2020 PLP 153 (PTD)

This order shall also dispose of PTR No. 285 of 2004 titled "Commissioner of Income Tax v. Grays Leasing Ltd. Lahore." as common questions of law and facts are involved in these cases.

2. Through this Reference Application under Section 133 of the Income Tax Ordinance, 2001 ("Ordinance of 2001"), following question of law, asserted to have arisen out of impugned order dated 02.09.2003, passed by learned Income Tax Appellate Tribunal, Lahore Bench, Lahore ("Appellate Tribunal"), has been proposed for our opinion:- "Whether lease key money is taxable being the sum received / receivable in connection with lease of an asset under section 12(19) of the Income Tax Ordinance, 1979 in the hands of lessor company or not?"

3. Brief facts of the case are that during course of assessment proceedings, a notice in terms of section 62 of the Income Tax Ordinance, 1979 ("the Ordinance of 1979") was issued to respondent-taxpayer regarding taxation of lease key money under Section 12(19) of the Ordinance of 1979, which culminated in passing of order-in-original dated 28.02.2001. Feeling aggrieved, respondent-taxpayer filed two appeals before learned Commissioner of Income Tax/Wealth Tax (Appeals) and the same were disposed of vide consolidated order dated 28.07.2001. Being dis-satisfied, respondent-taxpayer as well as applicant department filed appeals before learned Appellate Tribunal, which were disposed of vide order dated 02.09.2003. Being offended by the said decision, applicant-department moved Reference Applications before Appellate Tribunal for sending reference to the High Court, but the same have been rejected vide consolidated order dated 23.04.2004. Hence, this reference application.

4. Learned counsel for applicant-department submits that learned Appellate Tribunal was not justified to declare lease key money as not taxable and exclude the same from the income of assessee, within the contemplation of Section 12(19) of the Ordinance of 2001.

5. Learned counsel for respondent-taxpayer defends the impugned order and submits that learned counsel for applicant-department has failed to point out any illegality or legal infirmity in it, hence, the same is liable to be upheld.

6. Arguments heard. Available record perused.

7. The question proposed is whether 'Lease Key Money' is taxable, being the sum received in connection with lease of asset. 'Lease Key Money' is the initial deposit that is given to a leasing company on getting an asset on lease, which is retained as security deposit against lease of assets and recorded in the accounts under the head 'Lease Key Money'. During the lease term, lessor receives lease rentals and at the time of maturity of lease, the asset is transferred to the lessee against the residual value, which is the same, as received at the start of lease under the head 'Lease Key Money' and the said residual value / lease key is treated as 'sale proceeds' of the assets and, after deducting the tax written down value from the amount of lease key money, net gain / loss on leased assets is offered for tax.

8. This money is not taxable for the reason that the leasing companies are already offering to tax the same amount in the year of maturity of lease by considering it as sale proceeds of leased asset. Otherwise, lease key money will be taxed twice, once in the year of receipt as taxed by the tax authorities and then at the time of disposal of leased assets, by treating the same as Sale Price of leased asset. This is also further fortified by the CBR's Circular dated 11.05.2000. The said treatment is also in accordance with the provisions of Third Proviso to Rule 8(5)(j) of the Third Schedule to the repealed Income Tax Ordinance, 1979. The intention of legislature is to tax the amounts / payments which are attributable to leasing and not to moneys received as security deposits, adjustable against sale of assets after end of lease period or refundable to lessee. Learned Appellate Tribunal, after appreciating the legal position, upheld the findings recorded by learned CIT (Appeals). The observations of learned CIT (Appeals) are reproduced hereunder:- "Considering that in the facts of the lease agreements other than lease key money nothing has been discovered by the assessing officer as amount paid or payable in connection with lease of asset in the shape of revenue receipt. LKM a sort of security deposit which was retained by the appellant as sale proceeds against the sale of asset on expiry of lease agreement, therefore, has not been proved to be simple and pure deposit on account of rentals factually attributable to be a deposit in terms of provisions of law under section 12(19) in view of its final settlement as sale price of leased asset as per practice by the appellant." Undeniably respondent-taxpayer recorded the lease key money as liability to be adjusted as a sale proceeds at the expiry of lease period, therefore, there is no justification to tax the security deposit under Section 12(19), considering the fact that the other related provisions of law i.e. proviso to Rule 8(5)(j) of the Income Tax Rules, 1982 direct such lease key money to be considered as sale proceeds.

9. In view of the above, our answer to the proposed question is in negative i.e. against applicant-department.

10. This Reference Application, along with connected reference application, is decided against applicant-department.

11. Office shall send a copy of this order under seal of the Court to the Appellate Tribunal as per section 133(5) of the Income Tax Ordinance, 2001. KMZ/C-14/L Order accordingly.