2012 PLP (Trib (PTD)

IKRAM ULLAH GHAURI, ACCOUNTANT MEMBER

By this order we intend to dispose of the aforesaid appeals filed by the taxpayer against the order dated 25-10-2011, passed by the learned Commissioner of Inland Revenue (Appeals-1), Islamabad for the Assessment Years 2006 to 2010.

2. The taxpayer Messrs Hub Power Co. Ltd. is a Public Limited Company which is engaged in the business of electric power generation, transmission and distribution. Returns for the tax years, 2006, 2007 and 2008 were filed declaring taxable income at "Nil" which constituted deemed assessment orders in terms of section 120(1) of the Income Tax Ordinance, 2001. Subsequently notice under section 122(9) for amendment of assessment under section 122'(5A) of the Income Tax Ordinance, 2001 was issued for the tax years 2006, 2007 and 2008 and after considering reply of the taxpayer, consolidated amended assessment order under section 122(5A) of the Income Tax Ordinance, 2001 was passed on 30-8-2011 for the said tax years raising tax demand of Rs.87,965,557, Rs.41,376,232 and Rs.9,595,298 respectively.

3. The appellant being aggrieved with the order of the CIR (Appeals-1) filed appeal before this forum on the following-grounds: (a) The order of the learned Commissioner, Inland Revenue, (Appeals-1), Islamabad dated 25-10-2011 is bad in law and on facts of the case. (b) The learned Commissioner (Appeals-1) has erred in upholding the order of the Additional Commissioner Inland Revenue who acted without jurisdiction and erred in invoking the provisions of section 122(5A) of the Income Tax Ordinance, 2001 to amend an assessment finalized under section 120(1)(b) by declaring it erroneous and prejudicial to the interest of revenue. (c) The learned Commissioner (Appeals-1) has erred in holding that the Additional Commissioner had valid jurisdiction to issue a notice under section 122(5A) of the Ordinance and passed the amended assessment order in terms of section 122(5A) of the Ordinance. (d) The learned Commissioner (Appeals-1) was not justified. in confirming the ' order of the Additional Commissioner who imposed tax on exempt profit on debt by treating the profit attributable to call and term deposits outside the scope of exemption available to the appellant under clause (74) Part-I of thee second schedule of the Ordinance. A (e) That without prejudice to grounds of appeals supra, the learned Commissioner (Appeals-1) failed to appreciate that the exemption under clause (74) referred above is wide enough to include, both profit on debt from bank accounts as well as from bank deposits and therefore the Additional Commissioner, has erred in disallowing' the exemption of profit on debt. (f) The learned Commissioner (Appeals-l) has erred in confirming the order of the Additional Commissioner, who extended the application of the provisions of Workers' Welfare Fund Ordinance, 1971" and charging WWF @ 2% of the total income. (g) That without prejudice to the grounds of Appeal No.(t) above, the learned Commissioner (Apperals-1) failed to appreciate the ratio decidendi of the judgments of Superior Courts viz: 2010 PTD 704 and PLJ 2005 SC 936 (sic) while upholding the levy of WWF on the appellant without confronting it by the Additional Commissioner.

4. The taxpayer being aggrieved filed appeals before CIR (Appeals-1) who vide order dated 25-10-2011 rejected the appeal and upheld the order passed ' by the Additional Commissioner, Audit Zone-Ill, L.T.U. Islamabad.

5. Hearing in the case was fixed on 18-11-2011 and finally heard on 29-11-2011. The learned counsel of the appellant reiterated his grounds of appeal as mentioned in Para (3) above.

6. On the other hand the D.R./L.A. supported the order dated 25-10-2011 of 'the CIR (Appeals-1), Islamabad as 'well as assessment order passed under section 122(5A) by the Additional Commissioner, Inland Revenue, Audit-III, L.T.U. Islamabad for the tax years 2006 to 2008.

7. Arguments of the D.R./L.A. 7.1 The D.R. / L.A. argued that as per note 13-14 to the audited accounts for the year ending 2006, 2007 and 2008 show that out of total cash/bank balance of Rs.3,363,303, Rs.742,861,000 and Rs.662,226,000 respectively Rs. 3,603,440,000, Rs.525,582,000 and Rs.511,125,000 are on account of call and term deposits. Term/call deposits are typically deposits held at a financial institution for a fixed term, therefore, when a term deposit/call deposit is opened the lender (customer) understands that the money can only be withdrawn after the term ended or by giving notice for a pre-determined number of days. 7.2 The D.R/L.A. further argued that terms deposits/call deposits being time specific, the funds in the aforesaid deposits are not utilized in the operation of the company/project, therefore, profit earned as such deposit is not entitled to exemption under clause 74 of Part-I of the Second Schedule to the Income Tax Ordinance, 2001. Therefore, claiming the entire interest income as exempt for the tax years 2006 to 2008 has rendered the assessments finalized under section 120(1) of the Income Tax s Ordinance, 2001 as erroneous and prejudicial to the interest of revenue resulting in loss of Revenue of Rs.84,825,276,. Rs.39,894,439 and Rs.9,251,666 respectively for the tax years 2006, 2007 and 2008.

8. This Tribunal is of the view that the entire case revolves around the following issues:-- (a) Whether Clause 74 of Part-I of the Second Schedule to the Income Tax Ordinance, 2001 covers "term deposits" for the purpose of exemption from income tax. (b) Whether "call/term deposits" can be construed to be directly connected with financial transaction relating to the project operations (c) Whether the benefit of Clause 74 of Part-I is restricted to the "bank deposits" or "accounts with financial institutions" relating to project operation. (d) Whether WWF is chargeable to tax if exemption under clause 74 of Part-I of the second schedule is available to the taxpayer. In the above scenario we feel imperative to discuss Clause 74 of Part-I, of 2nd Schedule and definitions of "Bank deposits "call" and "terms deposits" as follows:-- Clause 74 of Part-I of the 2nd Schedule: "Any profit derived by the Hub Power Company Ltd. on or after the first day of July, 1991 on its bank deposits or accounts with financial institutions directly connected with financial transactions relating to the project operations". Definition of Term Deposit. Term deposit is the popular name used for .a savings product in Australia, New Zealand and Canada, but they are used throughout the world by both consumers and businesses to store cash for the future. Term deposits are also known D as Certificates of Deposit in the United States, bonds in the United Kingdom and Fixed Deposits in India and some other countries. Term Deposit Meaning: In deposit terminology, the phrase Term deposit refers to a savings account or certificate of deposit that pays a fixed rate of interest until a given maturity date. Funds placed in a Term deposit usually cannot be withdrawn prior to maturity or they can perhaps only be withdrawn with advanced notice and/or' by having a penalty assessed. For example, a "term deposit" will often be used by individuals, businesses and financial institutions around the world as a means of storing their liquid funds for a fixed period of time for future use. In the retail market. Term deposits are relatively safe investments when provided by insured financial institutions such as banks, savings and loan F corporations and credit unions that are duly. regulated within the country in which they operate. Also, while the phrase Term deposit is in common usage in countries like Australia, Canada and New Zealand, Term deposits are also known as time deposits in the United States, as bonds in Great Britain, and as Fixed Deposits in India and some other countries. Term deposits involve putting cash into a savings account with a financial institution that pays a fixed rate of interest until a set maturity date. Funds cannot generally be withdrawn during the time frame covered by the Term Deposit unless a penalty is paid. Therefore, a bank deposit held at a financial facility for the purpose of a long term investment for capital preservation, growth or fixed income. Financial facilities for investment accounts include banks, insurance companies, and brokerage houses. Bank deposits, Call Deposit. Bank Deposits What Does Bank Deposits Mean? Money placed into a banking institution for safekeeping. Bank deposits are made to deposit accounts at a banking institution, such as savings accounts, checking accounts and money market accounts. The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the F account. The "deposit" itself is a liability owed by the bank to the depositor (the person or entity that made the deposit), and refers to this liability rather than to the actual funds that are deposited. Investopedia further explains Bank Deposits When someone opens a bank account and makes a deposit of cash, the account holder surrenders legal title to the cash. This cash becomes an asset of the bank; the account becomes a liability. Call Deposit/Bank deposits Meaning: In deposit terminology, the term "Call Deposit" refers to a specific type of interest bearing investment account that allows a person to withdraw their money from the account without a penalty. In many cases the money can be withdrawn from a "Call Deposit" account without prior notification to the bank. Call Deposit Example: For example, a person with a "Call/Bank Deposit" account, besides earning a favorable rate of interest, also has considerably more access to their money than people with their money invested in other types of accounts. As a result, a "Call/Bank Deposit" account has considerable advantages over other types of interest bearing accounts when liquidity is required. A "Call/Bank Deposit" account allows the holder instant access to their account and the ability to withdraw their money at any time without having to pay an early withdrawal penalty or inform the bank in advance of their intention to withdraw their funds. "Call/Bank Deposit" accounts generally have a minimum balance which must be maintained in order to take advantage of the benefits.

9. Conclusion: Hearing carefully examined the above definitions it transpires that the returns on ""term deposits" are substantially greater than rates paid on a simple savings or checking accounts (bank deposits). The reason for higher return is the relatively longer period of availability of investor's funds with the bank but they usually yield less than risk investments like stocks or bonds. No money can be invested in "term deposits" unless it is disengaged from the normal business operations of the creditor. Be that as it may the term deposits are prima facie outside the scope of business operations within the meaning of clause (74) of Part-I, 2nd Schedule until brought back to the regular stream of business operation. Term deposits attract a higher profits compared to the 1 "normal deposits" due to their long term removal from routine or ordinary course of company's business operations and therefore, are not entitled to the benefits of exemption under clause 74 which exemption is purely restricted to the "bank deposits". Secondly the funds deposited under a term deposit certificates cannot generally be withdrawn during the time frame covered by the "term deposit" and in case of their withdrawal before the maturity date, certain penalties have to be paid. G On the contrary the "bank deposits" in any saving or current account do not suffer any strings with regard to their withdrawal. Based on the discussion we concluded that Clause (74) of Part-I of the Second Schedule to the Income Tax Ordinance, 2001 does not covers "term deposits" for the purpose of exemption from income tax as the "term deposits" being time bound are not directly connected with financial transaction relating to the project operations hence is ousted from the purview of clause (74). The clause (74) provides exemption only to "bank deposits" relating to routine business operation of the H company and not either long term deposits. In view of the ratio decidendi of various judgments the exemption provisions are to be strictly construed. Had the intention of the legislature been to extend exemption to entire profit on debts and interest income, the words "bank deposits" would have not been expressly provided in clause (74). Profits or interest earned on debts are covered under presumptive tax regime and we do not find any substance in the appellant's claim of exemption. Notwithstanding the absence of merit in the appellant's case this Tribunal is of the view that the discriminatory exemption given to Hubco 1 Power is prima facie repugnant to the Article 25 of the Constitution of the Islamic Republic of Pakistan, 1973. We have also examined the issue of chargeability of WWF. The WWF is chargeable on the "total income" of an industrial establishment and not on "taxable income". The WWF is thus chargeable not only from the Hubco but all I. P. Ps, as well. The appellant of any other I.P.P. is an industrial establishment within the meaning of WWF Ordinance. The J appellant's contention that electricity generated by Hubco or any other I.P.P. is not an article within the meaning of WWF Ordinance is without substance. The criteria for an industrial establishment are the use of electricity for its operation. The appellant's claim that Hubco-is not an industrial establishment is baseless. In view of the above no legal infirmity is found in the order of the CIR (Appeals-1) and the same is hereby confirmed. The appeal is g dismissed accordingly. The respondents are directed to enforce, their demand along with penalties. This order consists of (08) pages each bears my signature and seal. C.M.A./279/Tax(Trib.) Appeal dismisse