, the relevant clauses of the said agreement are reproduced below:
“CLAUSE
1-ON PART OF PARADISE
1)
PARADISE will purchase and hold
the land on behalf of BAHRIA which will be transferred to BAHRIA in the
subsequent appropriate period.
2)
PARADISE will invest and hold
any unutilized moneys received by the BAHRIA in the form of TDR,s in various
banks.
3)
PARADISE will transfer the land
so purchased or return the unutilized amount so invested as and when BAHRIA
requires.
CLAUSE
2-ON PART OF BAHRIA
1)
BAHRIA will provide funds for
purchase of land and investments in TDR's, etc.
2)
BAHRIA will be responsible to
make the arrangements for purchase /transfer of land purchased on its behalf
and will bear all expenses incurred there against. However, Taxes withheld U/s
2360 as well as 236(K) will be claimed by Paradise Real Estate (Pvt) Ltd in its
return of Income for the respective period Tax Year.
3)
BAHRIA will provide office
facilities including staff to the PARADISE and will charge an amount of Rs.
30.0 million Per annum as office facility charges. The amount of facility
charges may increase as and when both the parties agree.
CLAUSE
3-SHARING OF FEES/PROFITS
1)
PARADISE AND BAHRIA will share
the profits/markups/interest received/earned on the deposits or financial
transactions as provided by the Bahria in the following ratio effective Tax
Year 2018:
Paradise 30%
Bahria 70%
However,
this ratio may and will vary from year to year or each subsequent year as per
mutual understanding between both the parties.
2)
The tax so withheld by the banks
in respect of profits paid on these deposits as well as TDR's will be claimed
solely by Paradise.”
Guidelines:
i. The Assessing Officer is
instructed to recharacterize the arrangement as a service agreement and
accordingly treat the income as service
income under Section 153(1)(b) of the Ordinance.
- The
income must be subjected to minimum
tax at 8% or normal
tax at 29%, whichever yields a higher revenue outcome.
- Section
109 (relating to tax avoidance through
artificial transactions) shall be invoked, applying the doctrine of substance over form.
Reliance may be placed on the judgment reported as Habib Insurance Ltd
versus Commissioner of Income Tax (Central) Karachi PLD 1985 Supreme Court
Page 109.
B. Beneficial Ownership of TDR Investments
and Profit Attribution
Finding:
A substantial amount (Rs. 36.1 billion) was recorded as an
advance from BTPL to PREPL. Investments made in TDRs and PLS accounts under
PREPL’s name were beneficially owned by BTPL. Despite this, profits were
apportioned in a 70:30 ratio, favoring PREPL without lawful justification. This
violates Section 69
(receipt of income) and Section
90 (beneficial ownership and transfer of assets), and the
income should have been entirely assessed in the hands of BTPL.
Guidelines:
i.
Invoke Sections 39(3), 69, and 90
to assess income in the hands of the true economic owner, i.e., BTPL.
- Tax
the entire profit
from TDRs in BTPL’s hands.
- The
tax deducted at
source (Rs. 170 million) on these TDRs shall be credited to BTPL.
- Secure
an affidavit from
PREPL confirming that it has not, and shall not, claim
this tax credit.
C. Misreporting of Profit and Tax Avoidance by PREPL
Finding:
PREPL has received 100% of the profit on debt from banks,
of which 70% was transferred to BTPL. The remaining 30% was retained under the
pretext of a service charge, without tax deduction under Section 153(1)(b),
suggesting a deliberate attempt to circumvent the minimum tax regime.
Additionally, PREPL availed tax benefits relating to real estate transactions
and TDRs amounting to Rs. 170.46 million, despite the economic burden of those
taxes falling on BTPL. These benefits amount to a perquisite under Section 18(1)(d).
Guidelines:
i.
Assess the retained 30%
income under the Normal
Tax Regime, ensuring proper application of minimum tax provisions.
- Recharacterize
these benefits as perquisites,
and include them in PREPL’s taxable income under Section 18(1)(d).
- Apply Section 109 to address the underlying
tax avoidance scheme.
D. Similar Structures in Other Subsidiaries of BTPL
As per Notes 36 and 36.1 of BTPL’s audited financials, the
same structuring methodology has been employed in other subsidiaries,
suggesting a systematic tax avoidance mechanism across the group.
Guidelines:
i.
Initiate parallel reassessment proceedings under
Section 122 for all such subsidiaries and holding company BTPL.
- Investigate and recover evaded taxes for Tax Years 2019 and onward,
along with default
surcharge and applicable penalties.
E. Amended Assessments Under Section 122 of the ITO, 2001
The magnitude of unassessed income and potential tax loss
warrants urgent and lawful invocation of Section
122. The Assessing Officer is legally obligated to amend the
assessments for Tax Year 2019 and all relevant subsequent years to rectify
material omissions.
Guidelines:
i. Immediately
commence amended assessment proceedings
under Section 122.
- Ensure all identified
transactions are re-evaluated in accordance with the principles of equity
and natural justice.
F. Provincial & ICT Ordinance Sales Tax Liabilities
Finding:
PREPL and its related subsidiaries failed to charge or
deposit Punjab Sales Tax
on Services (PSTS) and ICT
Ordinance sales tax for services rendered to BTPL. These
services fall under taxable categories in the Second Schedule of the Punjab
Sales Tax on Services Act, 2012.
Guidelines:
i.
Refer the matter
to the relevant provincial revenue authorities and the Federal Board of Revenue
(FBR).
- Ensure
recovery of sales
tax, default
surcharge, and statutory
penalties in accordance with provincial laws.
G. Invalid Deduction of Donation
PREPL has claimed a deduction of Rs. 38 million towards a
donation, which was paid by BTPL. Furthermore, the recipient organization’s
approval under Section
2(36) was valid only up to Tax Year 2018. The claim under Section 61 is therefore
inadmissible.
Guidelines:
i.
Disallow the deduction
under Section 61.
- Treat
the donation as a benefit/perquisite
under Section 18(1)(d) and tax it in PREPL’s hands.
- Recalculate PREPL’s tax liability
accordingly.
H. Application
of Super Tax Under Section 4B
Super tax at the rate of 2% is applicable where taxable income exceeds Rs. 500
million. A revised computation of income is essential in light of disallowed
claims and recharacterized income items.
Guidelines:
i.
Recompute total taxable
income after disallowing inadmissible deductions.
- Apply Section 4B and assess the liability
to super tax
as per law.
7. CONCLUSION
In
view of the foregoing findings, it is directed that the Assessing Officer
shall:
i. Initiate
fresh reassessment proceedings for
all relevant tax years, particularly from Tax Year 2019 onward of the
appellant, subsidiaries
and holding company BTPL;
ii. Ensure
full compliance with the following statutory provisions:
a)
Sections 39(3), 69, 90, and
109: For assessment of true income and
identification of tax avoidance;
b)
Section 153(1)(b) and 113C:
For proper tax treatment of service income;
c)
Section 18(1)(d):
For inclusion of perquisites or benefits;
d)
Provincial Sales Tax Laws:
Particularly the Punjab
Sales Tax on Services Act, 2012 and ICT;
iii. Disallow
all unlawful deductions and claims,
including donations and wrongly availed tax credits;
iv. Recompute
income and tax liability based on revised facts,
ensuring inclusion of:
a)
Super Tax under Section 4B,
b)
Default surcharge,
c)
Applicable penalties
under the ITO and provincial tax statutes;
v. Rigorously
evaluate all relevant documentary
evidence, intercompany transactions, and audited financial statements
to ascertain the true economic substance.
Failure
to address these issues will amount to disregard of statutory duty and
continued loss of public revenue. This process shall be
carried out under the administrative supervision of the relevant Zonal
Commissioner (Inland Revenue). In light of the above observations, the
appellant’s appeal is hereby disposed of.
|
|
-SD- (M. M. AKRAM) JUDICIAL MEMBER |
|
-SD-
(IMRAN LATIF MINHAS) ACCOUNTANT MEMBER |
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