Deductions

On the basis of the standard accounting principles, a debt becomes irrecoverable when it is written off and so the entitlement regarding deduction for bad debts is, to the extent of irrecoverable loans, determined as such under the regulatory framework governing financial institutions

Thus, it would be a matter to be determined on a case to case basis whether the deduction for bad debts was allowable to a particular taxpayer/financial institution or not

Such issue is required to be determined under the (repealed) Income Tax Ordinance, 1979, by the concerned Deputy Commissioner being the competent Officer

Deputy Commissioner is to determine whether deduction for bad debts is to be allowed to a particular taxpayer individually on the basis of the treatment that has been given by the taxpayer/financial institution in its books of account

High Court , therefore, remitted the present case for the necessary determination regarding irrecoverability of a loan to the concerned Deputy Commissioner

Appeal was disposed of accordingly.

Argument of the Department was that depreciation must be calculated after reducing the income from lease rentals by deducting other allowances

Validity

In Cl. V of S. 23(1) of Income Tax Ordinance, 1979, the word "income" is not to be to read as "net income" as this would be adding words to a provision which is not permissible as there is no intendment in taxation laws

In fact, the expression "income from lease rentals only" has to be taken in its ordinary connotation and it signifies simply that depreciation on assets given on lease shall be allowed against any income from lease rentals

Term "income" in this clause has not been used in the isolated sense that it has been defined in the Income Tax Ordinance, 1979

Thus, argument of the Department was misconceived

Question of law to said extent was decided in favour of the appellant and against the respondents / Department

High Court set-aside impugned order passed by Appellate Tribunal

Appeal filed by financial institution was allowed.

Whether the Appellate Tribunal had not erred in law by vacating orders passed by lower fora wrongly relying on Notification SRO 333(I)/2011, dated 02-05-2011 and Clause 45A of Part IV of Second Sched. ignoring S.113 of the Income Tax Ordinance, 2001

Validity

Restraint imposed specifically excluded incidence of withholding tax deductions under S.153(1)(a) of Income Tax Ordinance, 2001

As no deduction was permissible, therefore, no question of classification of such deduction as final tax, in terms of S.153(3) of Income Tax Ordinance, 2001 had arisen

Taxpayer claimed income from both streams, covered under normal and final tax regimes

Incidence of deduction of withholding tax under S. 153(1)(a) of Income Tax Ordinance, 2001 and claiming benefit of proviso were mutually exclusive

Allegations that withholding tax deductions were claimed as corresponding adjustment of minimum tax liability were misconceived

Provision of S. 113 of Income Tax Ordinance, 2001 was not ignored and order of Appellate Tribunal Inland Revenue was not fully comprehended

Appellate Tribunal Inland Revenue did not commit any illegality and had rightly construed scope and effect of proviso to Cl. 45A of Part-IV of Second Schedule to Income Tax Ordinance, 2001 and correctly allowed concessional rates for the purposes of minimum tax liability

High Court declined to interfere in the matter as Appellate Tribunal Inland Revenue did not commit any error while construing S.113 and Cl. 45A, Part-IV of Second Sched. to Income Tax Ordinance, 2001 for the purposes of relevant tax years

Reference was dismissed, in circumstances.

Simply on the basis of mere provision an expenditure cannot be allowed and for allowing the claim of the assessee the Assessing Officer is duty bound to call the record, necessary explanations/clarifications from the assessee and thereafter allow or disallow any claim.

While claiming any income from any business and profession, under S. 22 of the Income Tax Ordinance, 1979, certain expenditures under S. 23 are allowable

Section 23(1)(x) deals with the claim made in respect of the bad debts claimed by an assessee

Bad debts are generally those accounts/amounts which due to any reason have become irrecoverable and all possible efforts with regard to their recovery including the hope of recovery has vanished which amounts are claimed as bad debts by an assessee

However, legislature has put a bar upon an assessee that only such amounts would be allowed as bad debts which are determined by the Deputy Commissioner to be irrecoverable

It is not a matter of discretion of an assessee to decide what is a bad debt, rather the assessee has to establish with cogent material and on reasonable grounds that such and such accounts/amounts since have become irrecoverable, therefore, the same are declared as bad debts

However the discretion to allow or not to allow the same has not been given to the assessee rather the said power is given to the concerned Deputy Commissioner Inland Revenue to determine the amounts which actually have become irrecoverable as bad debts and the onus in this regard for claiming any accounts/amounts as irrecoverable as bad debts lies squarely on an assessee.

Assessee is required to give the names of the account holders and amounts considered as bad debt in each case, as may be indicated in a certificate issued by the State Bank of Pakistan

Assessing Officer has the authority under the law to enquire into genuineness of the claim and the assessee has no arbitrary or irrational authority to write off any amount as bad debt until and unless the parameters, as provided under the law, have been fulfilled or met out, as simply making a provision for doubtful debt is not sufficient to claim deduction under S. 23(1)(x) of the Income Tax Ordinance, 1979.

Question before High Court was whether allowable expenses towards earning Normal Business Income ("NTR") could be prorated against expenses incurred for earning income under Presumptive Tax Regime ("PTR"); when income from such business was derived from composite business activity

Held, that under head of "income from business" there seemed to be no distinction between income derived under NTR and PTR as both were derived from "income from business" as per S.18 of Income Tax Ordinance, 2001

Different types of income of a person for a tax year, to be charged from business, had been defined in said S.18 whereas deductions in computing income chargeable under "income from business" had been provided in S.20 of said Ordinance

While computing "income from business" all types of income from a business, falling under the NTR and PTR, had to be treated as part of composite business income whereas all expenses (deductions) incurred wholly and exclusively for purposes of said business were to be allowed while computing income charged under head of "income from business"

Total income, if the same consisted of more than one head, then expenses incurred where not separable and such apportionment of expenses towards income under NTR and PTR could be made in terms of S.67 read with S.169 of Income Tax Ordinance, 2001

Total income, if it was received from same head of income as a composite business activity, then there was no occasion of proration of expenses between NTR and PTR particularly when such expenses were common and not separable

Once expenses were verifiable and admissible in terms of S.20 of Income Tax Ordinance, 2001 against business income, then there existed no reason to disallow such expenses by making by simply making proration against NTR and PTR income.

Question before High Court was whether immoveable properties purchased by taxpayer for purposes of business could avail benefit of initial depreciation allowance under S.23 of Income Tax Ordinance, 2001, when such immoveable properties / buildings were old and used, and not newly constructed

Held, that Legislature used the phrase "placed into service" with the words "for the first time" for purpose of allowance of initial depreciation under S. 23 of Income Tax Ordinance, 2001 and thus when read in concomitance, same meant the point in time when a fixed asset was put into use for first time

Words "placed into service" had been used to determine starting point of depreciation, which was date of purchase of building and its use for first time by taxpayer

Intention of Legislature was not to allow benefit of section 23 of Income Tax Ordinance, 2020 only for purchase of newly constructed buildings and was not to deprive taxpayer who invested large amount in immoveable proprieties from such benefit

High Court held that immoveable properties were included in definition of "eligible depreciable assets" and therefore investment made in such asset, whether new or old, by a person in Pakistan for purposes of business would be entitled to benefit of initial depreciation allowance under S.23 of Income Tax Ordinance, 2001

Reference was answered accordingly.

Original assessments finalized under S. 62 of Income Tax Ordinance, 1979 were modified under S. 66A by making an addition on account of income credited to suspense account and by making addition on account of lease rentals and the incomes of taxpayer

Commissioner Inland Revenue (Appeals) accepted the appeal of taxpayer on said issues

Department contended that Commissioner Inland Revenue (Appeals) was not justified in allowing depreciation allowance against gross leasing rental income

Validity

Inspecting Additional Commissioner had examined the account and had worked out delayed lease rental at his own by taking difference of lease rental receivable and lease rental actually received and calculated penal interest @ 24% per annum thereon and included the same in the income for the year

Commissioner Inland Revenue (Appeals) had observed that in addition to voluntarily offering penal interest as income of the taxpayer, the assessing officer could not himself determine the late payment recovery which was outside his powers

Depreciation against lease assets was allowable against lease rentals under S. 23(1)(v) of Income Tax Ordinance, 1979

Taxpayer had claimed depreciation against gross lease rentals whereas the Inspecting Additional Commissioner had restricted the same to the extent of net lease rentals (after allocation of proportionate expenses)

Commissioner Inland Revenue (Appeals) had allowed depreciation to the extent of gross lease rental instead of net lease rentals

Commissioner Inland Revenue (Appeals) had accepted the appeal of the taxpayer in accordance with law

Appellate Tribunal agreed with the findings of Commissioner Inland Revenue (Appeals) and held that the actions of Inspecting Additional Commissioner were not justified.

Deduction of Gas Development Surcharge had been provided for in a statute i.e. Oil and Gas Regulatory Authority Ordinance, 2002

Contention of revenue that neither any tax could be levied nor it could be exempted except through Income Tax Ordinance, 2001 was completely out of place and was repelled

Present case neither involved levy of tax nor grant of exemption, rather was a case of admissibility of expenditure under a special law.

Title of account "provision for bad debts" did not make it provision of for bad debt; it was in substance a charge to Profit & Loss account

In revenue matters the substance and not the form of transaction decide the taxability and/or deduction or otherwise

Title `provision for bad debts' was due to format prescribed by the State Bank of Pakistan or Securities and Exchange Commission of Pakistan for presenting of accounts; in substance, this was `loan irrecoverable account'

In the case of financial institutions engaged in money-lending business, money was their stock-in-trade and any irrecoverable loan constituted an allowable deduction

"Irrecoverability" did not mean absolute irrecoverability.

Bad debts and doubtful debts were not two different kinds of debts, the Legislature in the Income Tax Ordinance, 1979 used the word `bad debt' which could not be interpreted to mean not to include doubtful debts.

Condition laid down for allowability of bad debt as deduction in the case of banks and other money lending institutions were the same as envisaged in S.10(2)(xi) of Income Tax Act, 1922 and S.23(I)(x) of Income Tax Ordinance, 1979.

Generally a debt proper is that which one owed to another, any money, goods or services that one is bound to pay to another, a pecuniary due or a liquidated demand

Debt has invariably been treated to be bad when it becomes irrecoverable and the eventuality of irrecoverability rests upon the fact when the debtor is in bad financial position and is unable to repay the debt, either wholly or in part or it may be that the debtor is in sound financial position but he denies his liability to pay or it is otherwise prudent and expedient for the assessee not to seek to recover the debt

To recover the debt, it is not always essential that the creditor should go to a court of law to enforce his claim and that he could write off the debt as irrecoverable only after he failed in court; it may happen that on an examination of the circumstances and after taking appropriate legal advice the creditor may come to a conclusion that resort to a court of law would only result in his throwing good money after bad or that his chances of recovery are doubtful and slender

Creditor, in such circumstance, may claim the debt as a 'bad debt'

As to what print of time a debt become a bad debt, it , is a question of fact and there is no general rule or universal test

Decision had to be arrived at after considering all the facts and circumstances of each case

Age of a debt is no doubt a relevant factor to be taken into consideration yet the mere fact that the debt has become barred under the law of limitation does not itself make it a bad debt

Statute-barred debt is not necessarily bad; neither is a debt which is not statute-barred necessarily good.

Bad debts were disallowed for the reasons that these were not written off during the year under consideration and that all measures for recovery were not exhausted to and First Appellate Authority, for assessment year 2002-2003, observed that disallowance pertaining to exemption period was in order

Assessee contended that no reservation was expressed by the Assessing Officer in his assessment order regarding the irrecoverability of the debts claimed to be bad; and since assessee had fulfilled both the statutory conditions; the facts that these debts were created when the income of assessee or its predecessors was exempt from income tax was simply irrelevant

Department contended that philosophy behind inclusion of CI.23(1)(x) of the Income Tax Ordinance, 1979 relating to allowance of bad debt was to provide relief in such cases when revenue had been offered for taxation in the earlier years on accrual basis and subsequently a part of the revenue which had already suffered taxation was not actually recovered despite all efforts; and in such situation law provides a concession to write-off such amounts, which had become irrecoverable so that the assessee could recoup the tax paid on revenue, which had not been actually earned

Both accruals and receipts of income were not liable to tax during the period to which bad debt related as income of the assessee was exempt

Bad debts relating to exempt period could not be allowed against the income of the taxable period as the exempt income could not be termed as income chargeable to tax

Validity

Claim relating to exempt period was not admissible under the law

Amount relating to predecessor companies and amount allowable during previous years to the assessee and its predecessor companies and claims relating to previous years could not be allowed

First Appellate Authority rightly confirmed the addition relating to assessment year 2001-2002

Department had not contested the setting aside of assessment on this point for assessment year 2002-2003 and tax year 2003; and setting aside of assessment for these two years were confirmed

Assessee's appeal for all years failed on this point.

Assessee contended that interest was capitalized in accordance with the accounting policy which provided that mark-up, interest and other charges on redeemable capital, long term loans and other borrowings were capitalized up to the date of commissioning of the respective asset, acquired out of the proceeds of such redeemable capital and long term liabilities; and all other mark-up, interest, profit and other charges were charged to income

Department contended that assets acquired out of borrowed funds on which interest and mark-up was claimed, had not been commissioned during the year; and interest on assets not actually put to business use or commissioned was not admissible as revenue expenditure and was to be capitalized; and it had also not been proved that assets had actually been commissioned and the amount was wrongly capitalized in the books

Expenses being in the nature of capital expenditure could not be allowed as deduction from income chargeable to tax; and First Appellate Authority had rightly observed that expenditure on installation of new telephone lines was a capital expenditure which should be capitalized

Validity

First Appellate Authority while upholding the addition properly took into account the relevant facts and confirmation of addition was quite justified specially when proper opportunity had been provided to the assessee to substantiate its claim but it failed and the Assessing Officer conclusively established that the amount in question was in the nature of capital expenditure which was inadmissible

Action of both the authorities below was confirmed by the Appellate Tribunal.

Claim of bad debts was disallowed for the reasons that debts were not written off during the relevant income year; and that these debts related to a period when income of assessee's predecessors was not subject to income tax; and debts related to a period before the assessee company came into existence

Assessee contended that debts were actually written off on 30-6-2001 and this action was approved on 8-11-2001 by the Board of Directors and the debts invariably became bad much later than the date of their creation; that debt which was considered as recoverable, at one time gets bad or irrecoverable at a later stage when all rays of hope of its recovery die down; that deduction on account of a bad debt being a loss becomes allowable at a time when the debt was irrecoverable; and that the debts were created by assessee's predecessors whose business had been taken over by the assessee

Department contended that assessee company earned big profits from 1967 to 1995 which were more than Rs.110 billion, yet these so called bad debts were not written off and the assessee waited for termination of exemption period and made the claim only when its income became taxable; that it was done intentionally to reduce the taxable income and tax liability; that taxpayer took a period of over 30 years to write them off; that the assessee neither deserved any favourable treatment nor it was warranted by law; that the intention of the legislature appeared to be that relief could only be granted when revenue had been offered for taxation in the earlier years on accrual basis and subsequently a part of the revenue, which had already suffered taxation was not actually recovered despite all efforts; and that so called bad debts relating to exempt period could not be allowed against the income of the taxable period

Validity

After promulgation of Pakistan Telecommunication Re-organization Act, 1996, the Federal Government had to establish a company to be known as Pakistan Telecommunication Corporation to whom shall have to vest all rights and liabilities, once held by predecessor organizations

All rights and liabilities of former organizations, of which Pakistan Telecommunication Company Limited would be a successor, stood devolved on the said company

Assessee company on its coming into being could recover the dues if any which accrued to the former organizations from time to time and the entitlement of Pakistan Telecommunication Company Limited/assessee could not be disputed

Assessee when it came into being might make a decision as to when these debts should be written off as having become irrecoverable and proved such fact before the tax officer

Findings of both the forums below were vacated and Taxation Officer was directed that the issue of bad debts be decided afresh while living within the parameters laid down by the relevant law.

Admittedly, assessee was already a running concern and seemingly it intended to enhance its efficiency by inducting into operation new equipment/devices as had emerged in the telecommunication field

Borrowed capital was being used in converting old system of Analogue into one to the Digital System

Action taken by the forums below was not in line with rule laid down by Supreme Court and was thus exceptionable

Assessee was entitled to claim borrowing cost on acquisition of machinery but the claims shall be subject to re-verification by the Taxation Officer.

Legislature in the use of words is very specific and by no intendment, the use of satellite could be brought within the meaning of royalty

Income Tax Ordinance 2001, in S.2(54) while defining the term royalty had covered and treated such kind of payment, that is consideration for use of satellite, as royalty it could be inferred that had the Income Tax Ordinance, 1979, contemplated such kind of payment as royalty, a different definition would not have been provided in the Income Tax Ordinance, 2001.

Addition was deleted by the First Appellate Authority on the ground that same was an invalid addition and was in violation of spirit of S.23 (vi)(a) of the Income Tax Ordinance, 1979

No interference was warranted by the Appellate Tribunal in the order of First Appellate Authority, being that of a higher authority, naturally deserved more credence

Departmental appeal was dismissed on the issue.