2015 PLP (Trib (PTD)

JAWAID MASOOD TAHIR BHATTI, CHAIRPERSON.

Through this Appeal the Appellant/Taxpayer company has objected against the impugned Order of learned CIR(A)-II, Islamabad bearing No.714/2011 dated 16-5-2012 whereby the learned first appellate authority partially upheld the Order of the Deputy Commissioner IR, Audit-I, Zone-II, RTO, Islamabad dated 27-2-2012.

2. Facts of the case, briefly stated, are that the Taxpayer company filed return of income declaring loss of Rs. 13,027,724 which was deemed to be assessed under section 120(1) of the Income Tax Ordinance, 2001. Subsequently, desk audit of the case was carried but and as a result thereof the DCIR was of the opinion that the income had not been declared correctly, which warranted action under section 122(5) of the Income Tax Ordinance, 2001. Accordingly, proceedings under section 122(5) were initiated and the company was confronted with disallowance of cost of sales as well as some P & L account expenses for failure to deduct tax under section 21(c) of Income Tax Ordinance, 2001. Reply submitted on behalf of the appellant company was not found convincing by the DCIR who proceeded to amend the deemed assessment in the following manner:-- Loss declared/assessed under section 120 Rs.(13,027,724) Additions as discussed above Additions in Rent/rates/taxes Rs. 953,685 Additions in Salaries and wages Rs. 2,706,904 Additions in Travelling and conveyance Rs. 515,242 Additions in Communication charges Rs. 183,315 Additions in Director Fee Rs. 389,315 Additions in Selling expenses Rs.702,080 Additions in Cost of Sales Rs.32,479,042 Additions in Others/ other expenses Rs.5,752,213 Total Additions Rs.43,681,491 Total income for the year Rs.30,653,767 Tax @ 35% Rs.10,728,818 The appellant, feeling dissatisfied, filed first appeal before the learned CIR(A) contesting the additions made to income as well as rejection of claim of exemption under clause 126F of Part-I of the Second Schedule to the Income Tax Ordinance, 2001. Submissions made before the first appellate authority bore fruit to the extent of deletion of disallowance of Rs. 32,479,042 made on account of cost of sales. Rest of the P&L account disallowances were maintained and rejection of claim of exemption under the above quoted clause of Part-I of the Second Schedule was also upheld. Hence, the instant appeal before this Tribunal.

3. Opening the arguments, the learned AR vehemently assailed the treatment meted out by the lower two forums and contended that the case of the appellant fell squarely under clause 126F Part-I of the Second Schedule to the Income Tax Ordinance, 2001 which provided exemption to the business of taxpayers located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for period of three years starting from the Tax Year 2010. He explained that the term "profits and gains" could not be equated with 'income' which could be either negative or positive. "Profits and gains "are to be taken as the fruits of a business whereas loss of fruit refers to the situation of loss. Advancing his arguments further, the learned AR submitted that only cases declaring profit were covered by exemption provided under clause 126F ibid, yet the case of the appellant would automatically fall under the said exemption as soon as loss was converted into profit. Although both the forums below determined the situation of profit in the instant case, they failed to record adequate reasons for rejecting the claim of exemption to which the appellant was fully entitled. Fortifying his arguments, the learned AR also filed a copy of the agreement dated 25-5-2011 executed between the appellant company and National Bank of Pakistan whereby the bank had waived off loan of Rs. 25,816,200 only because the appellant was an adversely affected unit of FATA. Coming to the facts, the learned AR vehemently contended that both the authorities below failed to appreciate the correct perspective and meaning of section 21(c) of Income Tax Ordinance, 2001. He stated that it was a well recognized principle of interpretation of fiscal statutes that a provision of law could not be stretched to include what was not explicitly provided in the plain language of the provision. Referring to the illegality committed by both the forums below, the learned AR contended that the expenses claimed under the heads travelling and conveyance (Rs. 515,242), communication (Rs.183,315), selling expenses (Rs.702,080) and others (Rs.5,752,213) were not the subject matter of 21(c) and as such the DCIR could not make disallowance under these heads by invoking the said provision. Referring to the expenses claimed under the head 'rent, rates and taxes' the learned AR stated that the expense under this head was the aggregate of token tax paid on vehicle used loading by the company, fee paid to SECP and rent of building. All these payments are verifiable and could not be justifiably disallowed. Similarly, salaries and wages paid to different employees were below the taxable limit in each individual case. Directors' Salary claimed under the head `Directors Fee' was also below taxable limit in the case of each director. There was, thus, no justification even to disallow these expenses.

4. The learned DR on his turn, supported the impugned orders of the authorities below and contended that the appellant company was not entitled to exemption because its registered office was situated in Wah Cantt., and possibility of sales having been made in settled area could not be ruled out. On the facts of the case he has reiterated the arguments on the basis of which the impugned orders have been passed by both lower forums.

5. We have given due consideration to the rival arguments and carefully gone through the impugned orders and record available on file. We feel that there is considerable force in the argument of the learned AR that the expenses claimed under the heads travelling and conveyance, communication, selling expenses and others could not be disallowed with reference to provisions of section 21(c) of the Income Tax Ordinance, 2001 as they do not find any mention in the said provision. We, therefore, direct deletion of these expenses holding that for the purpose of making said disallowances, reference to section 21(c) was irrelevant as well as illegal. As regard other expenses claimed under the heads 'rent, rates and taxes', salaries and wages and directors' fee, we agree with the arguments of the learned AR that question of withholding tax from payments made on account of these expenses did not arise because all the payments were not only below the threshold but in the case of 'rent, rates and taxes' substantial payments were also made to the Government Departments. Had the assessing officer bothered to go deeper into the record relating to these expenses, he would have comprehended the reasons of non-deduction of tax by the taxpayer company. We have further noticed from the Order of DCIR that after examination of details and information submitted by the appellant no notice under 122(5) confronting the taxpayer with the defects, if any, in the said details and information was issued although issuance of this notice was mandatory.

6. For reasons recorded supra, we accept the appeal of the company to the extent and in the manner referred above and direct deletion of all the disallowance made by the DCIR and upheld by the learned first appellate authority. Resultantly, declared version of the company which is loss, stands restored. Needless to say that in this scenario the benefit of clause 126F of Part I of the Second Schedule to the Income Tax Ordinance, 2001 would not be available to the company as only those companies which earn 'profits and gains' are entitled to exemption under the said clause. CMA/3/Tax(Trib.) Appeal accepted.