APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I ISLAMABAD
ITA No.1031/IB/2023
(Tax Year, 2019)
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The
Commissioner Inland Revenue (Appeals-V), LTO, Islamabad. |
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Appellant |
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VS |
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M/s Askari
Bank Limited; Finance
Division, AWT Plaza, The Mall Road, Rawalpindi. NTN:0709045-5 |
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Respondent |
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Appellant by: |
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Mr. M. Alam, DR |
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Respondent by: |
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Mr. Bilal Ali, Advocate |
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Date of hearing: |
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19.08.2025 |
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Date of order: |
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19.08.2025 |
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O R D E R
M. M. AKRAM (JUDICIAL MEMBER): The
appellant Department has preferred the present appeal challenging the impugned
appellate order dated March 20, 2023, passed by the Commissioner Inland Revenue
(Appeals-V), Large Taxpayers Office (LTO), Islamabad, whereby the claim of
initial allowance made by the respondent Bank in respect of office equipment
and computers was allowed. The appeal relates to Tax Year 2019 and has been
instituted on the grounds set forth in the memorandum of appeal.
2. The brief facts of the case are that the
respondent taxpayer, being a banking company, derives income from the provision
of commercial banking services. The return of income for Tax Year 2019 was
e-filed on November 28, 2019, which stood assessed under section 120(1)(b) of
the Income Tax Ordinance, 2001 (“the Ordinance”). Subsequently, the amended
assessment determined the taxable income of the taxpayer at Rs. 9,139,211,978,
resulting in a tax liability of Rs. 405,107,292. During the course of
examination of the return and audited accounts, it was observed that the
taxpayer had claimed an initial allowance on computer equipment amounting to
Rs. 26,346,750 in violation of section 23 of the Ordinance. Further, it was
also noted that the taxpayer, being a service provider, had claimed an initial
allowance on account of plant and machinery amounting to Rs. 66,604,000.
Consequently, the business income of the taxpayer stood under-assessed due to
the alleged inadmissible deduction claimed on account of the initial allowance.
3. Accordingly, a show cause notice was
issued by the Deputy Commissioner Inland Revenue (DCIR) through IRIS on January
5, 2020, requiring compliance by January 19, 2021, under section 122(9) of the
Ordinance for amendment of assessment. In response, the taxpayer furnished a
detailed reply on January 19, 2021. Thereafter, another notice dated October
22, 2021, was issued, to which the taxpayer submitted its reply on November 12,
2021. Subsequently, on September 29, 2022, the DCIR passed an amended assessment
order under section 122(4) of the Ordinance.
4. Being dissatisfied with the amended order,
the respondent taxpayer preferred an appeal before the Commissioner Inland
Revenue (Appeals-V), LTO, Islamabad, who, through the impugned appellate order
dated March 20, 2023, deleted the disallowance of the initial allowance and
allowed the appeal. Aggrieved by the said decision, the Department has now
filed the present appeal before this Tribunal, challenging the appellate order
on multiple grounds.
5. The appeal was heard on 19.08.2025. The
learned Departmental Representative (DR) contends that:
(a) Office equipment and computers fall within
the excluded category of “furniture, including fittings” under section 23(5)(b)
of the Ordinance. Thus, the office equipment
amounting to Rs. 66,604,000 and office computers amounting to Rs. 26,346,750
are not eligible depreciable assets.
(b) Initial allowance is admissible only to
manufacturers and producers, as section 23(1) refers to “commercial
production,” which does not apply to banks.
(c) Rule 1(a) of the Seventh Schedule does not
extend the benefit of initial allowance beyond “plant and machinery” or
“buildings.” As provided in the Third Schedule to the Ordinance.
(d) Office equipment and computers are
classified under IAS-16 as Furniture, Fixture and Equipment (FFE), hence not
plant or machinery, and specifically excluded as a class in terms of section
23(5)(b) of the Ordinance.
(e) The computer equipment in the case of the
respondent bank is merely movable assets employed for routine office work and
cannot be equated with “plant and machinery” as contemplated for the purposes
of initial allowance, which is generally associated with industrial
undertakings.
(f) No specific rate of initial allowance has
been prescribed in the Third Schedule to the Income Tax Ordinance, 2001, for
such assets; therefore, the claim is legally untenable.
6. Conversely, the learned
AR for the respondent Bank submitted that:
(a) Section 22(15) defines “depreciable asset”
widely to include tangible movable and immovable property, except unimproved
land, which is used in business and has a useful life exceeding one year.
(b) Section 23(5) excludes only four classes of
assets, namely: road transport vehicles not plying for hire, furniture
including fittings, previously used plant and machinery, and assets already
deducted. Computers and office equipment do not fall within these exclusions.
(c) Judicial precedents (2006 PTD 1800; 2013
PTD 1429; 2020 PTD 2119) have categorically held that computers and office
equipment constitute machinery and are eligible for initial allowance.
(d) Rule 1(a) of the Seventh Schedule expressly
incorporates section 23, thereby extending the benefit of initial allowance to
banking companies at par with other taxpayers.
(e) Accounting standards (IAS-16) cannot
override fiscal statutes; the functional test laid down by superior courts
determines whether an item qualifies as “plant and machinery.”
7. We have carefully examined the record, the
rival submissions, the statutory framework under sections 22 and 23 of the
Income Tax Ordinance, 2001, the Seventh Schedule thereto, and the judicial
precedents cited by the learned AR for the respondent Bank. The issue at hand
is:
Whether
office
equipment and computers acquired by the respondent Bank qualify as “eligible
depreciable assets” for purposes of initial allowance under section 23 of the
Ordinance.
8. A. Department’s Contention:
The Department contends that
office equipment (Rs. 66,604,000) and computers (Rs. 26,346,750) do not qualify
as “eligible depreciable assets” within the meaning of section 23(5)(b) of the
Income Tax Ordinance, 2001. According to the Department, such assets fall
within the category of “furniture, including fittings,” rather than “plant and
machinery,” and therefore do not qualify for initial allowance.
Tribunal’s Findings:
Upon careful consideration,
this contention is found to be misconceived. The reliance placed by the
Department on section 23(5)(b) is misplaced. This provision merely excludes
certain specified classes of assets from the scope of “depreciable assets”; it
does not impose a blanket exclusion of all office equipment and computers. Section
22(15) of the Ordinance defines a “depreciable asset” in comprehensive terms
as:
“…
any tangible movable property, immovable property (other than unimproved land),
or structural improvement to immovable property, owned by a person that— (a)
has a normal useful life exceeding one year; (b) is likely to lose value as a
result of normal wear and tear, or obsolescence; and (c) is used wholly or
partly by the person in deriving income from business chargeable to tax ..…”
Section
23(5) provides for specific exclusions, namely:
(a)
road transport vehicles not plying for hire,
(b)
furniture, including fittings,
(c)
previously used plant or machinery, and
(d)
plant or machinery already deducted elsewhere.
The attempt of the Department
to classify computers and office equipment as “furniture” is untenable.
Judicial precedents have consistently adopted a functional and expansive
interpretation of the words “plant and machinery.” The term “plant” has been construed
to include all apparatus and equipment employed in carrying on a business. In
this context, computers and related office equipment, being indispensable tools
in modern banking operations, cannot be equated with mere “furniture.”
In 2006
PTD 1800, the Tribunal held:
“Office
equipment does constitute machinery … as normal depreciation has been allowed
on office equipment, there was no justification to disallow initial
depreciation.”
Similarly, the Gujarat High
Court in CIT v.
Professional Information Systems & Management, [2005]
274 ITR 242 (Guj.) held that:
“……
computers and the data processing machines would be the plant and machinery,
and the investment allowance would be available.”
The broader jurisprudence has
also recognized the wide ambit of the term “Plant.” In D.G. Khan Cement Company Ltd. v. Deputy
Collector of Customs, (2003 PTD 986), the Court observed:
“Plant
is an all-embracing term … it refers to the entire machinery, apparatus, tools,
and appliances necessary for carrying on a trade or business, and is not
confined to any particular form of machinery or equipment. It encompasses
everything, fixed or movable, live or inanimate, which constitutes the
permanent apparatus employed in the business, excluding only the stock-in-trade
or raw material.”
The Supreme Court in Collector of Customs (Appraisement),
Karachi v. Fauji Fertilizer Co. Ltd. (PLD 2005 SC 577 =
2005 PTD 2178) clarified that:
“…….
‘plant and machinery’ are not two separate entities, as a plant cannot function
without machinery, and machinery, being an integral part of plant, is
synonymous and interchangeable with it.”
Further support is found in Messrs Moro Textile Mills Ltd. v.
Central Board of Revenue, (PTCL 2007 CL 355), wherein the Hon’ble
Sindh High Court held that even ancillary tools like fibre cans and roving
bobbins fell within the definition of machinery, being integral parts of the
industrial process. Similarly, in Scientific
Engineering House (Pvt.) Ltd. v. CIT, (AIR
1986 SC 338), the Indian Supreme Court extended the definition of “Plant” to
technical documents, designs, charts, and drawings, holding that they
constituted “Plant” in a functional sense.
From the foregoing judicial
precedents, it is evident that the term “plant” has been given a liberal and
purposive construction, encompassing not only heavy machinery but also all
equipment indispensable to the carrying on of business. Accordingly, computers
and office equipment, being essential to the respondent’s banking operations,
fall squarely within the ambit of “plant and machinery” and therefore qualify
as “eligible depreciable assets.”
9. B. Department’s
Contention:
Initial allowance is
admissible only to manufacturers and producers, as section 23(1) refers to
“commercial production.” Since banks are service providers, their equipment is
outside the ambit of section 23.
Tribunal’s Findings:
i. This
contention overlooks the plain language of section 23(1), which states:
“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.”
Section 23(1) of the
Ordinance, on a plain reading, makes it clear that the benefit of initial
allowance is available to “any person” who places an eligible
depreciable asset into service in Pakistan for the first time in a tax year,
provided the asset is used for business purposes for the first time or in the
year in which commercial production commences, whichever is later. The deliberate
use of the term “person” by the legislature shows that the allowance is not
confined to industrial undertakings or manufacturing concerns. The expression
“commercial production” has relevance only in relation to industries where such
production is notified, such as power generation or manufacturing. In the case
of service industries, however, the operative requirement is that the asset
should be used for business purposes for the first time. This interpretation
has been affirmed by the Appellate Tribunal in 2013 PTD 1429,
where it was observed:
“Finance
Act, 2003 omitted words ‘that is plant or machinery’. This clearly shows that
earlier initial depreciation was eligible only for plant and machinery, whereas
after omission of those words, initial depreciation has been extended to all
assets except exclusions provided in clauses (a) to (d) of subsection (5) of
section 23.”
Accordingly, the Department’s
interpretation that section 23 is confined to manufacturers is contrary to the
express words of the statute and binding precedent.
ii. It is settled law that depreciation has
always been an allowable deduction in computing taxable income under the head
“Income from Business” under all previous enactments, namely section 10(2)(vi)
of the Income Tax Act, 1922; section 23(1)(v) of the Income Tax Ordinance,
1979; and now sections 22 and 23 of the Income Tax Ordinance, 2001.
Depreciation is a non-cash expenditure allowable in respect of depreciable
assets used for deriving income chargeable under the head “Business.” It is,
therefore, a mandatory statutory deduction available to a taxpayer.
iii. Depreciable assets are defined in section
22(15) of the Ordinance and cover a wide range of assets on which depreciation
is allowable under section 22 at the rates specified in the Third Schedule.
These include buildings of all types; furniture and fittings; plant and
machinery (not otherwise specified); motor vehicles, ships, and technical or
professional books; computer hardware and allied items; aircraft and aero
engines; machinery and equipment used in the manufacture of IT products;
mineral oil concerns; and ramps for disabled access. In addition to normal
depreciation under section 22, initial allowance under section 23 is
admissible, subject to specified exclusions, on additions to fixed business
assets during a tax year.
iv. It is a well-established principle of
statutory interpretation that a provision must be construed as a whole to
discern the true legislative intent. The legislature has used the expression
“placed into service” together with the phrase “for the first time” in section
23(1). Read conjunctively, these words indicate that an asset becomes eligible
for initial allowance when it is first deployed in business operations. “Placed
into service” in this context, therefore, refers to the commencement of actual
use of the asset for business purposes, marking the starting point for
depreciation.
V. The key elements of section 23(1) are:
i. “Used for the
purposes of his business for the first time” means the asset is
considered when first utilized in business operations. The definition of
“business” in section 2(10) is inclusive and covers trade, commerce,
manufacture, profession, vocation, or any similar activity, excluding only
employment. This shows that the scope of “business” is not limited to
manufacturing or production.
ii. “The tax year in
which commercial production is commenced” applies only where commercial
production is undertaken.
iii. “Whichever is later” ensures that the relevant year for
allowance is the later of these two events.
It is therefore evident that section 23(1) was
intended to fix the point in time when an asset becomes eligible for initial
allowance, so that businesses receive tax relief on investments once assets are
actively deployed. Acceptance of the Department’s interpretation would unjustly
deprive service providers of this incentive and defeat the legislative intent
of encouraging investment across all sectors, including IT.
vi. Section 23(5) further clarifies the scope
of exclusions from “eligible depreciable assets.” Computer hardware and allied
items do not fall within these exclusions, and hence are clearly eligible. This
position is also supported by Circular No. 01 of 2006 dated July 1, 2006,
issued by the Federal Board of Revenue, which categorically distinguished
computer hardware from plant and machinery for depreciation purposes only,
prescribing normal depreciation at 30% instead of 10% due to rapid
obsolescence. The Circular also emphasized the policy of encouraging investment
across all sectors, including the IT sector. The relevant extract of the
aforesaid circular dated July 1, 2006, is reproduced below for ease of
reference:
“Depreciation allowance @ 10% is admissible in
the case of machinery and plant in addition to the 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 IT 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.”
Accordingly, it is clear that
computers and allied equipment constitute a recognized sub-category of
depreciable assets and fall within the ambit of section 23. The appellant’s
claim of initial allowance is, therefore, consistent with the express provisions
of law as well as the legislative intent.
10. C. Department’s
Contention:
Rule 1(a) of the Seventh
Schedule was misread by the Commissioner (Appeals), since it does not extend
the benefit of initial allowance to banks beyond “plant and machinery” and
“buildings.”
Tribunal’s Findings:
i. Rule 1(a) of the Seventh Schedule
provides in categorical terms:
“Deduction
shall be allowed in respect of depreciation, initial allowance and amortization
under sections 22, 23 and 24 provided that accounting
depreciation, initial allowance or amortization deduction shall be added to the
income.”
This explicit incorporation
of section 23 within the Seventh Schedule leaves no doubt that banks are
entitled to an initial allowance in the same manner as any other taxpayer. The
Commissioner (Appeals) correctly interpreted this rule.
ii. The Hon’ble Islamabad High Court in Messrs Askari Bank Limited, Rawalpindi vs
Commissioner Of Income Tax (Legal), Large Taxpayer Unit, Islamabad and others,
(2020 PTD 2119),
further clarified the scope of section 23 in the context of banking companies.
It held:
“…
when read in concomitance, the words ‘placed into service’ and ‘for the first
time’ mean the point in time when a fixed asset is put into use for the first
time … intention of Legislature was not to restrict benefit of section 23 only
for newly constructed buildings or manufacturers … immovable properties
purchased and put to use by a bank were held to be eligible depreciable
assets.”
This judgment, having
attained finality after dismissal of the Department’s Civil Petitions No.
2597 to 2600 of 2020 dated 01st February 2022 by the Supreme
Court in 2022, conclusively establishes that banks are entitled to claim an initial
allowance under section 23.
11. D.
Department’s Contention:
Office equipment and
computers, as per IAS-16 classification, fall under Furniture, Fixture and
Equipment (FFE), and hence are excluded.
Tribunal’s Findings:
i. This contention is devoid of merit. The
classification of assets under IAS-16 is relevant only for financial reporting
purposes and carries no determinative effect under the tax law. The treatment
of assets for income tax purposes is governed exclusively by the provisions of
the Income Tax Ordinance, 2001, read with judicial interpretation of
expressions such as “plant,” “machinery,” and “equipment.” Courts have
consistently applied a functional test rather than a rigid dictionary or
accounting classification. Consequently, the Department’s reliance on IAS-16 is
misplaced.
ii. For
purposes of taxation, the established judicial test of “plant” is whether the
asset constitutes an apparatus with which the business is carried on. In the
case of banking companies, office computers, servers, ATMs, note-counting
machines, and allied equipment are not mere furniture or fixtures, but the very
apparatus through which the core business of banking is conducted. Accordingly,
their classification as FFE in accounting standards does not preclude their
recognition as “plant and machinery” under the Ordinance. Furthermore, section
3 of the Ordinance expressly provides that its provisions override all other
laws, which includes accounting standards.
iii. Judicial
precedents fortify this view. In Munby v. Furlong
[1977] All ER 953, Lord Denning observed that:
“… in
the interests of fairness, ‘plant’ extends virtually to a man’s tools of trade
…”
Similarly, in Scottish & Newcastle Breweries
55 TC 252, Lord Wilberforce emphasized that “plant” under fiscal statutes must
be construed in light of its functional role in the taxpayer’s trade rather
than by its ordinary dictionary meaning.
Applying these principles, it
follows that computers, servers, ATMs, note-counting machines, and other
banking apparatus are indispensable tools of the banking trade and therefore
fall squarely within the ambit of “plant and machinery” for purposes of the
Income Tax Ordinance, 2001.
12. E. Department’s
Contention:
The computer equipment in the
case of the respondent bank is merely movable assets employed for routine
office work and cannot be equated with “plant and machinery” as contemplated
for the purposes of initial allowance, which is generally associated with
industrial undertakings.
Tribunal’s Findings:
The movability of office
computers and related equipment does not change their essential character. Many
forms of plant and machinery—such as generators, vehicles, and even industrial
equipment—are movable by nature, yet consistently treated as depreciable plant.
What matters is not the mobility of the asset but its functional role in the
business. Since the computers and office equipment are indispensable tools of
the banking business, they qualify as “plant” irrespective of their mobility.
13. F. Department’s Contention:
No
specific rate of initial allowance has been prescribed in the Third Schedule to
the Income Tax Ordinance, 2001, for such assets; therefore, the claim is
legally untenable.
Tribunal’s Findings:
The
fact that the Third Schedule does not separately specify a rate for “office
equipment” does not preclude the grant of an initial allowance. Instead, the
proper approach is to examine whether the asset falls within the scope of
“plant and machinery.” If the functional test is satisfied, the general rate
prescribed for plant and machinery in the Third Schedule would apply. Denying
allowance merely on the ground of absence of a distinct category would be
contrary to the beneficial and purposive construction of depreciation
provisions, which are intended to promote investment in capital assets.
Conclusion:
The Department’s assertion that office equipment and office
computers fall within “furniture and fittings” is legally unsustainable.
Applying the functional test of a plant, it is evident that computers
and office equipment in the banking sector are not ornamental or ancillary
items but the very apparatus with which the core business is conducted.
Accordingly, such assets fall within the ambit of plant and machinery,
making them eligible depreciable assets under section 23, read with the Third
Schedule of the Income Tax Ordinance, 2001. Accordingly, the Commissioner
(Appeals) has rightly allowed the initial allowance to the respondent Bank. The
Department’s appeal is dismissed
for lack of merit.
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Sd/- (M. M.
AKRAM) JUDICIAL MEMBER |
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Sd/- (DANISH
ALI QAZI) MEMBER |
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