2005 PLP (Trib (PTD)

By this single combined order we intend to record our findings so as to dispose of the matter referred to us on noticing conflicting orders passed by the learned Division Benches of this Tribunal. The conflicting orders were regarding exactly identical/common issue i.e. in the cases of assessee's with taxable and exempt income, the total expenses were claimed for taxable income, but the disallowances/ add backs were made by prorating the expenditure to exempt and taxable income. The language of questions referred to us and description of expenses are variating in each case but spirit/essence of each question placed before us is the same i.e. proration of expenses whether proper or not or as wrong:

(Sections referred in the order are of repealed Income Tax Ordinance, except when specifically mentioned otherwise. Firstly the Department/Revenue argued the case). The legal advisor in support of the contention that prorating of expenses is quite proper has referred to the Hon'ble High Court Karachi order, wherein prorating of expenditure was allowed, but while describing, it is noticed that such proration of expenditure is being permitted in the case of presumptive and non-presumptive regime. Then he referred to the case with citation as 2002 PTD (Trib.) 900 where proration of expenditure was permitted in an identical situation. The entire text of the order was read. On the question from the Bench, the learned legal advisor submitted that there is neither any provision which is permitting the Department for allowing expenditure on proration basis nor there is any provision prohibiting it. The learned legal advisor, thereafter proceeded with his arguments by submitting that as per scheme of Income Tax Law, the ultimate purpose is to frame assessment of an assessee and for so preceding gross income is to be worked out and all expenses are to be deducted out of it for reaching at a net figure for levying tax, so in this manner the income is assessable by the Department. Every income is assessable though it may be taxable, non-taxable or exempt. Again the taxable, non-taxable or exempt income is to be determined by the Department. The law as envisaged for the assessee, minutely takes care of the assessee in the manner that, sources of income are under different heads have been described and also with the corresponding expenditure/allowances. The learned legal advisor in reference to the relevant provisions of law has submitted that various heads of income have been elaborated, when any income is not precisely covered under any head then it is to be covered under the head "other income". For each class of income it is explained that which expenditure are complementary or corresponding, ultimately which are to be allowed or not to be allowed. The Assessing Officer is to examine, as to whether the method of accounting as employed is reflecting the income correctly or not and the expenses deducted against each head have been properly claimed. In the case of ,any deviation by the assessee, as it is in the instant case before us, where bifurcation of expenditure as required by the Assessing Officer was not provided, so for allowing expenditure, the same is prorated among the taxable income and exempt income. The learned legal advisor has referred clause (116) of Part-I of the Second Schedule which has allowed exemption of capital gain. The provisions of section 28 were also referred in support of the contention that only after allowing the expenditure that capital gain is to be worked out. The learned legal advisor on a question has failed to explain that what could be the legal effects in the absence of any claim of expenditure against the exempt income. The learned legal advisor in support of his contention that proration of expenditure is quite fair and proper derived force from the following citations: (i) 2002 PTD (Trib.) 900 (ii) 1998 PTD (Trib.) 626 The learned legal advisor emphasized that under the schemes of the computation of income, the deduction of expenditure has to be there in the picture. The learned legal advisor on a question as to how the proration of expenses could be possible has referred to section 67 of new Ordinance, 2001, wherein provisions have been enacted for prorating of expenditure in exactly similar situation as it is in the instant case, so with the insertion of it the controversy has been avoided. Mr. Farrukh Ansari the learned representative on behalf of the large taxpayer unit has read out the object clause of the Atlas Investment Bank, so as to explain and substantiate his arguments that the exempt income is the part of the business activity, where the expenditures are to be prorated among the taxable and non-taxable income, Mr. Farrukh Ansari on behalf of the LTU, has quoted with favour the case cited as 2002 PTD

589. Mr. Ansari proceeded further by elaborating that the provisions of section 9 are for charging to tax the total income, then by referring to section 15 it was explained that for the charge of tax the computation of total income shall be classified under the six distinct heads. By referring to provisions of sections 23 and 24, it was explained that allowance and deductions are to be allowed, only by establishing its connection with the business, that expenditure has been incurred against it or not or partly incurred against it. This exercise is to be undertaken in a manner that Revenue interest is to be watched. The learned representative on behalf of the LTU further quoted with favour the case-law cited as (1969 20 Tax supplementary) on the issue of expenditure not related to the business. The case-law as referred to by the learned representatives on behalf of the LTU is in reference to the provision of Income Tax Act, 1922, no further explanation as to how it is in reference to the context before us has been given. The learned A.R. Dr. Ikram-ul-Haq on mutual agreeing with all the learned representatives of the assessees has taken the lead, firstly submitted that the Assessing Officer has no justification for prorating expenditure even in the absence of providing the details because it is against the reported case-law. The learned A.R. Mr. Ikram-ul-Haq has submitted that the capital gain vis-a-vis capital assets related to the period, where it has arisen. The capital assets means stock in shares, the gain claimed as exempt on sale of such shares which is capital assets, both have been defined in the repealed Ordinance. For the computation of capital gain has also been given in section 28 by specifying that cost of acquisition of capital assets and any expenditure incurred wholly and exclusively in connection with the transfer of such capital asset shall be deducted. The learned A.R. thus pleaded that except these two expenditures, i.e. cost of assets and secondly the expenditure incurred wholly for acquiring it, nothing else is not liable to be deducted as no expenditure could be claimed over and above than these two specified against the capital gain. By referring to the provisions of section 28, it was explained by him that it is quite restricted as it does not take into account any expenditure incurred except specifically mentioned. The learned A.R., has further submitted that no intendment is possible in the tax laws. Further argued that the findings in this regard of the Assessing Officer are exactly emanating from general presumptions. The A.R. Mr. Ikram-ul--Haq by referring to the citation as 2002 PTD (Trib.) 900 which being relied upon by the Department has submitted that this order of the Tribunal is as a result of misconstruction of facts and misconceiving of law, the words used in this order is "capital gain net", secondly that the expenditure have been allowed to be deducted by totally discarding the provisions of section 28(1), by stating "capital gain net" which is a mis reading of facts, with this, the benefit of gross capital gain is being taken which is incorrect because, capital gain is to be worked out by deducting the cost of acquisition and other expenses incurred wholly and exclusively for it. The learned A.R. has explained that expenditure on capital assets cannot be debited to Profit and Loss Account, as these are capital in nature. The case of PICIC with citation as 2005 PTD (Trib.) 344 was referred and also the case of MCB with I.T.As. Nos. 1066 to 1078, dated 22-12-2004. The other case-law reported as 1993 PTD (Trib.) 472 was also referred to by the learned A.R. The order passed by the Hon'ble High Court of Karachi with citation as (1998) PTD 626 was referred by particularly submitting that it is to be followed by the Income Tax Tribunal with Bench at Karachi. The learned A. R. has also referred to the judgment of Hon'ble Lahore High Court in the case of Crescent Bank, where a contrary view to the judgment of the Hon'ble Karachi High Court has been expressed. In support of his contention that the judgment of Honourable Karachi Bench may be followed. The learned A.R. has referred to PLD 1995 Supreme Court 423, 90 Tax 128, 2004 PTD 62 Lahore High Court. Coming to challenge that no apportionment could be possible, the learned A.R. referred to CIT v. PICIC and in the case of Crescent Bank, dated 22-6-2004 wherein it is quoted that in case of "passive .income" there is no concept of expenditure. The learned A.R. has not elaborated it that what is a passive income and how the "capital gain" in the instant case could be "passive income". The learned Dr. Ikram-ul-Haq has further explained that question of proportion of expense as not possible has not been dealt with by the Lahore High Court, so instant case is quite distinguishable where rejection of accounts has not been made and income has rightly been calculated. Mr. Shabbar Zaidi, learned A.R. on behalf of one assessee, before this Bench has firstly submitted that charging of expenditure is to be made only towards the taxable business activity. In respect of the fact that employing of funds for taxable and non-taxable or exempt activity, then the expenditure are to be charged to taxable activity in a composite business activity. Reference was made to the following judgments:-- (i) PLD 1992 SC 562 = 1992 PTD 954 (ii) 1994 SCMR 229 = 1994 PTD 174 The learned representative Mr. Shabbar Zaidi submitted that earlier when PICIC enjoyed exempt income in the form of Dividend income that the expenditure incurred were not allocated to exempt income. Although which was a part of composite business activity. The learned A.R. Shabbar Zaidi has submitted with full force that allocablility of expenditure against the exempt interest income or dividend income is never made as it is based on a decision which was never overruled and secondly it was not referred to the Hon'ble Supreme Court of Pakistan, thus attained finality. In respect of provisions of section 31(2) which and for the determination of income from other sources where only specified expenditure are to be allowed. The matter regarding the interest income was discussed by drawing similarities that only such expenditure are to be allowed which are given here as also in the case of capital gain, where expenditure has been specified in section 28(1). It was also brought into notice of this Bench that in the case of Crescent Bank only one question was, referred and not the matter of interest allocable to exempt income which shall be allowable towards taxable income, when more than one were referred for forwarding to Hon'ble High Court. It is contended that provision of section 31 also support the deductions as specified expenditure under section 28(1) Which could be enjoyed by the business houses with composite activity and not merely and exclusively deriving income from gain on sale of - shares or interest income. The learned representative on behalf of the Department has submitted that case of PICIC is quite distinguishable as one business activity was taxable, whereas other was not. Reliance has also been placed by the learned representatives of the Department, on the case-law and citation as under: (i) (1984) PTD (Trib.) 341 (Kar. H.C.) (ii) (2005) PTD 259 (Trib.) With reference to the case-law at serial No.II, ibid, it was pointed out to both the parties that this particular order is in fact in context with the provision of section 66-A against a completed assessment, the finding as recorded therein are based on the facts which have not any relevance in the instant case and secondly these findings are purely from the point of view of applicability of section 66-A. In the given circumstances, that the matter was, adjudicated, where findings particularly are on applicability of section 66-A and not precisely in respect of the matter before us regarding apportionment of the business expenditure. We have heard the arguments of the learned representatives of both the parties and also of the learned D.R. and have also gone through the case-law as cited by both the parties. The available record has been perused. It is very clear that the concept of income and expenditure go together side by side. In Income Tax Law, .there is firstly the working out of income and also the allowing of expenditure/allowances. Here it is to be brought on record in a categorically plain language and which is also undeniable that exempt income cannot be earned without a certain definite amount of expenditure. As for computation of the capital gain earned on the transfer of capital assets, its cost and expenditure incurred wholly and exclusively for acquiring, are deducted from the amount realized on transfer firstly. For dealing with a situation after this first step, then there are provisions of subsection (2) of section 28, which for convenience are produced as under:-- "...The provisions of section 24 shall, so far as may be, apply to the allowances and deductions under this section as they apply to the allowances and deductions in respect of income chargeable under the head "Income from business or profession." This subsection (2) supra is making clear that that statutory provisions contained in section 24 shall be applicable for working out any income to be assessed under the head capital gain. The section 24 is again referring to the provisions of earlier section i.e. 23 which is starting as under:-- " In computing the income under the head "Income from business or profession", the following allowances and deductions shall be made, namely. The language as reproduced supra is making incumbent upon the Assessing Officer that the allowances and deductions as prescribed shall be made. So no escape is possible in respect of any income whether liable to tax, or not, exempt are not taxable. It is here also be clarified for shedding all the doubts, that exempt, taxable non-taxable income are to be worked out but only the taxable income shall be charged to tax, where patently the part of total income is not liable to tax in the hands of the assessee. Here in the instant case nothing has been commented upon the Assessing Officer, regarding the income claimed as exempt and the expenses incidental with it, so the exempt income has not been disturbed. It is only in respect of taxable income, where add-backs/disallowances of expenditure have been made by prorating the same on the basis of exempt and taxable income. Thus the income which has been charged to tax has been assessed at an enhanced figure against the declared after these add-backs. It is a matter of great concern that the Department is not pointing out as to how the accounts were maintained, which is missing in such accounting record. How the exempt income has been recorded in, the books which was ultimately reflected in the final accounts at the end of the year. Similar is the position of the expenses which too could not get the attention of the Assessing Officer. Nothing has been expressed as to how the capital gains or losses arising in the (transactions have been recorded in the books or that have not been recorded at all or not fully recorded and the resultant position on the given facts. It is of vital importance for such concerns, like the assessees' cases before us, to keep a proper fair record of investment along with expenditure incidental with it. Mainly such business houses earn profits by managing its funds and it is next to impossible as it is not at all comprehensible that there is total absence of maintenance of day to day record of such transactions like investment of funds by also highlighting expenditure involved with reference to such transactions. With the insertion of section 67 in the new Ordinance, 2001, the law makers have accepted that prior to it there cannot be any concept of "Proration of expenses" exactly in identical situations. Anyhow it is an admitted fact that the onus to prove the non-incurranence of any expenses for earning the exempt income was on the assessees, where the assessees have failed, whereas the Assessing Officer have also proceeded arbitrarily by making add-backs/disallowances on proration basis without analyzing/ determining as to the extent of each expenditure for generating exempt income in the hands of assessee, for example, the extent of financial expenses if investment in capital assets i.e. stock in shares is wholly from borrowed funds or partly, and that borrowed funds A have been wholly or partly utilized for carrying on taxable business activity. Similarly the administrative expenditure could be assigned by making clearly in reference to exempt and taxable activities. Another factor which is of utmost importance is that in the instant cases the funds have been invested so as to earn profit on sale of such shares out of investment portfolio, whenever the opportunity arises in the market, which is distinct from the cases when simply surplus funds in hand are invested to earn the profit which could be either in the shape of dividend or surplus realized on sale. Another example is the investment of personal savings. But here it is not the question of gain on sale of investment primarily representing the personal savings where there could not be any noticeable element of expenditure except the purchase price and the cost incidental thereto. The investment has been made by an organization with its object to indulge in such business activity as a result of it exempt capital gain has become visible', so here entire organizational structure with the fund at is disposal were used for such business activity. Thus there is an element of definitely attributable expenditure to investment. Now, we discuss the applicability of case-law cited before us. In the case of PICIC cited as 1988 PTD 626 (Karachi H.C.) findings were recorded by their lordships regarding dividend as the "exempt income" where the expenses shall not be charged. Sections as referred in this judgment are 10(2)(iii) and 15(BB) of the Repealed Income Tax Act, 1922. This reported judgment is in context with an assessee engaged in advancing of loan for setting up the industries and got shares of borrowing company compulsorily against the loan under the terms of loan agreement on which the tax free dividend was earned but in the instant case before us investment was being made by the assessee-Companies as a part of business activity. Further nothing is on record from the assessee's sides as well as from the Department as to whether funds invested represent borrowings or own funds i.e. equity from members. In the Tax Reference No.7 of 2001, the PTR No.128 of 2001, judgment has been authored by Mr. Justice Nasim Sikandar in Division Bench of Honourable Lahore High Court, but the learned representatives of assessees are claiming that this judgment is not to be followed by this Bench, as it is sitting at Karachi which is within the jurisdiction of Honourable Karachi High Court. But without commenting on this arguments it would be of utmost importance that view as expressed in this cited Honourable Lahore High Court judgment should be brought on record by referring to the following paras:-- Thirdly, "The concept of "composite business" in case of a bank or an investment company cannot be extended to capital gains as a matter of course. It is simply for the reason that a bank or investment company cannot take shelter behind their own failure to maintain accounts with respect to their different spheres of activities. To say that an investment company could not maintain separate accounts with regard to sale and purchase of shares, their retention and then disposal in the market and alleging them to be a part of day to day business is not acceptable either as a matter of fact or in law. With the availability of professional expertise in financial and accounting matters the assessee as an investment company cannot take benefit of its own default of, having failed to maintain record of transactions in shares. Fourthly, "The plea of a "composite business" is in fact an attempt to over simplify the issue. The sale and purchase of shares in a stock market is completely recorded and it is not believable that an investment company bank failed to maintain faithful record of these transactions even if these are in thousands. All payments and receipts without any iota of doubt are made through cheques and other banking instruments. In the case in hand despite repeated notices the assessee-Company failed to produce the record and as said above still wanted to take benefit of its default of having maintained no independent account of these transactions. The Revising Authority, therefore, rightly refused to give premium for the default of the assessee." Fifthly, The Revising Authority appears justified in finding that the original assessment order under section 62 as framed- by the Assessing Officer was prejudicial to the interest of Revenue inasmuch as even accrual of the claimed capital gains was not proved through production of record and books of accounts. No allocation of expense to such income, therefore, certainly increased the volume of the claimed exempt income. Sixthly, Learned counsel for the Revenue is correct in pointing out that in case the assessee had returned only capital gains it could not refuse allocation of expense. In such situation provisions of subsection (3) of section 32 (method of accounting) of the late Ordinance would have become applicable. The declaration of higher income from exempted source is an objectionable attempt as to inflate losses. Seventhly, It is also correct that during the proceedings before the Revising Authority the petitioner failed to establish that the investment in shares which resulted in capital gains was made from the equity of the members. The Revising Authority rightly rejected a telegraphic statement submitted before it to show the position of availability of certain funds out of share-holder equity on a particular date. The plea taken in this regard though quite frivolous on the face of it was again sought to be supported from the factum of default on the part of the petitioner to maintain accounts. Lastly, It is also not acceptable that no expense whatsoever was incurred to earn such a huge amount of capital gains. It is common knowledge that stock exchange brokers charge commission of different rates in case of shares of different values. Also revenue stamps are required to be affixed on transfer deeds of shares. These expenses must have been substantial when transactions were made in thousands of shares and were repealed frequently. This judgment though in respect of .applicability of section 66A but the views expressed by the Honourable Division Bench of Lahore High Court have pertinently dealt with the issue in a judicially logical manner. Again reverting to the case of PICIC cited supra where funds were advanced for setting up industrial undertaking, as per the terms/ conditions of working relationship between the PICIC and the borrower, that shares were given by such borrower to the PICIC, so it could become a party in managing and controlling the affairs of the Company, whereas in the instant case before us there is no such compulsion, it is simply the investment of funds by the assessee with a view to earn the profits as well as selling at an appropriate time with a specific object of earning the profits. Thus we do not find that judgment passed in the case of PICIC is in context with the issue before us. To sum up the discussion and also keeping in view the discussion supra we feel persuaded to hold that exempt income cannot be earned without the incurrence of specific and certain amount of expenditure. Such incurrence of expenditure is being found also relatable to exempt income, whereas it is only the proration of expenses which have been made at assessment stage. Such proration of expenses has no scope in the Repealed Income Tax Ordinance, 1979 and secondly, in these cases where the maintenance of accounts is inevitably indispensable so proration would become arbitrary method as in the present days against each rupee of investment, expense could be very easily co-related and assigned in a precise manner re-exempt vis-a-vis taxable income. So we are reluctant to uphold the allowing of expenditure on prorating business instead of determining exactly the amount of expenditure related to exempt income vis-a-vis the taxable income after pinpointing each amount of expenditure to taxable and exempt income. Such working are to be made by the Assessing Officer. The stakes of the Revenue are higher when funds after B borrowing were utilized in the investment and the profit arising on sale of shares is being incorporated in the books without deduction of any expenditure, so in respect of financial expenses greater care is to be exercised by the Assessing Officer for co-relating to exempt and taxable activities. As far as the administrative expenditure are concerned these shall be allocated on the basis of the work force essentially kept for running the two distinct business activities i.e. exempt and taxable. In this computerized scientific age the proration of expenditure is an arbitrary method which cannot be permitted. So even at the cost of repetition, it is to be made clear again that expenditure shall not be prorated but should be allowed by actually identifying each amount of expenditure after proper scrutiny of the same by the Assessing Officer. The order passed by both authorities below are to be vacated and matter shall be remanded back to the Assessing Officer for passing a proper speaking order after obtaining the necessary details with documentary evidence of expenditure and on affording a proper opportunity of being heard to the assessee. The assessee is also directed to extend maximum cooperation to the Assessing Officer for properly disposing of the issue. M.B.A./460/Tax (Trib.) Order accordingly.