1990 PLP (Trib (PTD)

ITA No. 454/KB of 1983‑84 pertaining to assessment year 1979‑80 has been preferred at the instance of department while ITA No. 2080 to ITA No. 2084/KB of 1986‑87 pertaining to assessment years 1980‑81 to 1985‑86 have been preferred at the instance of assessee (hereinafter referred to as the appellant). One issue relating to the exemption of special allowance is common in all the appeals while there are other issues also in the appeals pertaining to assessment years 1980‑81, 1981‑82 and 1982‑

83. The issue relating to the special allowance is, therefore, disposed of jointly as follows.

2. SPECIAL ALLOWANCE.‑‑The appellant is Chairman and Chief Executive of Atlas Autos Limited. The Board of Directors of the Atlas Autos Limited passed a resolution on 7th April, 1980 whereby it was resolved that the appointment of Mr. Yousuf H. Shirazr as Chief Executive of the Company which expired on 30‑8‑1979 was renewed for a further period of three years. The remuneration of Mr. Yousuf H. Shirazi was fixed by this resolution which, inter alia, included special allowance of Rs. 3,000 per month. The terms of appointment of the Chief Executive of M/s. Atlas Autos Limited were approved by the Controller of Capital Issues. Finance Division. Government of Pakistan vide their letter dated 4‑2‑1981. Subsequently the Board of Directors passed two resolutions on 30th of March, 1983 as follows: RESOLVED: "that the special allowance paid to Mr. Yousuf H. Shirazi as Chief Executive of the Company is not in the nature of entertainment, conveyance and other perquisite and benefit but the payment is in lieu of reimbursement of expenses incurred by him on commercial intelligence in order to protect and improve operating conditions of the company." FURTHER RESOLVED: "that this resolution clarifying the nature of the payment of the special allowance has retrospective effect from 7th April, 1980 the date of the aforesaid resolution passed."

3. Keeping the above background in view we come to the ‑ facts of the appeals under consideration. In the assessment year 1979‑80, the appellant in his return of income claimed exemption of special allowance amounting to Rs. 30,000. 1t was contended on behalf of the appellant that special allowance paid to him by the company as Chairman was exempt under Clause (25) of Part I of the Second Schedule to the Income Tax Ordinance, 1979. Clause (25) of Second Schedule to the Income Tax Ordinance, 1979 as it stood in the assessment year 1979‑80 read as follows: "Any special allowance of benefit (not being entertainment or conveyance allowance or other perquisite within the meaning of subsection (2) of section 16 specially granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit."

4. The ITO held that this exemption is identical to clause (VI) of subsection (3) of section 4 of the Repealed Income‑tax Act, 1922 and, therefore, the appellant was required to prove that he had actually incurred this amount. On behalf of appellant an explanation was furnished vide letter dated 8th May, 1981 as follows: "The special allowance was specifically granted by the company to the Chairman to meet expenses which were incurred by the Chairman wholly and necessarily in the performance of the duty of the office of Chairman. We have already furnished a certificate to the effect that the expenses on special allowance were actually incurred by the Chairman for the purposes of the business of the Company. It may also please be noted that the special allowance was not in the nature of an entertainment or other perquisites within the meaning of subsection (2) of section 16 of the Income‑tax Ordinance, 1979. The allowance fully qualified the condition laid down by the C.B.R. vide Circular No. 12 of 1980 (Income tax dated 12‑6‑1980). Therefore, the disallowance of special allowance by Your Honour would tantamount to disobeying the directions of the C.B.R."

5. The ITO did not accept the contention and disallowed the exemption as follows: "He has also referred to the Board's Circular No. 12 dated 12‑6‑1980. The circular clearly lays down the following three conditions in order to make special allowance exempt from tax. (i) the special allowance or benefit should be specifically granted to meet expenses; (ii) the allowance or benefit should not be in the nature of an entertainment allowance or other perquisite within the meaning of subsection (2) of section 16. (iii) the expenses should be wholly and necessarily incurred in the performance of the duties of an office or employment of profit. The said circular in para 5 also states that the common items falling under the category are travelling allowance as well under the circular, the assessee is required to place facts before the Assessing Officer as to for what specific purpose the so‑called special allowance was granted and the allowance has been spent for that specific purpose alone, even though there may be some savings to the assessee out of the allowance. Neither these conditions have been fulfilled by the assessee. He bas not filed any documents like any copy of agreement etc. with the company as to for what purpose this allowance has been sanctioned to him. True that written evidence is not necessary, but existence of an oral agreement at least is a must. The assessee has, however, failed to prove either of those, nor has given any proof of his spending the allowance for that special purpose for which it was sanctioned. Mere filing a certificate by the assessee himself that he had spent the allowance wholly and necessarily for the, business of the company is not sufficient, because if certificate like the one filed is accepted, it would tantamount to deprive the department of its right to look into such type of claim provided under the Income‑tax law or recognized by the Courts of law while deciding such issues falling within the section 4(3)(vi) of the Repealed Act and now under the Ordinance, 1979. Hence the claim amounting to Rs. 30,000 is disallowed under this head‑"

6. The appellant being aggrieved with the above disallowance preferred first appeal before the learned CIT (A) Zone‑3, Karachi. The learned CIT (A) deleted the addition made by the ITO without assigning any reason by making a general observation that the claim of the appellant was justified. Being aggrieved with this scanty and slipshod order the department has preferred second appeal before us being ITA No. 454/KB of 1983‑84.

7. In the assessment years 1980‑81 to 1985‑86 similar disallowance was made by the assessing officer.

8. The appellant again feeling aggrieved preferred first appeals for all these assessment years before the learned C.I.T. (A) Zone‑2, Karachi. It would be appropriate to refer here that the exemption of special allowance was previously allowed under clause (25) of the Second Schedule to the Income Tax Ordinance, 1979 but now it is covered under clause (39) of the Second Schedule. The same learned CIT (A) took a different view in the subsequent assessment years and maintained the disallowance as follows: "In the year 1980‑81 the issue is the taxing of special allowance to the extent of Rs. 30,

000. With all due respects to the arguments advanced by the learned A.R. I would like to state that keeping in view the provisions of Rule 16 and also the admission by the learned counsel in the written arguments that this allowance was for entertainment purposes and also keeping in view the fact that separate entertainment and conveyance expenses are claimed by the company in which the appellant is a Director the ITO was justified in taxing this special allowance. The action of the ITO is accordingly confirmed and the claim rejected."

9. Thus, in the assessment year 1979‑80 the department is aggrieved with the grant of exemption from tax to the special allowance received by the appellant, while in the assessment years 1980‑81 to 1985‑86 the appellant is aggrieved with the disallowance thereof.

10. We have heard Mr. Mahmood A. Hashmi, learned counsel for the appellant and Mr. Mohammad Dawood Khan, learned D.R. for the Department. Mr. Mahmood Hashmi, learned counsel for the appellant has contended that the exemption to the special allowance received by the appellant as Chief Executive of the company was allowed from the assessment years 1967‑68 to 1978‑79 under the provisions of section 4(3)(vi) of the Repealed Income‑tax Act, 1922. The ITO disallowed the claim for the first time in the assessment year 1979‑80 which was allowed in appeal by the learned CIT (A) and thereafter in the subsequent years the learned CIT (A) also disallowed the claim which is not justified. He has contended that the ITO has disallowed this claim for the non‑compliance of his objection that the particulars of the expenses actually incurred should be filed. He has maintained that a Certificate from the appellant in the capacity of Chief Executive of the company was filed which was to the effect that the special allowance paid to him by the company to meet the expenses was incurred by him wholly and necessarily in the performance of duties of office and employment of profit. He has further contended that the appellant was not required to furnish the details as to the actual expenses and the purpose for which. the sum was incurred. His plea is that the details are not required to be furnished as it may be in the nature of secret expenditure and the mere certificate by the appellant that the expenditure has been incurred is sufficient. In support of his contention he has placed reliance on a judgment of Bombay High Court in the case of Tejaji Farasram Kharawalla v. C.I.T. (1948) 16 ITR

260. He has further submitted that the special allowance should not be treated as taxable perquisite because it is merely reimbursement of the expenses incurred by the appellant.

11. On the other hand, the learned D.R. has supported the disallowance as made by the ITO in all the assessment years under appeal and the order of CIT (A) in the assessment years 1980‑81 to 1985‑

86. So far the order of learned CIT (A) in the assessment year 1979‑80 is concerned, the learned D.R. has submitted that it is negated by the order of learned CIT (A) herself in the subsequent years. He has contended that the question of reimbursement of expenses does not arise as no proof of actual incurring of the expenses has been furnished. He has further contended that the granting of exemption in the assessment years 1967‑68 to 1978‑79 is of no help to the appellant, first, because every assessment year is an independent and separate unit and, secondly, the provision granting exemption in the Repealed Act of 1922, and the Income‑tax Ordinance, 1979 are not similar.

12. We have carefully considered the contentions raised by the learned representatives for the parties. The first contention of Mr. Mahmood Hashmi that the exemption was allowed under the Repealed Income‑tax Act from the assessment year 1967‑68 to 1978‑79 by virtue of the provisions contained in section 4(3)(vi) of the repealed Act, therefore, the disallowance thereof under the Income Tax Ordinance, 1979 is not justified, does not appear to be convincing. There is substance in the contention of learned D.R. that the provision in the two statutes are not similar. Section 4(3)(vi) of the Repealed Income‑tax Act read as follows: "(vi) Any special allowance, benefit or perquisite specifically granted to meet expenses, wholly and necessarily incurred in the performance of the duties of an office or employment of profit." On the other hand clause (39) of the Second Schedule to the Income Tax Ordinance, 1979 reads as follows: "(39) Any special allowance or benefit (not being entertainment or conveyance allowance or other perquisite within the meaning of subsection (2) of section 16 specially granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit."

13. It will be seen that under the Repealed Income‑tax Act, 1922 any special allowance, benefit or perquisite specifically granted to meet expenses wholly and necessarily incurred in the performance of duties of an office or employment of profit enjoyed exemption, while under clause (39) of Part ‑1 of the Second Schedule to the Income Tax Ordinance, 1979 it is provided that the special allowance or benefit should not be in the nature of entertainment or conveyance allowance or other perquisite within the meaning of subsection (2) of section

16. Thus, the scope of special allowance enjoying exemption under the Repealed Income‑tax Act, 1922 was broader than the special allowance or benefit granted exemption under clause (39) of Part 1 of the Second Schedule to the Income Tax Ordinance, 1979. There is another significant departure made by the legislature. It is provided in subsection (3) of section 4 of the Repealed Income‑tax Act, 1922 as follows: "Subject to the provisions of this Act, any income, profits or gains falling within the following clauses shall not to such extent as may be specified in this subsection or prescribed in this behalf, be included in the total income of the person receiving them. .

14. Thus, it is specifically provided that the income profits or gains falling under the various clauses of subsection (3) of section 4 were not to be included in the total income of the person receiving them. On the other hand, section 14(1) of the Income‑tax Ordinance, 1979 reads as follows: "Exemptions.‑‑‑(1) Notwithstanding anything contained in this Ordinance, the incomes or classes of incomes, or persons or classes of persons specified in the Second Schedule shall be‑‑ (a) exempt from tax under this Ordinance, subject to the conditions and to the extent specified therein; or (b) liable to tax at such rates, which are less than the rates specified in the First Schedule, as are specified therein; or (c) allowed a reduction in tax liability, subject to the conditions and to the extent specified therein; or (d) exempt from the operation of any provisions of this Ordinance, subject to the conditions and to the extent specified therein."

15. A perusal of the above section shows that clause (a) has granted exemption from tax under this Ordinance, subject to the conditions and to the extent specified therein and in pursuance thereof Part 1 of the Second Schedule of the Income‑tax Ordinance, 1979, has been enacted. It is not provided in section 14 that the income specified in Second Schedule shall not be included in the total income but it has merely provided that it shall be exempted subject to the conditions specified in the Second Schedule and on the other hand a new provision has been inserted in the Ordinance which is contained in section 49, f which is reproduced below: "

49. Allowances to be treated as deductions from income.‑‑Save as otherwise provided in this Ordinance, any allowance, admissible or any sum exempt from tax under any provision contained in this Ordinance shall be included in the total income, but may be deducted from such income for the purposes of computing the tax payable by an assessee."

16. Thus, under the Repealed Income‑tax Act, 1922 the income profit or gains falling under any of the clauses specified in subsection (3) of section 4 were not to be included in the total income of the person receiving them but under the Income‑tax Ordinance 1979 by virtue of section 49 all such allowances or any sum exempt from tax is to be included in the total income but it has to be deducted from such income for the purpose of computing the tax payable by an assessee. It means that all the provisions contained in Schedule II of Income‑tax Ordinance, 1979 including clause (39) have to be read with section 49 of the Ordinance. When both these provisions are read together it becomes clear that the special allowance granted to meet the expenses in performance of duties of office or employment or profit is to be included in the total income of the assessee in the first step and thereafter so much of it is to be allowed exemption as has been incurred on the expenses other than entertainment, or conveyance or other I perquisite within the meaning of subsection (2) of section 16.

17. For the purpose of determining whether any special allowance is entitled for exemption or not the ITO is supposed to examine the nature of expenses and actual incurring of the expenses. He is also supposed to examine whether the expenses have been incurred wholly and necessarily in the performance of the duty of an office or employment of profit or not. Thus, in order to enjoy the exemption an assessee is required to furnish evidence for proving the actual incurring of expenses and is further required to prove that the expenses are not in the nature of entertainment or conveyance allowance or perquisite within the meaning of subsection (2) of section 16 and that they have been actually incurred in the performance of the duties of an office or employment of profit. The burden of furnishing evidence in this behalf lies on an assessee. In other words the special allowance received by an employee from his employer for the purpose of meeting an expense would be in the nature of his income till he actually spends the amount received by him for the specified purpose. If the employee spends the amount in incurring the expenses on the purposes for which the amount has been r entrusted to him by reason of his‑so incurring the expenditure the amount received by him ceases to be his income or falls cut of his income. Till that time the special allowance received by him retains the character of his income. If an assessee fails to establish that the entire amount received by him as special allowance has been expended by him in incurring expenses on the purposes for which the amount had been paid to him the combined effect of the provisions contained in sections 14, 49 and clause (39) of Part 1 to the Second Schedule of the Income‑tax Ordinance, 1979 would be that it would be included in his total income.

18. So far the ruling relied upon by Mr. Mahmood Hashmi reported as (1948) 16 ITR 260 is concerned, we regret to observe that Mr. Mahmood Hashmi has cited an overruled ruling. It is difficult to believe that Mr. Mahmood Hashmi has placed reliance on this overruled ruling out of ignorance because the ruling relied upon by Mr. Mahmood Hashmi has been overruled in the case of very same party by Supreme Court of India which is reported as (1968) 67 ITR 95, and the judgment of Supreme Court of India is cited in a judgment of Sindh High Court reported as (1984) P T D 169 which has been cited by Mr. Mahmood Hashmi himself during the course of arguments. Mr. Mahmood Hashmi is a very senior and respectable member of the Bar and it is not expected from such senior advocates that the overruled rulings shall be cited by them in support of their contentions. It has been held by the Supreme Court of India in the case of CIT v. Tejaji Farasram Kharawalla (cited supra) whereby judgment of Bombay High Court reported as (1948) 16 ITR 260 was overruled, that any surplus remaining in the hands of the grantee after meeting the expenses does not bear the character of the allowance for meeting expenses, or for performing duties of the office or employment of profit and would be taxable. This would be so even if the employer has disabled himself from demanding refund of the amount not expended for meeting the expenses incurred in the performance of the duties of an office or employment of profits and the surplus remaining in the hands of the grantee acquires for the purpose of Income‑tax Act the character of additional remuneration.

19. As a result of above discussion it is held that for availing exemption under clause (39) of Part 1 to the Second Schedule of the Income‑tax Ordinance, 1979 following four conditions should be fulfilled: (a) the special allowance or benefit should be specially granted to meet the expenses; (b) the allowance or benefit should not be in the nature of an entertainment allowance, conveyance allowance or other perquisite within the meaning of subsection (2) of section 16 of the Income‑tax Ordinance; (c) the expense should be wholly and necessarily incurred in the performance of the duties of an office or employment of profit; (d) the exemption is only to the extent to which such expenses are actually incurred.

20. The onus of establishing the above requirements lies on an assessee and in the event of his failure the allowance to the extent of non‑establishment of above conditions shall not be excluded from the total income and shall be treated as taxable income.

21. Now applying the above principles to the facts of the present case we find that it is admitted position that in none of the assessment years under consideration the appellant has discharged the onus heavily laid on him. Moreover it is evident from the impugned order of learned CIT (A) for the assessment years 1980‑81 to 1985‑86 that there was admission by the learned counsel for the appellant in the written arguments before the learned CTT (A) that the allowance for which exemption was being claimed was for entertainment purposes. Thus, this admission is sufficient per se for refusing the exemption and, therefore, the learned two officers below have rightly refused the exemption to the appellant in the assessment years 1980‑81 to 1985‑86 to which no exception can be taken. So far the assessment year 1979‑80 is concerned it is held that the ITO rightly disallowed the exemption claimed as the appellant failed to discharge the onus and the learned CIT (A) was not justified in deleting the addition and extending the exemption. The finding of the learned CIT (A) is, therefore, vacated and the order of learned ITO is hereby restored.

22. This brings us to the second objection of the appellant in the assessment years 1980‑81, 1981‑82 and 1982‑83 relating to the disallowance of the claim of interest amounting to Rs. 55,566, Rs. 137,774 and Rs. 31,753 respectively. A perusal of the assessment orders in these three assessment years shows that the appellant was required to give bifurcation of the interest relatable to investment in income‑generating assets liable to tax and to investment in non‑income generating assets or the income exempt from income tax. The appellant failed to furnish such bifurcation and, therefore, the ITO disallowed the amount of interest on loan which tax under the Ordinance. The ITO made disallowance in respect of the interest attributable to exempt income by placing reliance on the provision contained in section 31(2)(a) of the Income tax Ordinance which reads as follows: "(2) Nothing contained in subsection (1) shall apply‑‑ (a) to any such sum paid or expenditure laid out or expended which is allocable to any income exempt from tax under this Ordinance."

23. The learned CIT (A) maintained the disallowance. Mr. Mahmood Hashmi, learned counsel for the appellant is not able to show any infirmity in the order of learned ITO and, therefore, there is no justification for any interference. The disallowance as made by the two officers below in the three assessment years under consideration is, therefore, maintained. Mr. Mahmood Hashmi, learned counsel for the appellant has not pressed ground No. 3 in the appeals pertaining to the assessment years 1981‑82 and 1982‑

83. No other point is agitated or pressed before us.

24. Consequent to the above findings the departmental appeal being ITA No. 454/KB of 1983‑84 is allowed and the remaining appeals at the instance of assessee stand dismissed. M.B.A./882/T Order accordingly.