2005 PLP (Trib (PTD)

(3) That the learned CIT Appeals has erred in misinterpreting the definition of income, as contained in the Income Tax Ordinance, 1979 and ratio of various judgments of the learned Tribunal and Hon'ble High Court and Supreme Court relied by the appellant. (4) That without prejudice to above the interpretation adopted by the learned CIT Appeals is wrong and against the principles settled and explained in these judgments of higher appellate forums.

3. The respective representative of the two sides have been heard and the two orders below have been perused.

4. The A.R. for the appellant assails the findings of the CIT(A) on the basis of the following arguments:‑‑ The A.R. of the appellant submits that the only issue requiring an adjudication in these appeals relates to the answer to the question whether the brought forward losses of the preceding assessments years can be adjusted against the profit and gains derived by an assessee for a subsequent assessment year, which are exempt for tax under any related provision of the Income Tax Ordinance. It is submitted that the facts of the case in brief are that the appellant public company is enjoying exemption as per the provision of section 118‑D of the Second Schedule to the Income Tax Ordinance, 1979. Whereas in respect of assessment years, 1995‑96 and 1996‑97 losses were declared and finally accepted by the Assessing Officer, the appellant derived profit and gains for assessment years, 1997‑98 and 1998‑

99. The Assessing Officer while carrying forward brought forward losses of the preceding years in his orders under section 156 for the impugned assessment years adjusted the brought forward losses against the exempt profit and gains of the appellant derived for assessment years, 1997‑98 and 1998‑

99. This action' was contrary to the provision of sections 34 and 35 of the Income Tax Ordinance, 1979. The Assessing Officer, however, refused to rectify this apparent mistake when a request was made by the appellant in this behalf. The CIT(A) in his decision, in appeal against this action of refusal to rectify the order, has maintained the Assessing Officer's action to be valid; against which the appellant is in appeal before the ITAT. In this connection it is argued that for the purposes of setting off the business losses assessed under one of the heads of income against the income derived under the other heads of income for the same assessment year, provisions of section 34 of the Income Tax Ordinance, 1979 are applicable, whereas for purposes of carry forward of the assessed business losses, and their adjustments against income of the succeeding assessment years, provisions of section 35 of the Income Tax Ordinance, 1979 are applicable. Section 34 very clearly provides that the losses assessed under one head are to be set off against the assessable income under the other heads derived during the said assessment year. Provisions of section 34 of the income Tax Ordinance, 1979 are as follows:‑‑ "34 Set‑off of losses.‑‑‑Where an assessee sustains a loss (not being a loss to which section 36 of section 37 applies) in any assessment year under, any head of income specified in section 15, he shall subject to clause (v) of subsection (1) of section 23 be entitled to have the amount of the loss set‑off against his income (other than income to which subsection (7) or (9) of section 12 applies); if any, under any other head assessable for that assessment year. " It is argued that as per the, provisions of section 35 of the Income Tax Ordinance,. 1979, the assessed losses carried forward can only be set off against the assessable income of the succeeding assessment years which is derived from the same source. It is argued that the CIT(A), while maintaining the Assessing Officer's action of refusing to rectify his orders through which brought forward losses were set off against the profit and gains of the subsequent assessment years, even though these enjoyed exemption under the Second Schedule, unjustifiably, found the reliance placed by the appellant on the Hon'ble Supreme Court judgment cited before him: dated 28‑3‑2000 in Civil Petitions Nos. 38, 156 to 180; 199 to 276, 278 to 283, 285 to 320, 323 to 411 and 518 to 524 of 2000 as irrelevant and observed incorrectly that the Hon'ble Supreme Court judgment related to chargeability of the W.W.F. only and was not applicable in this case. It is contended that this assertion of the CIT(A) is patently incorrect and based on mis-appreciation of the ratio of the Hon'ble Supreme Court judgment, which very clearly lays down the meaning of the words `assessable' in respect of chargeability 'and the levy of W.W.F. It is argued that the Hon'ble Supreme Court judgments precise ratio is that WWF is leviable on income assessable under the provisions of Income Tax Ordinance, 1979 and is not leviable one exempt income. On the same analogy since appellants exempt income was not assessable under the provisions of Income Tax Ordinance, 1979, the brought forward losses could not be adjusted against this exempt income as provisions of sections 34 and 35 permitted set off only against income assessable under the Ordinance only. The A. R. of the appellant also places reliance on a case from the Indian jurisdiction, reported as: (1962) 46 ITR 1135, and the related head note reads as under:‑‑ "The expression `assessable income which was used in section 23A(1) of the Indian Income Tax Act, 1922, before it was amended in 1955, meant income liable to be assessed income‑tax; and income which was exempt from tax, though it formed part of the total income, had to be excluded in determining whether 60% of the assessable income was distributed as dividends." It is finally, contended that since the appellant did not have any assessable income in respect of the assessment years, 1997‑98 and 1998‑99, as the related profit and gains of these years were exempt under Clause 118‑D of the Second Schedule to the Income Tax Ordinance, 1979, the brought forward losses could not be set off against this exempt income, which as stated was not assessable under the provisions of tire Income Tax Ordinance, 1979.

5. The D.R. for the Department supports the orders of the two officers below and contends that the action of the Assessing Officer in setting off the brought forward loss against appellant's income for the succeeding assessment years was in accordance with the provisions of section 35 of the Income Tax Ordinance, 1979 and the CIT(A) was justified in rejecting the appellant's appeal relating to Assessing's Officer refusal to rectify his impugned action of setting off the losses.

6. The related arguments made before us have been taken into consideration and the judgment relied upon by the A.R. of the appellant have also been perused. The CIT(A) has placed reliance on the ITAT judgment 1999 PTD (Trib.) 1528. It has been ` held in this judgment that only profit and gains derived by an assessee enjoy exemption under the provisions of the 2nd Schedule and the losses incurred during the period of exemption are not exempt and therefore can be carried forward and set‑off against income for the subsequent assessment years. It has also been held in the judgment that the total income of an assessee from all sources derived under the various heads of income specified in section 15 is to be computed first as its total income as per provisions of section 14 to the Income Tax Ordinance, 1979. Thereafter, such portion of this total income which is exempt under any provision of the Income Tax Ordinance, 1979 shall be excluded from this total income and the balance amount left is the income assessable for the related assessment year. In view of the above we are inclined to agree with the A.R. of the appellant that the provisions of section 34 of the Income Tax Ordinance, 1979, are very explicit and refer to the adjustment of the business losses assessed under one head of income against the income assessable under the other heads specified in section 15 of the Income Tax Ordinance, 1979. It is also evident that the term `assessable income' relates only to such income which is chargeable to tax for the year in accordance with the provisions of Income Tax Ordinance, 1979. Since in this case, for the years impugned in appeal, the income of the appellant enjoyed exemption under the related provisions of the Second Schedule to the Ordinance, this income was not to be included in appellants assessable income. The Assessing Officer, therefore, clearly fell in error in adjusting brought forward business losses against the exempt income of the subsequent assessment years as the provisions of section 35 of the Income Tax Ordinance, 1979 read with section 34 of the Ordinance, lay down that brought forward losses could only be set‑off against assessable income for the succeeding assessment years. The CIT(A) also fell in error in not appreciating the ratio of the ITAT judgment supra and in also not finding the reliance placed on the Hon'ble Supreme Court judgments reported as valid which very clearly held that W.W.F. was leviable only on income assessable under the provisions of Income Tax Ordinance, 1979 and would not leviable on income exempt under the provisions of the Second Schedule of the Income Tax Ordinance, 1979 i.e. exempt income does not constitute assessable income. Since an identical situation in this case is involved i.e. whether income exempt under the Second Schedule of the Income Tax Ordinance, 1979 was to be considered as `income assessable' under the provisions of the Income Tax Ordinance, 1979, the ratio of the Hon'ble Supreme Court judgment was relevant and the appellant's exempt income did not constitute income assessable under the provisions of Income Tax Ordinance, 1979. We, therefore, have no hesitation in holding that Assessing Officer and the CIT(A) were not justified in holding the view that the brought forward business losses of the appellant could be set off against its income of the succeeding assessment years, which was otherwise exempt under Clause 118‑D of the Second Schedule to the Income Tax Ordinance, 1979. The impugned order of CIT(A) is accordingly vacated and the Assessing Officer is directed to rectify his impugned assessment orders and not to set off the business losses against the appellant's exempt income for the assessment years, 1997‑98 and 1998‑99.

6. The appeals decided in the manner indicated above: C.M.A./278/Tax (Trib.) Order accordingly.