2012 PLP (Trib (PTD)

The instant cross appeals have been filed both by the department and taxpayer which-are directed against an order dated 23-2-2010 passed by learned CIR(Appeal-I), Islamabad relating to tax year, 2008.

2. Brief facts are that for the tax year 2008, the appellant company filed its income tax return declaring a net loss of Rs.5,603,211,740 which was treated aS an assessment order under section 120 of the Income Tax Ordinance, 2001. Lateron, it came to the notice of the Additional Commissioner (Audit)/Taxation Officer, L.T.U, Islamabad that the assessment completed under section 120 was erroneous as well as prejudicial to the interest of revenue calling for an action under section 122(5A) of the Income Tax Ordinance, 2001 whereon a show cause notice was issued and a reply was submitted which however was not accepted. As a result, the Additional Commissioner/Taxation Officer, keeping in view the material available on record, passed the amended order under section 122(5A) of the Ordinance whereby the total income of the appellant company for the year under consideration was adopted at Rs. 16,362,919,860.

3. Aggrieved of this treatment, taxpayer went in appeal wherein learned Appeal Commissioner proceeded to condone the delay in filing the appeal but upheld the order of the Additional Commissioner by treating among others, Voluntary Separation Scheme expense as intangible assets. However, the learned Appeal Commissioner reduced the useful life of such intangible from 10 to 3 years. Aggrieved of this treatment both the department and taxpayer are in appeals before this Tribunal on the following grounds:- Grounds of Appeal by department (1) The learned Commissioner (Appeal) was not justified to condone the time as no reasonable cause was put up for condonation. Section 127(6) of the Income Tax Ordinance, 2001 clearly state that if the Commissioner (Appeal) is satisfied that the appellant was prevented by sufficient cause from lodging the appeal within that period. (2) The learned Commissioner (Appeal) was not justified to reduce the useful life of intangible assets from 10 years to 3 years. The action of the Taxation Officer was legal as per section 24 of the Income Tax Ordinance, 2001 and there is no provision in law whereby an intangible asset is amortized over a period of 03 years. Grounds of Appeal by taxpayer (1) That the learned CIR(A) was not justified in holding that the Additional Commissioner had jurisdiction to pass the amendment order under section 122(5) of the Income Tax Ordinance, 2001, (the Ordinance). (2) That the learned CIR(A) was not justified in up holding decision of the Additional Commissioner Inland Revenue (Audit-I) by treating Voluntary Separation Scheme (VSS) expense as an intangible asset under section 24 of the Ordinance.

4. Learned A.R did not press the first ground. However, on the issue of treating Voluntary Separation Scheme (VSS) expense as intangible asset, learned A.R maintained that the VSS expenditure amounting to Rs.23,937,854,000 falls within the definition of salary as contained in section 12 of the Ordinance and by no means may be treated as an intangible asset as contained in section 24(11) of the Ordinance; that the VSS expenditure has been incurred exclusively for the purpose of the business therefore it is allowable deduction from income under section 20 of the Ordinance in a single go; that the benefit of the VSS expenditure is not available to the taxpayer company over a period of more than one year: that the salary expense can only be disallowed under section 21(c) or (m) of the Ordinance for non deduction of tax; that the action of the AC with regard to the treatment of VSS expenditure as intangible was based on mere presumption; that the Accounting Standards and tax laws are in complete agreement with each other on the treatment of VSS expenditure. Learned A.R further maintained that this controversy already stands settled while issuing a pronouncement by the International Accounting Standards Board in its international Accounting Standard No.19 relating to employee benefits. The pronouncement was made in paragraphs 133 and 137 of the said Standard as follow:-- "

133. An entity shall recognize termination benefits as a liability and en expense where and only when, the entity is demonstrably committed to either:-- (a) tertninate the employment of an employee or group of employees before normal retirement date; or (b) provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. "

137. Termination benefits do not provide an entity with future economic benefit and are recognized as an expense immediately. The above referred international standard No.19 was notified through S.R.O. 665(I)/2005 dated 28 June, 2005 by the Securities and Exchange Commission of Pakistan for the purpose of above referred section 234(3) of the Companies Ordinance, 1984. Learned A.R referred to International Accounting Standard regarding intangible asset in the following words:-- "

9. Entities frequently expend resources, or incur liabilities, on the. acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design or implementation of new processes or systems, licences, intellectual proper market knowledge and trademarks (including brand names and publishing titles) Common examples of items encompassed by these broad headings are computer software, patents copy rights, motion picture films, customer lists, mortgage servicing rights, fishing licences import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights." Learned A.R contended that the definition of intangible assets through section 24(11) was introduced in the Ordinance after issuance of the International Accounting Standard-38, accordingly, accounting standards and tax law are synchronized on the treatment of VSS expense and the International Accounting Standard 38 does not recognize VSS expense as an intangible asset.

5. Learned A.R concluded that department was not justified to treat the expenditure on VSS as intangible and to amortize the same over a period of 10 years.

6. While defending the departmental view point, the D.R pleaded that the arguments put forth by the A.R carry no weight. He contended that the expenditure under reference fell within the definition of intangible for the reason that the benefit of this expenditure shall extend to the appellant company over a period of more than one year, thus the A.C. was justified to treat the expenditure under reference as intangible and amortize the same over a period of 10 years in equal proportion. I Further, learned D.R referred to director's report relevant to tax year 2008 and maintained that the appellant itself says that the benefits of the VSS shall accrue to it in the years to come, then there remains no ambiguity with regard to the fact that the benefit of VSS expenditure shall extended to the appellant company for a period of more than one year. Besides, learned D.R maintained that the amended order passed under section 122(5A) by the AC is in accordance with law.????? .

7. Learned Additional Commissioner while passing the amended assessment order observed that the expenditure the benefit/advantage of which extends to a period of more than one year is an intangible when the income tax law says that the expenditure the benefit of which extends to a period of more than one year can be regarded as an intangible in the light of the provisions, as contained in section 24(11) the A.C. discussed in the amended order at length as to why the companies conc,erned launch various separation schemes and the purpose for which the expenditure on such schemes is incurred and added that the Separation Scheme are always launched by the Management of the concerned companies to extract the benefits there from in future. It is a matter of common knowledge that the schemes which are not beneficial to the concerned companies are never launched.

8. Both the forums below have treated the VSS expense as intangible asset. The thrust of the findings of the forums below primarily seems to be that since the expenditure incurred on VSS is an advantage or benefit, ranging over for a period of more than one year thus it falls within the definition of intangible as contained in section 24 of the Income Tax Ordinance. It has been concluded that the separation schemes are launched by the management of the companies to extract benefit therefrom in future, as such the same is an intangible asset.

9. However, it is worth noticing that the very concept of intangible as mentioned in section 24 of the Ordinance has not been properly construed. It seems that the emphasis of the forums below remained on the advantage or benefit of the expense ranging over a period of more than one year. In this regard, before proceeding further, it is useful to reproduce the definition of intangible as under:

?????????? . Section 24????..? (11) In this section "cost' in relation to an intangible, means any expenditure incurred in acquiring or creating the intangible, including any expenditure incurred in improving or renewing the intangible; and "intangible" means any patent, invention, design or model, secret formula or process, copyright [trade marl, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, licence, intellectual property] or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved land."

10. A perusal of the above definition shows that it enumerates certain types of incorporeal property/intellectual property, which is followed by the expression "and any expenditure that provides the advantage or benefit for a period of more than one year" The forums below seemingly focused on the second aspect of the definition i.e. "and any expenditure" and concluded that expense of VSS is intangible. It seems that this conclusion is misplaced for the reason that the expression "and any expenditure" is to be read in conjunction or in the light of the first part of the definition of intangible. The legislature after having given a delination of certain intellectual properties used the expression "and any expenditure"; thus this expression is to be interpreted or coloured in the light of enumeration of the above mentioned incorporeal properties which precede. In other words, the expenditure incurred for the purchase of any of the kind of the property mentioned in the first part and has a useful life of more than one year is to be treated as intenabile and the expression "and any expenditure" is not an independent part of the definition. It cannot be segregated from the aforesaid enumeration. An expenditure incurred by taxpayer in running his business may have the benefit or an advantage over a period of more than one year but it cannot be said to be an intangible if it does not qualify the quality or character of an intellectual property.

11. Further seems the contention of learned A.R that an expense under a Voluntary Separation Scheme (VSS) being is included in the amounts, received by an employee on termination of employment whether voluntary or under an agreement including any compensation under golden hand scheme payments falls within the definition of the term salary, as contained in section 12(2)(e)(iii) of the Ordinance, carries weight and such a salary expense is an allowable deduction and can be disallowed only if it is hit by the mischief of section 21 of the Ordinance viz for non deduction of tax therefrom or its payment above specified threshold. Also contention of the learned A.R has to be given credence D that all payments made under VSS can not be disallowed by re-characterizing it by any other title. Section 12 of the Ordinance exclusively deals with salary and in its definition a compensation given at the time of termination of services is included which thus cannot subjected to the application of any other provision of the Ordinance. The definition of the term intangible containing certain intellectual properties named therein had to be pinpointed to justify VSS the expense for inclusion in the term intangible for the purposes of amortization. The attempt for dragging the expense incurred in the VSS into amortization would be a far fetched interpretation of law which can not be accepted.

12. Incidentally, a Division Bench of this Tribunal in I.T.A. No.778/LB of 2010 in Messrs Zarai Taraqiati Bank Ltd., Islamabad v. CIR, L.T.U, Islamabad vide order dated 9-6-2000 also found that the expense on VSS cannot be treated to be an intangible.

13. Further the arguments of learned A.R, while referring to section 234(3) of the Company's Ordinance, 1984 showing weightage to International Accounting Standard cannot to be lost sight of.

14. The learned Appeal Commissioner while entertaining the appeal condoned delay of three (03) days which has been agitated by the department before this Tribunal. It may be said in this regard that discretion so exercised by the Appeal Commissioner is unexceptionable and does not require any interference.

15. In view of the above discussion, the forums below are not justified in treating the Voluntary Separation Scheme expense to be an intangible under section 24 of the Ordinance. Consequently the appeal of the taxpayer merits acceptance which, in the given circumstances, is accepted and that of the department is rejected. CMA/147/Tax(Trib.)??????????????????????????????????????????????????????????????????????????? Order accordingly.