2012 PLP (Trib (PTD)

MUHAMMAD IQBAL KHAN, ACCOUNTANT MEMBER.

These two appeals of the Taxpayer are directed against the Orders of the learned CIT(A) and Learned CIR(A) Karachi dated 28-10-2008 and 13-11-2009 respectively. I.T.A. No. 723/KB/2008 was heard on 26-5-2010 while the I.T.A. No.260/KB/2010 was heard on 1-6-2010. Since the issues relate to one single Tax Year and are interrelated, we are disposing them through this consolidated order.

2. In I.T.A. No.723/KB of 2008, the appellant has raised several issues in the grounds of appeal which are reproduced hereunder for the proper perspective: "(a) That the learned Commissioner (Appeals) has erred in holding that the taxation officer's action was correct in rejecting claim of Group Relief under section 59-B of the Income Tax Ordinance, 2001. (b) That the learned Commissioner (Appeals) has erred in holding that the taxation officer's action was correct in applying the legal provisions under section 59-B of the Income Tax Ordinance, 2001 applicable form 1st July 2007 to year under reference. (c) That the learned Commissioner (Appeals) has erred in holding that the appellant was a trading company while its main business is that of manufacturing. (d) That the learned Commissioner (Appeals) has erred in holding that tax paid under section 153 of Income Tax Ordinance, 2001 on account of supply of goods/services as final tax liability ignoring the fact that same is not treated as final tax liability for a manufacturer and for a public company listed on a registered Stock Exchange in Pakistan. (e) That the learned Commissioner (Appeals) has erred in confirming the taxation officer's order on calculation of purchase price of shares of an associated company. (f) That the learned Commissioner of Income Tax (Appeal) was not justified in law and on facts to essentially confirm that the order and calculation of gain on sale of assets.

3. On the date of hearing, the appellant company was represented by Syed Shabbar Zaidi, FCA and Mr. Aziz Nishtar. Advocate while the Department was represented by Mr. Ghulam Mustafa Rahu and Mr. Shafquat Hussain Kehar as D.Rs.

4. Brief relevant facts of the case as transpired from the record are that the appellant is a well known industrial company engaged in the business of manufacture and supply of chemical fertilizers. Over time it has diversified its businesses and has sponsored some new companies in different areas of economy. One such company is Messrs Engro Foods Limited, which is appellant's wholly owned subsidiary and is engaged in the business of production, processing and packing of fresh milk into long duration containers. It is claimed that the said Engro Foods, being a new company despite its obvious commercial success, is accruing losses in terms of its taxable income particularly because of heavy initial allowance. The appellant on the other hand has substantial taxable income, part of which it has offset against the tax loss of its said subsidiary Engro Foods under section 59B of the Income Tax Ordinance, 2001 (hereinafter to be referred as the "Ordinance") as it existed at the relevant time. Because of said offset of income, the appellant's taxable income got reduced to the extent of the said offset causing reduction in tax liability to be paid to the Department.

5. The first three grounds of appeal involve the said issue of Group Relief as is it called in the Ordinance and are addressed collectively hereunder. The Department selected the case for audit after which it amended the income of the appellant through an amended order under section 122(1) of the Ordinance dated 13-5-2008 in which the Department disallowed the said Group Relief on the grounds that:-- (a) The holding company (the appellant) is engaged in the business of trading of imported fertilizer where trading business comprises around 41% of its turnover. (b) Holding company and the subsidiary are not designated by the SECP for the Group Relief. (c) Transfer of funds was not made before the filing of returns. Thus in the Taxation officer's opinion mandatory provisions of law were not followed for availing the Group Relief.

6. The appellant felt aggrieved and filed an appeal before the Learned CIT(A) Karachi on several grounds including the issue of Group Relief. The Learned CIT(A) rejected the appellants grounds on the issue and confirmed the Department's action besides adjudicating on certain other issues vide order dated 28-10-2008. Being dissatisfied the appellant company has come in appeal before this forum.

7. During proceedings before this Court, arguing on behalf of the appellant the A.Rs. vehemently argued that in the instant tax year, the law which was in force upto 30-6-2007 before amendment was applicable since the underlying assessment relates to tax year 2007, while the learned Taxation Officer applied the amended law which took effect on 1-7-2007 and which was applicable to tax year 2008 and years thereafter. It was argued that under the current legal framework a legal provision is applicable to a tax year if it came into force some time during the tax year to which the accounting period relates. The tax year 2007 closed on 30-6-2007 and any law coming into force after closure would not be applicable to this tax year.

8. The DR submitted that the Taxpayer did not fulfil the conditions of section 59B of the Income Tax Ordinance, 2001. It was further argued that it was well settled by now that provisions becoming applicable from 1st July shall be applicable to the returns filed after those provisions coming into effect. In support of the contention he relied upon unreported decision of the Learned ITAT in the case of Messrs Royal Exchange Assurance Karachi v. The DCIT Circle Karachi vide I.T.A. No.833/KB of 2000-2001 (Assessment Year 1999-2000).

9. We have heard both sides and perused the orders of the two authorities below. We have noted that same legal issue of applicability of law as it stood on June 30, 2007 was the main argument advanced before the CIT(A) on behalf of the appellant which the learned CIT(A) has reproduced on page 2 of the appellate order in the following words:-- "That the largest addition in taxable income was on account of denial of benefit of Group Relief under section 59B of the Income Tax Ordinance, 2001. While making this addition the learned Taxation Officer applied the law as its current form will be applicable for 2008 onwards. Applicable in the current case would be section 59B as it stood before July 1, 2007 which reads as under:-- "59B. Group Relief.

(1) Subject to subsection (2), any company, being a subsidiary of a public company listed on a registered stock exchange in Pakistan, owning and managing an industrial undertaking or an undertaking engaged in providing services, may surrender its assessed loss for the tax year other than brought forward losses, in favour of its holding company provided such holding company owns or acquires seventy-five per cent or more of the share capital of the subsidiary company. (2) The loss surrendered by the subsidiary company may be claimed by the holding company for set off against its income under the head "income from Business" in the tax year and the following two tax years subject to the following conditions, namely:-- (a) there is continued ownership of share capital of the subsidiary company to the extent of seventy-five per cent or more for five years; and (b) the subsidiary company continues the same business during the said period of five years. (3) The subsidiary company shall not be allowed to surrender its assessed losses for set off against income of the holding company for more than three tax years. (4) Where the losses surrendered by a subsidiary company are not adjusted against income of the holding company in the said three tax years, the subsidiary company shall carry forward the unadjusted losses in accordance with the provision of section 57. (5) If there has been any disposal of shares by the holding company during the aforesaid period of five years to bring the ownership of the holding company to less than seventy-five per cent, the holding company shall, in the year of disposal, offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company. The treatment meted out by the learned Taxation Officer is misapplication of law since he applied law which was not applicable to the tax year under reference/appeal here. All the requirements that were applicable in the tax year under appeal were fulfilled according to law. It is therefore requested that the addition of Rs.1,224,964,000 on account of disallowance of Group Relief may kindly be deleted."

10. We have gone through the above appellate Order of learned CIT(A). We could not find out in the impugned appellate order as to how the said ground was adjudicated, which was the basic legal issue to be decided before examining whether other requirements of the law were fulfilled to be eligible for claiming the benefit of the Group Relief since the requirements under the law before the substitution through Finance Act, 2007 and after that substitution were substantially different. Therefore it was the duty of the authorities below to first decide as to whether the law before the substitution was applicable or the law as substituted was to be applied. After deciding that basic issue they should have in their respective, spheres applied the objective test of meeting one requirement after the other and on the outcome of those tests should have decided that whether the tax payer qualified for the relief under the law or not. We could not find any adjudication on this issue in the impugned appellate order despite the fact that the appellant's arguments before the learned CIT(A) have been reproduced in the body of the order. The learned Taxation Officer though has dealt at length with the issue of the fulfillment of the requirements of the section 59B as it stood after the 2007 substitution but has failed to adjudicate as to which provision of law would be applicable in the instant case, whether the provision as on 30-6-2007 will be applicable or the one that came into effect on 1-7-2007.

11. The Learned A.Rs. have contended that undoubtedly the law applied in the instant case is the one which took effect on 1-7-2007, which was not in force during the time relevant to the tax year to which, the return/assessment relate.

12. After hearing the arguments and perusing the records and relevant law we are of the view that law as it stood as on 30-6-2007 was applicable in the instant case and not the law that came into force on 1-7-2007. The reference to case-law cited hereinabove relates to the Repealed Ordinance of 1979 under which the assessment year concept was in force which was different in implication to the concept of the tax year as applicable in the current statutes. The said case-law therefore will not be applicable in the instant controversy.

13. Apart from above facts, any right or vested interest accrued to a party under a law cannot be snatched away or curtailed by any subsequent amendment in law. Reliance can be placed on the Judgment of the honourable High Court cited as 1998 PTD 2769 wherein their Lordships observed as under:-- "If some rights have accrued to a party under a law which is subsequently, amended or if substantive rights of parties are concerned, the amendment made in the existing law or the enforcement of a new law will not affect such right and the effect of such an amendment would be generally prospective."

14. In a case (ITO Investigation Circle and others v. Suleman Bhai and Jiwa and others) reported as 1970 PTD 127 it has been held as under:-- "It is fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in terms of the Act, or arises by necessary and distinct implication (see Maxwell on the Interpretation of Statute - 9th edition - Page 221 and Treaties on Statute Law by Caries - 4th edition - page 329). It follows from this rule that retrospective effect to a statute may be given either by express words or that the same may be inferred from the language employed."

15. The honourable Supreme Court of Pakistan while deciding the case of Nagina Silk Mills v. ITO reported as 7 Tax 442 (S.C. Pak) has observed as under:-- "The courts must lean against giving a statute retrospective operation on the presumption that the legislature does not intend what is unjust. It is chiefly where the enactment would prejudicially affect vested rights, or the legality of past transactions, or impair existing contracts, that the rule in question prevails. Reference may be made in this connection to page 206 of Maxwell on the Interpretation of Statutes, Eleventh Edition. Even if two interpretations are equally possible, the one that saves vested right would be adopted in the interest of justice, specially where we are dealing with a taxing statute."

16. Keeping in view above facts and case-laws we have no doubt in our minds that provisions of section 59B would be applicable in the case before amendment through Finance Act, 2007.

17. Now whether the appellant company has met all other legal requirements is a matter of fact which requires documentary evidences and verifications but this court cannot fully ascertain those facts. We therefore, annul the impugned order of Learned CIT(A) on the issue and remand back the case to the Taxation Officer with the direction to determine whether requirements of relevant law as it existed on the close of the tax year, i.e., 30-6-2007 have been met or otherwise and the issue be decided as per that law after affording reasonable opportunity of being heard to the Taxpayer.

18. The next ground relates to the controversy about the treatment of tax withheld under section 153 on manufactured goods which was not pressed, we therefore do not opine on that.

19. In Ground 6 of the grounds of appeal, the appellant has assailed the confirmation by the Learned CIT(A) of purchase price of shares of an associated company from a Japanese co-sponsor of that associated company. The controversy is that the appellant purchased the shares at face-value while the Taxation Officer estimated the value based on breakup value of the shares on the close of the accounting year of the company. It has been argued by the ARs of the appellant that the share sale-purchase was an arm's length agreement between two non-related parties from two different countries, therefore the value shown was fair and appropriate. They also argued that as part of the deal the dividend accruing to the acquired shares under reference here was to be paid to the seller and the sale was ex-dividend value. While we generally uphold the basis of valuation adopted by the Taxation Officer, we feel that the same basis has been not fully adhered to if the appellant's contention that the transaction value was essentially ex-dividend. We therefore, annul the impugned order of Learned CIR(A) on the issues and remand the issue back to the Taxation Officer with direction to adopt the break-up value taking into account the payment of dividend to the seller.

20. On the issue of sale of company's vehicles to the Officials of the appellant, we have heard the arguments of the two sides and we are of the opinion that the valuation adopted by the Taxation Officer does not warrant any interference by this court since it is undeniable fact that sales of vehicles to the company officials is usually on below fair market value and the appellant's contention on the issue that the disposal values were fair cannot be accepted in the circumstances. We accordingly uphold the decision of the two officers below on the issue. In I.T.A. 260/KB of 2010 the following grounds have been raised:-- "(a) That the learned Commissioner erred in holding that the Taxation Officer has rightly not excluded the revenues from Sales while prorating and disallowing expenses. The proration of expenses without excluding the commensurate revenues from the overall revenues would be against the very spirit of the proration. (b) That the learned Commissioner has erred in holding that the Taxation Officer has appropriately applied section 67 read with the Rule 13 in prorating and attributing expenses to the dividend income. (c) That the learned Commissioner has erred in holding that the Taxation Officer appropriately prorated and disallowed expenses as attributable to exempt income:"

21. The brief facts leading to this appeal are that after passing the Order dated 13-5-2008 under section 122(1), the Department passed a further amendment Order dated 30-1-2009 under section 122(5A) in which the learned Additional Commissioner of Income Tax prorated the P&L expenses between the manufacturing business trading of goods business, and the revenues from non-core activities such as earnings from dividend from the associated companies and investments part of which was exempt while dividend were taxable on a fixed rate. The argument of Additional Commissioner was that since all the expenses were debited against the normal income therefore the amendment order of the learned Taxation Officer dated 13-5-2008 was erroneous to the extent that proportionate financial and administrative expenses were not allocated. He therefore prorated the financial and administrative charges against dividend, trading and exempt income from investments.

22. The learned Commissioner of Inland Revenue (Appeal-I) Karachi vide his order dated 13-11-2009 upheld the treatment meted out by the Department. Hence this appeal.

23. The AR of the appellant did not press the first ground while on the remaining two grounds he contended that the appellant company's core business is manufacturing and trading of chemical fertilizers for which almost all the employees have been employed. Similarly financial expenses are incurred for the purposes of the appellant's core business. The investment into associated concerns is a passive activity for which many years ago certain sums were invested towards diversification of the appellant's business and promoting new industrial concerns in the country. He further argued that such activities do not require whole time engagement of the company personnel and that allocating expenses on the basis of revenues would be excessive since for receiving and recording the dividend into the books and depositing dividend cheques would not need more than few hours of a lower level official. He referred to the language of section 67 of the Ordinance and Rule 13 of the Income Tax Rules, 2002 under which the proration was made by the Department and emphasized that the basic requirements of the said section are that "the expenditure shall be apportioned on any reasonable basis taking into account the relative nature and size of the activities to which the amount relates" while the Department has apportioned the expenses merely on the basis of turnover of the different streams of revenue, which in his opinion was not reasonable in view of the nature and size of the underlying activities.

24. On the other hand the DR contends that since there was no, bifurcation of expenses under income from different sources the only reasonable way left with the Department was to apportion the expenses on turnover basis under Rule 13(3) of the Income Tax Rules, 2002.

25. While we generally agree with the treatment adopted by the Department and upheld by the learned CIR(A), we are of the view that on the balance of reasonableness and regard to the nature and size of the underlying activities, apportionment of the administrative expenses on the basis of turnover would be harsh and unrealistic. Therefore, we uphold the apportionment of the financial expenses on the basis of turnover while direct the Additional Commissioner to re-examine the quantum of involvement of the administrative machinery in earning income from dividend and investment that has led to the apportionment under reference here. Accordingly impugned order of the CIR(A) is annulled and the case is remanded back to the Additional Commissioner on the issue for de novo proceedings after affording reasonable opportunity of being heard to the Taxpayer.

26. The two appeals are decided as provided hereinabove. C.M.A./33/Tax(Trib.) Order accordingly.