2010 PLP (Trib (PTD)

These appeals have been filed by the appellant/taxpayer Messrs Jahangir Siddiqui Investment Bank Ltd. (Now J.S. Bank Limited), Karachi against the consolidated orders dated 31-8-2009 passed by the Commissioner of Income Tax (Appeals-I), Karachi on the following grounds:- (I) Grounds for Tax year, 2005 (2) That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the order of the Additional Commissioner who has erred in allocating/apportioning the allowable profit and loss account expenses toward exempt capital gain/dividend income which resulted in a disallowance of Rs.46,796,

906. It is contended that the action of the Commissioner of Income Tax (Appeals) and the Additional Commissioner is arbitrary, contrary to law and facts of the case. (3) That without prejudice to ground of Appeal No.2 above, the learned Commissioner of Income Tax while confirming the order of the Additional Commissioner failed to appreciate that the appellant has already apportioned allocated expenses amounting to Rs.6,294,000 towards the above heads of income and therefore, further, allocation of expenses is defiance of the decision reported as 2008 PTD (Trib.) 679. (4) That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the treatment accorded by the Additional Commissioner who had confirmed the allocation/apportionment of expenses over and above the expenses allocated by the appellant which is in disregard to the provisions of section 67 the Ordinance read with Rule (13) of the Income' Tax Rules, 2002 vis-a-vis case law reported as (i) 2005 PTD 344 and (ii) (2004) 92 Tax 128 (sic). (5) That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the order of the Additional Commissioner who had confirmed the disallowance of provision for non-performing loans amounting to Rs.24,000 which is allowable under section 29 of the Ordinance." (II) Grounds for Tax Year, 2006 (2) That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the order of the Additional Commissioner who has erred in allocating/apportioning the allowable profit and loss account expenses towards exempt capital gain/dividend income which resulted in a disallowance of Rs.80,423,

732. It is contended that the action of the Commissioner of Income Tax (Appeals) and the Additional Commissioner is arbitrary, contrary to law, and facts of the case. (3) That without prejudice to ground of appeal No.2 above, the learned Commissioner of Income Tax while confirming 'the order of the Additional Commissioner failed to appreciate that the appellant has already apportioned/allocated expenses amounting to Rs.3,991,000 towards the above heads of income and therefore, further allocation of expenses is defiance of the decision reported as 2008 PTD (Trib.) 679. (4) That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the treatment accorded by the Additional Commissioner who had confirmed the allocation/ apportionment of expenses over and above the expenses allocated by the appellant which is in disregard to the provisions of section 67 of the Ordinance read with Rule (13) of the Income Tax Rules, 2002 vis-a-vis case law reported as (i) 2005 PTD 344 and (ii) (2004) 92 Tax 128 (sic). (5) That the learned Commissioner of Income Tax (Appeals) was not justified in confirming the order of the Additional Commissioner who had confirmed the disallowance of provision for non-performing loans amounting to Rs.23,000 which is allowable under section 29 of the Ordinance."

2. Brief facts of the case are that the taxpayer is a banking company filed return of income for tax year, 2005 declaring loss at Rs.3,462,562 same was deemed to have been assessed under section 120 of the Income Tax Ordinance, 2001. Resultantly, after completion of the proceedings, the Additional Commissioner/Taxation Officer-D, Audit Division, LTU, Karachi recomputed the taxpayer's income and amended the order. Taxpayer being aggrieved with the order of the Additional Commissioner/Taxation Officer-D Audit Division, LTU, Karachi filed appeal before the First Appellate Authority i.e. CIT (A) who vide impugned order disposed of the appeal partially. Taxpayer dissatisfied with the order of CIT(A), preferred appeal before this Tribunal.

3. Mr. Muhammad Athar Advocate, appeared on behalf of the taxpayer while Mr. Abdul Hameed Sheikh, DR represented the department.

4. While arguing the case, AR of the appellant/taxpayer relied upon the case law reported as 2008 PTD 679 (Trib.) of the Lahore Tribunal reproduced as under:- "

Capital gain

Allocation of expenses

Expenditure actually incurred by the assessee on earning the exempt income could be set off against the exempt income

Assessee declared gross gain after deducting the expenses incurred in respect thereof, and after setting off these expenses against the said gain, the net gain was declared

Since assessee had already set off the actual expenses relating to the earning of capital gain, no expenses could be allocated to exempt income." " ..Next issue which was contested by the revenue did relate to deletion of expenses allocated to capital gain accrued on account of disposal of company shares It was stated that it was not possible that the assessee did not incur any expense in earning such a huge amount. On the contrary, the learned AR appearing on behalf of the assessee defended the impugned order passed by the learned CIT(A), it was averred by the learned AR that first of all it was to be ascertained if any expenditure was incurred in earning the exempt income and only then the expenditure could be allocated to taxable and exempt income and no allocation could be made on pro rata basis ..It was also brought to the notice of the Court that for the Tax year, 2004, assessee was also confronted on the issue of allocation of expenses, but after considering the reply of the same assessee, no adverse inference was drawn by the same authority. Hence, there was no justification to allocate expenses to capital gain in the current year." The above case law could not be applied squarely to the taxpayer's case as the provisions are very clear which is evident from the following section 67 and Rule 13 and we find that the taxpayer failed to fulfill the requirements of law, therefore, he cannot derive the desired benefit's.

5. Regarding the grounds Nos. 2, 3, 4 and 5 the Commissioner of Income Tax (Appeals-I) Karachi in his impugned order has given his verdict as under:

"Ground Nos. 2, 3 and 4 Apportionment of Expenses Against Capital Gain and Dividend Income. (4) The appellant has allocated allowable profit and loss account expenses against the exempt income i.e. capital gain on sale of listed securities and term finance certificates and dividend income. It is observed by the Taxation Officer that the appellant has not provided the basis of allocation of allowable profit and loss account expenses against exempt against the said classes of income without supporting the same with any evidence. Consequently, the Taxation Officer has allocated amounts of Rs.46.797 million for tax year, 2005 and Rs.80.424, 2006 million for tax year, 2006 respectively towards exempt capital gains and dividend income in the two years under appeal. (5) The learned AR of the appellant submitted that the appellant has itself allocated expenses of Rs.6.294 million for tax year, 2005 and Rs.3.991 million for tax year, 2006 to exempt capital gains and dividend income allowable profit and loss expenses and their allocation along with the basis of allocation to all types of incomes was filed along with the return of income, which is available on records. He also refers to section 7 of the Ordinance read with Rule 13 of the Income Tax Rules, 2002 ("Rules") which provide that any expenditure incurred for a particular class or classes of income should be allocated to that particular class or classes, as the case may be. However, where any expenditure relates to derivation of more than one head of income or income chargeable to tax or otherwise, such expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the nature and size of the activities to which the amount relates. It is submitted that the maintenance of financial records either for the whole business or segment-wise is not of prime importance since the appellant can identify expenses incurred for a particular class or classes of business. (6) The learned AR challenged the action of the Taxation Officer in apportioning all the expenditure (inclusive of financial and administrative cost) towards earning of capital gain and dividend income is bases on incorrect appreciation of the law and the facts all these expenses by applying Rule 13 of the Rules on the basis that the same is binding on him precluded employment of any other method of Proration expenses. The Taxation Officer has misdirected himself in law by ignoring the main provisions of the statute i.e. section 67 of the Ordinance. He relied on Rule 13 of the Rules which is framed by the subordinate authority i.e. the F.B.R. It is a well-established principle of interpretation of statute that Rules which are merely, subordinate legislation cannot override or prevail upon the provisions of the parent statute and whenever there is an inconsistency between Rule and the statute, the latter must prevail. Reliance in this regard is placed on the case reported as 1986 SCMR 1114; 1993 SCMR 1232; 1993 PTD 766. (7) It is further argued that the Taxation Officer has apportioned all the administrative and financial expenses based on the prescribed formula given in Rule 13 of the Rules under the impression that the formula given in Rule 13 takes away his discretion to evaluate the reasonableness of expenses incurred for earning taxable or non-taxable income. Apparently, for this reason he did not consider the explanation tendered by the appellant in this regard which action; is completely in disregarded to clause (o) of sub-rule 8 of Rule 13 ibid, wherein the term "common expenditure" has been defined as:-- "Common expenditure" means expenditure that is not clearly allocable to any particular class or classes of income, such as general administrative and other such allocable expenditure." (8) It is evident that Rule 13 of Rules puts no bar on income i.e. taxable and exempt income prior to making computation on the basis of the prescribed formula. The treatment of the Taxation Officer about prorating of all administrative and financial expenses on the thrust of formula prescribed in Rule 13 may not be allowed to be sustained. Reliance placed' on following ITAT case laws:-- I.T.A. No.1615/KB of 200; 2008 PTD (Trib.) (sic) and 2005 PTD 2586 (9) I have accorded conscious consideration to the above arguments of learned AR, perused the impugned order and repeatedly gone through the provisions of law and Rules, allocation of expenses under section 67 and relevant Rule 13 of Income Tax Rules, 2002. My findings are as under:

(10) It may not be lost sight that subsection (2) of section 6 very clearly provides that the "Board" may make rules with relations to application of the said sections for the purpose .of apportioning deductions. (11) In compliance to this subsection rule 13 of the Income Tax Rules, 2002 have, therefore, been framed. This rule is quite elaborate and covers all conditionalities envisaged in the context of apportionment of expenditures. This rule derives its force from section 67 and its clauses enclose the scope and methodology of expenses and their allocations in the context various classes of incomes. (12) Rule 13 is giving a plain meaning and leaves no ambiguity as to the application of section 67, thus there remains no scope to scan its wisdom with respect to exploring any reasonability, it should be applied as it stands. (13) The above arguments finds support from the case reported PLD 1974 Kar. 6 wherein it has been held that:-- "In fiscal statutes the meaning has to be ascertained from the plain language of the statute and 'nothing is to be implied' in such statute." (14) I have discussed above provision of law and Rules to conclude that an unambiguous and complete method of allocation of deductible expenditures relatable to class of income has been put in a place by law through rule 13 without leaving any fraction of discretion in the hands of taxing authorities. In a case reported as (1966) 13 Tax 210 (S.C. Pak) is has been held that: "It is well established rule of interpretation of statute that no word in a statute are to be treated as surplusage or redundant. The words such capital being computed in accordance with the rules made by the C.B.R. could not be read as surplusage or redundant." (15) The common expenditure incurred to earn income in the instant case have been apportioned under Rule 13 to the Income Tax Rules, 2002 read with section 67 of the Income Tax Ordinance, 2001 in accordance with the requirement of law. The Taxation Officer had no choice to deviate in this context. (16) For the reasons discussed above the arguments of learned are repelled and action of allocation of expenses made by the Taxation Officer is fully endorsed and approved for both the tax years, 2005 and 2006. The impugned orders on this issue are accordingly, upheld and maintained. Ground No. 5 PROVISION FOR NON-PERFORMING LOANS. (17) The Taxation Officer disallowed provision for non-performing loans amounting to Rs.24,000 and Rs.23,000 for the tax years, 2005 and 2006 in the light of the judgments of the superior for that the claim of appellant is mere a provision, therefore, inadmissible. The learned AR of the appellant submitted that the company has claimed the above provisions strictly adhering to the provisions of section 29 of the Ordinance and therefore, the same are legitimately allowable. Moreover, the assessee could only be the judge to determine that there are reasonable grounds for believing that the debts are irrecoverable. The learned ITAT vide its decision reported as 2002 PTD (Trib.) 1898 has discussed the provisions relating to admissibility of bad-debts under the Income Tax Ordinance, 1979, .which are similar to the provisions of section 29 of the Ordinance as under:-- "The Courts have considered written off as irrecoverable from the individual account of the debtor in the assessee book or by making appropriate entries in the profit in loss account to be enough a requirement. In many cases the squaring of individual account for such a claim have been considered as an unnecessary. Courts have held that if an assessee having some hope of recovery keeps the amount as provision it debars him from claiming a bad and doubtful debt with reference to the provision of law under discussion. The department can insist upon demonstration of infallible proof that the debts have become bad. Even non-initiation of legal proceedings against the debtor for the recovery claim, before writing off in some of the case may not be necessary. Further even if a debt is reduced on the basis of some subsequent agreement with the debtor it becomes irrecoverable and bad debt." (18) This obviously includes that the bad debts claim of the assessee shall be allowed. The Taxation Officer may be directed to allow the above claims being allowable under section 29 of the Ordinance. (19) The arguments of the appellant and TO/AC have been considered. There are conflicting decisions of the Hon ITAT on this important issue which needs to be conclusively resolved on the basis of provisions of Income Tax Ordinance, 2001 by higher judicial authorities. The learned AR also has not preferred to section 29(2) of Income Tax Ordinance, 2001 which is quite important in understanding the scope of section 29 of Income Tax Ordinance, 2001 and the same being reproduced below for ready reference:-- "(2) The amount of the deduction allowed to a person under this section for a tax year shall not exceed the amount of the debt written of in the accounts of the person in the tax year." (20) I find that the provisions of section 23(1)(X) of Income Tax Ordinance, 1979, and section 29 of Income Tax Ordinance, 2001 are different. Under section 23(1)(X) of Income Tax Ordinance, 1979(R) it was the judgment/opinion of the Deputy Commissioner that made the determination about irrevocability of the bad debt. But under section 29 of Income Tax Ordinance, 2001 prima facie, it is the judgment/opinion of the taxpayer, which would hold the field. This is what the plain reading of the section would reveal. (21) I find that Taxation Officer has rejected the claim of the appellant relying on the judgment of Sindh High Court in case of Grindlays Bank in Income Tax Appeal No. 565 dated 1-3-2006, this issue allowing or otherwise of provision of non-performing loans and advances has also been discussed in details by the learned Karachi Bench in recent judgment vide Income Tax Appeals Nos.13201, 1895; 1896, 1304, 131 1890 dated 14-1-2009 in case of Messrs Standard Chartered Bank and upheld the addition on account of provision of doubtful debt. Respectfully following the ratio of decisions of the Karachi Bench of learned ITAT confirm the additions on disallowance of provision for non-performing loans and Advances made by the Taxation Officer for both the tax years, 2005 and 2006. The appeals are disposed of in the manner and to the extent as indicated above.

6. We have considered the arguments of both the parties. Learned D.R. has 'supported the order of CIT(A) and has stated that as the appellant/taxpayer did not comply with the provisions of the law, the action taken by the Additional Commissioner was within the four corners of Income Tax Ordinance, 2001. Learned AR of the appellant/taxpayer, however, as stated above, has assailed the orders of both the authorities down below. In order to proceed further in the matter we have to resolve the matter. The following questions are needed to be framed envisaging all the grounds of appeal: (i) Whether the Additional Commissioner has rightly allocated/ apportioned the profit and loss expenses toward the exempt income resulting in the disallowance of Rs.46,796,906? (ii) Whether the CIT(A) was justified in confirming this order of the Additional Commissioner.? (iii) Whether the CIT(A) was justified in confirming the order of Additional Commissioner who had confirmed the disallowance of provision of non-performing loans amounting to Rs.24,000 which is allowable under section 29 of the Ordinance, ?

7. It would be in the fitness of things to reproduce section 67 of the Income Tax Ordinance, 2001 and Rule 13 of the Income Tak Rules, 2002 quoted in the order of CIT(A), as under:-- SECTION 67 OF THE INCOME TAX ORDINANCE, 2001 "(67) Apportionment of deductions.

(1) Subject to this Ordinance, where an expenditure relates to (a) the derivation of more than one head of income or [(ab) derivation of income comprising of taxable income and any class of income to which subsections (4) and (5) of section 4 apply, or] (b) the derivation of income chargeable to tax under a head of income and to some other purpose, the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates. (2) The Central Board of Revenue may make rules under section [237] for the purposes of apportioning deductions." RULE 13 OF THE INCOME TAX RULES, 2002 Apportionment of expenditures.--(1) This rule applies for the purpose of section 67, which provides for apportionment of expenditure incurred for more than one purposes. (2) Any expenditure that is incurred for a particular class or classes of income shall be allocated to that class or classes, as the case may be. [(3)(a) Any common expenditure excluding financial expenses relatable or attributable to non-business advances or loans and the amount to in sub-rule (2) relatable to business including presumptive and exempt income shall be allocated to each class of income according to the following formula, namely:-- A x B/C Where - (A) is the amount of the expenditure incurred; (B) is the total amount of gross receipts (without deduction of expenditure) for the tax year for the class of income; and (C) is the total amount of gross receipts (without deduction of expenses) and net gains for the tax year of all classes of income; (b) Where however, net gain, brokerage, commission and other income is to be taken into account on turnover of such transactions, such income shall be compared with gross profit from business for adopting figures for components "B" and "C" of the formula at (a) above] (4) Where expenditures are to be allocated among different classes of income under sub-rule (3), consideration shall be given to the nature and source of each class of income, on reasonable basis to earn each class or income (particularly, in allocating selling expenses) (5) Where the allocation of expenditure is made in accordance with sub-rule (3) a certificate by the Chartered Accountants or Cost and Management Accountant stating the basis of allocation shall be accepted unless significant variations are found; and where books (of accounts) are not required to be audited, the reasonable basis based on the (sub-rules) (3) and (4) may be adopted which would be accepted by [the] Commissioner, unless variation is found. Significant variations would be beyond the limits of 10+ in collection as in sub-rule (3) under any head of account [(6)] In this rule-"class of income" means ." "(o) amounts to which section 169 applies[]; and "common expenditure" means expenditure that is not clearly allocable to any particular class or classes or income such as general administrative and other such allocable expenditure."

8. After having gone through the detailed discussion made by the Commissioner (A) and the facts and figures discussed by the Assessing Officer and the plea of AR of the appellant/taxpayer Which we feel not, very convincing, we are of the considered view that the CIR(A) was justified in upholding the treatment meted out by the Assessing Officer. We feel staunchly that the answer to the above cited questions are in the affirmative. Therefore, all the grounds of appeal have properly been addressed by the CIR(A) in the judicious and lawful manner. There being no merit in the appeal filed by the appellant/taxpayer; the same is hereby dismissed.

9. The appeals partly succeed as above. H.B.T./149/Tax(Trib.) Appeal dismissed.