2014 PLP (Trib (PTD)

NAZIR AHMAD, (JUDICIAL MEMBER).

The instant appeal pertaining to the tax year 2011 has been filed on behalf of the taxpayer against the appellate order bearing No.18 dated 14-12-2012 recorded by CIR(Appeals-I), Lahore.

2. Brief facts emanating from record are that the taxpayer, a public limited company, deriving income from the business of preparation and spinning of textile fibers, filed return for the year under consideration disclosing loss of Rs.(83,947,180). The said return was scrutinized by the taxation officer, who observed that the taxpayer company was under legal obligation to pay minimum tax under section 113(2)(b) of the Income Tax Ordinance, 2001 (hereinafter called 'the Ordinance') amounting to Rs.22,169,690 along with the return but failed to do so. Therefore, proceedings were initiated by way of issuance of show-cause notice under sections 221/205 of the Ordinance on 3-5-2012 which culminated in charging of minimum tax under section 113(2)(b) along with default surcharge under section 205 of the Ordinance at Rs.22,169,690 and Rs.1,306,256 respectively. Feeling aggrieved, the taxpayer preferred appeal before CIR(Appeals-I), Lahore, who also upheld the action of the DCIR, Audit-03, Zone-III, Large Taxpayer Unit, Lahore. Still discontented, the taxpayer has come up in appeal before this Tribunal on the strength of following grounds taken as per memo of appeal:-- (i) That both the Offices have failed to dilate and apply correct law while adjudicating the issue involved in this case as such the order passed is not only illegal but also mala fide. (ii) That as the appellant has declared gross loss of Rs.141,720,909 before set off of depreciation and other inadmissible expenses under the Ordinance, therefore the return filed by the appellant had attained the status of order under section 120(3) has illegally and wrongly been rectified by the learned Deputy Commissioner Inland Revenue, Audit-03, Zone-III, Large Taxpayer Unit, Lahore. (iii) That in turn the learned Commissioner Inland Revenue has failed to dilate on Grounds Nos.2, 3 and 4 of the grounds of appeal filed with him by the appellant and confirmed the order without discussion or adjudicating the same in the body of the appellant order. (iv) That in any case the charge of minimum tax under section 113 for Rs.22,169,690 and default surcharge under section 205 of the Income Tax Ordinance, 2001 amounting to Rs.1,306,256 is illegal and not sustainable in law.

3. However, during the course of hearing the learned counsel appearing on behalf of the taxpayer by reiterating the above, mentioned grounds has stressed that since the taxpayer had declared gross loss of Rs.(152,426,691) before setoff of depreciation and other inadmissible expenses under the Ordinance total of which is Rs.62,139,108 and loss declared is (90,284,583). He further, explained that as per proviso to section 113 of the Ordinance, the declared turnover is exempt from 0.5% turnover tax. To substantiate his contentions, he also filed copies of account statements, return for the tax year under consideration and breakup of declared loss etc. On the strength of above submission he prayed that minimum tax under section 113(2)(b) along with default surcharge under section 205 of the Ordinance was not leviable as provided Circular No.3 of 2009 dated 17-7-2009.

4. On the contrary, learned DR has fully supported the orders passed by both authorities below by reiterating the basis evolved therein. He has also explained that the taxpayer has declared net instead of gross loss as is evident from the return at Serial No.27, which is Rs.22,515,405 whereas depreciation as per Serial No.29 of the return is Rs.50,590,

422. Thus, he emphasized that application of section 113 of the Ordinance is well justified and legal, which merits confirmation.

5. We have given anxious considerations to the arguments and also thoroughly examined the record as well other details provides by the parties including account statements and return etc. Section 113 of the Ordinance, which has been invoked is reproduced for facility:--

113. Minimum tax on the income of certain persons.

(1) This section shall apply to a resident company where, for any reason whatsoever allowed under this Ordinance, including any other law for the time being in force-- (a) loss for the year; (b) the setting off of a loss of an earlier year; (c) exemption from tax; (d) the application of credits or rebates; or (e) the claiming of allowances or deductions (including depreciation and amortization deductions) no tax is payable or paid by the person for a tax year or the taxpayable or paid by the person for a tax year is less than one-half per cent of the amount representing the person's turnover from all sources for that year: Provided that this subsection shall not apply in the case of a company, which has declared gross loss before set off of depreciation and other inadmissible expenses under the Ordinance. If the loss is arrived at by setting off the aforesaid or changing accounting pattern, the Commissioner may ignore such claim and proceed to compute the tax as per historical accounting pattern and provision of this Ordinance and all other provisions of the Ordinance shall apply accordingly. (Underlining is for emphasis)

6. In order to ascertain the correct and proper application of the aforesaid provisions, it is imperative that first of all the meaning and scope of expression "gross loss" is determined, which otherwise is not defined in the Ordinance. In this respect, it needs to be appreciated and realized that the expression used in the provisions of law is neither the "accounting loss" nor the "taxable loss".

7. The context of the provision, when it specifically refers to "accounting pattern" within it, clearly suggests that the expression "gross loss" has been used in accounting parlance [i.e. generally accepted account principles] where it refers to difference between sales and cost of sales in a manner that latter exceeds the former. That is to say, under generally accepted accounting principles, "gross loss" refers to a situation where 'cost of sales' exceed the 'sales'. Alternatively, where 'cost of sales' remains less than 'sales' the resultant amount is denoted by "gross profit". Thus "gross loss" is opposite to "gross profit". Further, in such accounting parlance both "gross loss" and "gross profit", as the case may be, is determined before accounting for administration expenses, selling expenses, financial charges and other charges etc.

8. It is in the aforesaid context that legislature, through the proviso, has created an exception with regard to imposition of minimum tax. Under this proviso, such companies which declare "gross loss" could be excused from levy of minimum tax provided such "gross loss" emerges before setoff of depreciation and other inadmissible expenses. In other words, under these provisions, only such companies are not liable to minimum tax where "cost of sales" exceeds the "sales" before and that too without accounting for depreciation and inadmissible expenses. For determining the entitlement to exception, one has to see that "cost of sales" even prior to accounting for depreciation charge and other inadmissible expenses exceed the "sales".

9. In the light of the aforesaid analysis of the statutory provisions, when one refers to facts of the present case, it follows that the taxpayer has declared a "gross loss" of Rs.22,515,405 [difference between 'sales of Rs.2,212,589,208 and 'cost of sales' of Rs.2,235,104,613]. However, this "gross loss" has been arrived at after the taxpayer had included an amount of Rs.52,590,422 under the head 'cost of sales' on account of depreciation charge. Such "gross loss" situation does not entitle the taxpayer to claim exclusion from ambit of minimum tax. That is so, because when one determines the 'cost of sales' before accounting for depreciation this aggregates to Rs.2,184,514,191 which in turn converts the situation to "gross profit", in which situation the exception is not applicable.

10. The interpretation of the subject provision, as aforesaid, also meets the test of reasonableness, equity, logic and fairness. The charge on account of depreciation is always a "non-cash" item. Thus, if an entity ends up into a "gross loss" scenario prior to account for depreciation one would not be absolutely unjustified to conclude about enterprise's inability to pay minimum tax in such a situation. It is for such circumstances that the legislature has created an exit that those enterprises should be excused from payment of minimum tax where there is "gross loss" prior to account for depreciation. Otherwise, if gross loss is arrived at after deducting depreciation charge, which is a non-cash item, an enterprise could still have surplus cash to discharge minimum tax liability. Such enterprises have been held by these provisions to be liable to minimum tax under the law.

11. In view of the above, the orders of the authorities below being in accordance with law are upheld. The taxpayer appeal is dismissed being devoid of any merits. CMA/184/Tax(Trib.) Appeal dismissed.