2011 PLP (Trib (PTD)

SYED MUHAMMAD JAMIL RAZA ZAIDI (JUDICIAL MEMBER).

Through this appeal the Department has challenge the .validity of order dated 17-1-2011 passed by the Commissioner Inland Revenue (Appeals-I), Karachi on the following sole ground:-- "That the learned CIR(A), Karachi has erred in allowing the set-off of losses sustained by the taxpayer on disposal of fixed assets, amounting to Rs.10.341(M) against interest income. "

2. Brief facts of the case are that respondent is a public limited company and filed the Return of Income along with audited accounts declaring loss of Rs. 1399270. The said return of income was treated as deemed assessment order under section 120(1) of Income Tax Ordinance, 2001. The Additional Commissioner of Inland Revenue-B Audit Div-1, LTU, Karachi (ACIR) assumed jurisdiction under section 122(5A) of Income Tax Ordinance, 2001 and issued notice under section 122(9) of Income Tax Ordinance, 2001 dated 9-6-2010 on a number of contentious issues. The respondent objected to the assumption of jurisdiction by the ACIR under section 122(5A) of Income Tax Ordinance, 2001 and specific issues raised in notice both on legal plane and on facts including the legality of taxing Interest Income and submitted their reply dated 25th October, 2010. The ACIR accepted the replies on all issues except but set off of loss on sale of assets in local market against interest income., The taxpayer/respondent being aggrieved by the order of ACIR filed an appeal before the learned CIR(Appeals), who vide his Order No.116 dated 7-1-2011, adjudicated the issues and accepted the contention of the respondent and allowed the set off under section 56 of Income Tax Ordinance, 2001 of business loss arising from sale of assets in local market against interest income earned during the year. The Department dissatisfied with the treatment meted out by the learned CIR(A) preferred appeal before this Tribunal.

3. The learned DR argued that in this case, the tax payer declared export receipts during the year and as per section 154 of Income Tax' Ordinance, 2001 and section 154(4) of Income Tax Ordinance, 2001, the tax deducted on exports is final discharge of tax liability. In addition to exports, during the year, the tax payer suffered loss of Rs.10341228 on disposal of assets in local market and the taxpayer had interest income of Rs.11140605 and the loss on sale of fixed assets was claimed as an expense against interest income. Further he argued that in past also, the entire income was from exports. The DR argued that Interest "Income is to be assessed under section 39 of Income Tax Ordinance, 2001 being "income from other sources" and only expenses allowable under section 40 of Income Tax Ordinance, 2001 can be allowed as expense. In addition, he argued that if there is no normal business revenue during the year, business loss cannot be determined. He supported the order of the Additional Commissioner of Inland Revenue.

4. In rebuttal, the learned AR stated that the respondent in past had both income from exports as well as normal income as such the contention of DR is. contrary to the facts and as an example in Tax Year 2008 the case of respondent was selected for audit and the respondent had both export sales and normal sales. He filed copy of the assessment order in support of his arguments. He further submitted that he has no dispute on the fact that Income' or Loss arising from different sources has to be determined under different heads of income specified under section 11 of Income Tax Ordinance, 2001. He further submitted that interest income is to be assessed under section 39 of Income Tax Ordinance, 2001 and Income or loss on sale of asset is to be treated as business income or loss as per clear provisions of sections 22(8)(a) and 22(8)(b) of Income Tax Ordinance, 2001. The learned AR further argued that as per section 56 of Income Tax Ordinance, 2001 income from one head of income should be "set off again loss from different head of income during the year. He further argued that the fixed assets on which depreciation had been allowed in past was sold in local market during the year and loss was computed as per clear provisions of section 22(8)(b) of Income Tax Ordinance, 2001. The learned AR of the respondent submitted that there is no dispute by the Department on factum of loss. This loss on sale of fixed asset was computed as per section 22(8)(b) of Income Tax Ordinance, 2001 and set off as per clear provisions of section 56 of Income Tax Ordinance, 2001 against Interest income computed under section 39 of Income Tax Ordinance, 2001.

5. The learned AR further argued that the provisions of section 122(5A) of Income Tax Ordinance, 2001 are conditioned on section 122(9) of Income Tax Ordinance, 2001 which inter alia means that before the order is amended under section 122(5A) of Income Tax Ordinance, 2001 it is mandatory that the ACIR should confront the taxpayer on that specific issue-which in this case is not allowing set off under section 56 of Income Tax Ordinance., 2001. In this case no specific show-cause notice under section 122(9) of Income Tax Ordinance, 2001 was issued asking taxpayer to explain why set off under section 56 of Income Tax Ordinance, 2001 should not be allowed. The learned Alt filed copy of notice under section, 122(9) of Income Tax Ordinance, 2001 in support of the argument and submitted that the proceedings as such are illegal and void ab initio as mandatory provisions of law have been violated.

6. The learned AR submitted that the respondent is an exporter of textile made ups and export business is governed under section 154 of Income Tax Ordinance, 2001. The said section clearly lays down that an authorised dealer in foreign exchange shall deduct tax on export proceeds at time of realisation of foreign exchange proceeds on account of export of goods by an exporter and tax so deducted shall be final discharge of tax liability as per section 154(4) of Income Tax Ordinance, 2001. In case of respondent it was argued that during the year, in addition to exports, they had other source of income/loss which were not exports. * interest income * loss of sale of fixed assets in local market.

7. The learned AR argued that the ACIR has treated Loss on sale of fixed assets in local market as export sale. There is absolutely no basis or logic or legal provisions to support this proposition. Hence he argued that the assets sold in local market cannot be exports and the ACIR has seriously erred in treating the same as exports. He argued that a taxpayer during the year can have export business [covered under Presumptive Tax Regime (PTR)] and normal local business activity which could result in income or loss during the year. He submitted that every thing cannot be treated as exports.

8. The learned AR also relied upon two reported decisions of the Tribunal in support of his argument that where there was no business revenue during the year, yet Taxation Officer was obliged to determine and compute loss under the head of business income due to expenses incurred and this business loss so determined had to be set off during the year as provided under section 56 of Income Tax Ordinance, 2001 against income assessable under any head of income.

9. In case reported as' 1996 PTD 292, the assessee sold fixed assets and suffered loss. During the year he had income from property. The assessee set off the loss on sale of fixed assets against property income. The Taxation Officer disallowed the loss on sale of fixed assets and set off with argument that during the year there was no business. The DB of ATIR did not agree with the findings of the Taxation Officer and held that although no business or profession has been carried out by the assessee during income year corresponding to the assessment year in which asset or class of asset have been sold but by fiction of law it shall be deemed that the business is carried on by the assessee and hence the Tribunal allowed set off of loss.

10. The learned AR also relied on another recent judgment of DB of ATIR reported as 2011 PTD (Trib.)

286. In this case the tax payer had "other income" assessable under section 39 of Income Tax Ordinance, 2001 and also had incurred expenses which were to be computed as business loss. The tax payer set off under section 56 of Income Tax Ordinance, 2001 income assessable under section 39 of Income Tax Ordinance, 2001 and the expenses which resulted in business loss under section 20 of Income Tax Ordinance, 2001. The Taxation Officer confronted the tax payer on this treatment as he was of the view that as there was no business revenue during the year, hence expenses cannot be allowed and the loss as such cannot be set off under section 56 of Income Tax Ordinance, 2001 against income assessable under section 39 of Income Tax Ordinance, 2001. The ATIR did not agree with treatment of Taxation Officer and held that although there was no business revenue during the year, yet that Taxation Officer was obliged to determine loss under the head of business income due to expenses incurred and this business loss so determined had to be set off as provided under section 56 of Income Tax Ordinance, 2001 against income assessable under head income from other sources under section 39 of Income Tax Ordinance, 2001. Hence the Tribunal allowed the set off as claimed.

11. The learned AR also submitted that similar ratio that loss from one head of income can be set off against income from any other source of income during the year in a large number of cases including Hon'ble Supreme Court of Pakistan in the case reported as 2010 PTD 1809.

12. Lastly the learned AR concluded that the learned Commissioner of Income Tax (Appeal-1) has rightly held that loss on sale of assets sold in local market is to be allowed under section 22(8) of Income Tax Ordinance, 2001 and this loss has to be set off under section 56 of Income Tax Ordinance, 2001 against interest income assessable under "income from other sources". The learned CIR(A) has relied on ratio of decision of ATIR in the case reported as 1996 PTD

292. The learned AR submitted that the order of learned CIR(A) is according to the provisions of law and ratio of decisions of the Tribunal and the same requires to be maintained.

13. Rival arguments heard and the case record has been examined. It is observed that the arguments advanced by the learned AR carry force; It is well settled principle of law that income/loss has to be computed under different heads of income as specified in section 11 of Income Tax Ordinance, 2001. It is also a well settled law, that where there was no business revenue during the year, yet Taxation Officer is obliged to determine and compute loss under the head of business income due to expenses incurred and this business loss so determined has to be set off during the year as provided under section 56 of Income Tax Ordinance, 2001 against income assessable under any head of income. Reliance can be placed on reported decisions 1996 PTD 292 and 2011 PTD (Trib.)

286. It is also a settled law that loss under one head of income is required to be set off against profit in other head of income and section 56 of Income Tax Ordinance, 2001 is clear in this respect and in conformity of the decision of Hon'ble Supreme Court of Pakistan in the case reported as 2010 PTD 1809.

14. In the present case, the tax payer sold fixed assets in local market and suffered loss of Rs.10341228. There is no controversy about the factum or the amount of loss. The taxpayer/respondent during the year also had Interest Income of Rs. 11140605. The ACIR was of opinion that this loss on sale of fixed assets in local market cannot be computed as there is no business revenue stream and loss should form part of export. This stance of ACIR is incorrect and contrary to law. The ATIR in cases reported as 1996 PTD 292 and' 2011 PTD (Trib.) 286 have held that where there was no business revenue during the year, yet Taxation Officer is obliged to determine and compute loss under the head of business income due to expenses incurred. Further in this case, the fixed assets were sold in local market and loss was computed as per provisions of section 22(8)(b) of Income Tax Ordinance, 2001 by the respondent tax payer and this is business loss and does not constitute exports as observed by the ACIR. Once the loss is determined as discussed supra as per section 22(8)(b) of Income Tax Ordinance, 2001 it is a business loss. This business loss during the year as per clear provisions of section 56 of Income Tax Ordinance, 2001 can be set off against income assessed any head of income. Hence the taxpayer respondent correctly and as per law set off interest income against business loss on sale of fixed assets in local market.

15. In view of the above facts and circumstances, the order of the learned CIR(A) needs no interference as it has been passed in accordance with law, hence stands confirmed.

16. The Departmental appeal is hereby dismissed. C.M.A./221/Tax(Trib.) Appeal dismissed.