Deductions not allowed

Officer Inland Revenue (OIR) made addition of the expenses on sale of shares of subsidiary company ('expenses-in-question') holding that the expenses claimed were not wholly and exclusively for business purpose

Department filed appeal as the Commissioner Inland Revenue (Appeals) ('the Commissioner-Appeals') deleted the disallowance holding that expenses incurred on the sale of shares had not been charged against business income

Validity

Taxpayer / Company claimed the expenses-in-question being cost of disposal of shares against the consideration received

Under the head capital gain, the taxpayer / company deducted the cost from the consideration to reach the value of capital gain

Since shares were held for more than one year, hence capital gain was exempt for tax year 2012 given the slab rates prevalent at that time as per Division VII of Part I of First Schedule of the Ordinance 2001

The Commissioner - Appeals rightly deleted the impugned addition under this head which does not warrant any external intervention

Appellate Tribunal Inland Revenue upheld the impugned order on issue-in-hand

Appeal, filed by the Department, was dismissed.

Taxpayer had deducted from its taxable income, the sales tax paid on free air time by claiming it an expenditure in order to attract the customers

Department, after issuance of show-cause notice, disallowed such deduction

Order-in-original was assailed before two appellate forums but to no avail

Validity

Taxpayer had adopted its own marketing strategy to increase the business or attract the customers but such practice could not absolve it from payment of sales tax on the free air time and when the sales tax had been paid, the same could not be allowed to be considered in terms of expenses as the taxpayer had not booked any revenue against the free air time

Department had rightly disallowed the deduction in terms of S. 21(a) of the Income Tax Ordinance, 2001

Reference applications were dismissed.

Section 21(e) of the Income Tax Ordinance, 2001 clearly stipulates that the contributions to an unapproved gratuity fund cannot be deducted while computing the income tax of a person under the head "Income from Business"

Admittedly, in the present case, the gratuity fund has not been approved

Contention of the counsel for the tax payer that once the contribution is made to a gratuity fund, section 21(e) is not applicable, is an absurd argument and totally negates the purpose and object of the statutory requirement of an approved gratuity fund

If the argument of the counsel were to hold true, the requirement of an approved gratuity fund is rendered totally meaningless, if the taxpayer simply states making the contribution to an unapproved gratuity fund and thereafter seeks deduction from the income from business

Such an interpretation is not only absurd but is also unsustainable in law

Petition for leave to appeal was dismissed and leave was refused.

Section 21(e) of the Income Tax Ordinance, 2001 clearly stipulates that the contributions to an unapproved gratuity fund cannot be deducted while computing the income tax of a person under the head "Income from Business"

Admittedly, in the present case, the gratuity fund has not been approved

Contention of the counsel for the tax-payer that once the contribution is made to a gratuity fund, section 21(e) is not applicable, is an absurd argument and totally negates the purpose and object of the statutory requirement of an approved gratuity fund

If the argument of the counsel were to hold true, the requirement of an approved gratuity fund is rendered totally meaningless, if the taxpayer simply states making the contribution to an unapproved gratuity fund and thereafter seeks deduction from the income from business

Such an interpretation is not only absurd but is also unsustainable in law

Petition for leave to appeal was dismissed and leave was refused.

Assessing officer disallowed the deduction of salaries paid by appellant to its employees under S.21(c), Income Tax Ordinance, 2001 for its failure to withhold tax

Validity

Appellant although claimed that its income was attributable to FTR and was exempt from tax but it did not mean that appellant was exempt from carrying out its duties as a withholding agent

Where withholdee was exempt from deduction of tax the withholding agent had to either provide a valid exemption certificate or to be covered under a specific provision of the Income Tax Ordinance, 2001 and in either condition the name of the withholdee had to be specified, yet not in general terms but each and single payment found to be below taxable limit had to be documented

Appellate Tribunal remanded the matter to the assessing officer with direction that each salary payment and its corresponding deduction of tax or otherwise be incorporated in the body of the assessment order

Appeal was disposed of accordingly.

Taxpayer, which was a television channel, impugned show-cause notice whereby it was alleged that taxpayer had claimed expenses under the head of Advertising Agency Commission which was liable to withholding of tax under S. 233 of the Income Tax Ordinance, 2001 and upon failure of taxpayer to deduct said tax, Department could disallow such expenses under S. 21(c) of the Income Tax Ordinance, 2001

Validity

Perusal of financial statements of taxpayer reflected that nowhere in the same, advertising agency commission had been claimed as an expense, and it was only an accounting treatment which it had been given and same had been done to arrive at net revenue under the head of "Net Revenue" by first mentioning total advertainment revenue and thereafter deducting sales tax on advertisement, agency commission, discounts as well as returns and allowances

Nowhere the same had been treated in any manner as an expense falling within definition of S. 21(c) of the Income Tax Ordinance, 2001 so as to make it liable for deduction of advance tax or addition to income as a whole

Section 21(c) of the Income Tax Ordinance, 2001 could have only been applied in respect of expenses being claimed, including brokerage or commission, paid by a person from which tax was required to be deducted

Department had therefore erred in plain reading of financial statements of taxpayer

Liability under S. 233(2) of the Income Tax Ordinance, 2001 would only be applicable in a situation where advertiser/customer of the taxpayer first paid the entire 100% of the amount directly to the advertising agency which thereafter retained or deducted its commission from said amount and remitted the balance to the taxpayer

Department was restrained from passing any final orders in the matter till disposal of the suit

Application under O. XXXIX Rr. 1 & 2, C.P.C. was allowed, accordingly.

Taxpayer contended that S.21(c) of the Income Tax Ordinance, 2001 had wrongly been applied on such expenses which did not come under said section and the addition was liable to be deleted

Revenue contended that addition had rightly been made as all such heads come under the ambit of services on which the taxpayer was required to deduct the tax and First Appellate Authority had rightly maintained the addition

Validity

Addition under S.21(c) of the Income Tax Ordinance, 2001 had wrongly been made which was ordered to be deleted as the addition made did not come under the ambit of S.21(c) of the Income Tax Ordinance, 2001

Such addition was also not maintainable as the same was not specifically confronted to the taxpayer and had been made without referring any definite information.

Assessing Officer observed that "payments were made by the fund itself therefore there seemed no justification in claim of such expense by the company in its account"

Taxpayer contended that it was confronted in another notice that addition was to be made for the reason that expense was of capital nature but while making addition the same had been made on the allegation that tax was not deducted; that it was clear that Assessing Officer alleged three contradictory reasons for disallowance of expense i.e. (i) payment had been made by the fund itself (ii) expense was of capital nature (iii) tax had not been deducted; and such three observations established that Assessing Officer wanted to make an inquiry in order to disallow the expense; that question as to whether tax had been deducted or not was the matter of inquiry which could not be conducted as per law available on the statute book for tax year 2010 and the addition was not maintainable for that reason ; that payment made to the employees working in branches of the Bank (Taxpayer) situated in remote areas and below taxable limit payments were not liable to deduction of tax; that Assessing Officer had not pointed out a single instance wherein tax had not been deducted ; that addition being without any information/material was liable to be deleted; that tax was duly deducted at the time of making the payment; that provision of S.21(c) of the Ordinance were not attracted; that apart from this the addition was not maintainable as the same did not come under the ambit of Seventh Schedule of the Income Tax Ordinance, 2001; and that business income had to be computed under the Said Schedule as specifically provided in its R.6

Revenue contended that the same had been disallowed for the reason that the payment were made by the fund and tax was not deducted and it was also the expenses of capital nature; and that there was no justification for remanding the matter to the Assessing Officer

Validity

Submissions of the taxpayer were correct that Assessing Officer had been changing his contention time and again (payment had been made by the fund itself, expense was of capital nature, tax had not been deducted)

Assessing Officer had been trying to justify addition for one reason or the other

Addition based on the circumstances was not maintainable under S.122(5A) of the Income Tax Ordinance, 2001 which required that Assessing Officer should establish the order to be erroneous and prejudicial to the interest of revenue

Appellate Tribunal directed to delete the addition.

Taxpayer contended that addition on account of recoveries was liable to be deleted as that amount related to the period upto tax year 2007; that income was not liable to tax upto tax year 2007; that the issue had wrongly been remanded to the Assessing Officer; that such addition should have been deleted: and apart from this the addition was not maintainable as the same did not come under the ambit of Seventh Schedule of the Income Tax Ordinance, 2001; and that business income had to be computed under the Seventh Schedule to the Income Tax Ordinance, 2001 as specifically provided in R.6 to the said Schedule

Revenue contended that recoveries of charge off amounts had rightly been added in the income of taxpayer as the provisions on account of non-performing loan and advance had been allowed to the taxpayer; and there was no justification for remand of the case

Validity

Assessing Officer had made additions under the head "recoveries" without any evidence/material establishing that recoveries did not relate to the period up to tax year 2007 (up till that time income of the taxpayer was exempt)

Even otherwise, the addition did not come under the ambit of Seventh Schedule to the Income Tax Ordinance, 2001

Appellate Tribunal directed to delete the addition for tax years 2010 & 2011.

Taxpayer (Bank) contended that addition was not maintainable as the same did not come under the ambit of Seventh Schedule; that business income had to be computed under the Seventh Schedule of the Income Tax Ordinance, 2001 as provided in R.6 to the Seventh Schedule of the Ordinance; and that there was no provision in the Seventh Schedule wherein disallowance of such expenses could be made

Revenue contended that provision for post-retirement medical benefit had been disallowed as the taxpayer failed to file the license of the value company, history of the value company and estimate had been made on the basis of case-law and that First Appellate Authority had deleted the addition without any justification

Validity

Addition under the head "post-retirement medical benefit" made by the assessing officer were not in accordance with settled law

Tribunal directed to delete the addition for the tax year 2010 and order of First Appellate Authority on this issue for the tax years 2011 & 2012 were upheld

Additions in that respect was also not maintainable for the reason that it did not come under the ambit of Seventh Schedule of the Income Tax Ordinance, 2001.

Revenue contended that instead of providing employee-wise detail of expenses on actual basis, the bank (taxpayer) provided total figure worked out by actuaries

Taxpayer contended that Appellate Tribunal in a reported case 2001 PTD 744 had held that any ascertainable accrued liability was deductible under the mercantile system of accountancy; that liability was not unascertainable liability if the same was stated as provision; and that it was the substance that matters and not the mere nomenclature given to any transaction

Validity

Substance that mattered and not the nomenclature given to any transaction

Liability could not become unascertainable if it was named as provision

Appellate Tribunal directed the department to allow the deduction.

Addition was upheld as it was inadmissible under S.21(g) of the Income Tax Ordinance, 2001.

Issues were remanded back to the Assessing Officer assuch those were required further adjudication, clarification and evidence to be placed on record

Assessing Officer was directed to pass fresh order in respect of said issues after affording reasonable opportunity of being heard to the taxpayer.

Taxpayer contended that it was a grant from Asian Development Bank and grant was not taxable income under the Income Tax Ordinance, 2001; that apart from this the addition was not maintainable as the same did not come under the ambit of Seventh Schedule of the Income Tax Ordinance, 2001; and that business income had to be computed under the Seventh Schedule as specifically provided in R.6 to the Seventh Schedule

Contention of Revenue was that it represented reversal of amortization claimed as deduction in previous years and constituted recouped expenditure; and that the same had rightly been disallowed and there was no justification to remand the matter

Validity

Addition was not maintainable in view of settled law

Even otherwise the addition was beyond the scope of Seventh Schedule to the Income Tax Ordinance, 2001

Addition made was deleted by the Appellate Tribunal for all the years.

Taxpayer contended that expenses claimed under the heads 'travelling and conveyance, communication, selling expenses and others' were not the subject matter of S.21(c) of the Income Tax Ordinance, 2001 and as such the Officer of Inland Revenue could not make disallowance under these heads by invoking the said provision; that expenses claimed under the head 'rent, rates and taxes' was the aggregate of token tax paid on vehicle used for loading by the taxpayer/company, fee paid to SECP and rent of building; that all such payments were verifiable and could not be justifiably disallowed; that similarly, salaries and wages paid to different employees were below the taxable limit in each individual case; and that Director's salary claimed under the head 'Directors Fee" was also below taxable limit in the case of each Director; and that there was no justification even to disallow such expenses

Validity

Expenses claimed under the heads travelling and conveyance, communication, selling expense and others, could not be disallowed with reference to provisions of S.21(c) of the Income Tax Ordinance, 2001 as they did not find any mention in the said provision

For the purpose of making such disallowances, reference to S.21(c) of the Income Tax Ordinance, 2001 was irrelevant as well as illegal

Question of withholding tax from payments made under the heads 'rent, rates and taxes', salaries and wages and Directors' fee, did not arise because all the payments were not only below the threshold but in the case of 'rent, rates and taxes' substantial payments were also made to the Government Departments

Had the Assessing Officer bothered to go deeper into the record relating to the such expenses, he would have comprehended the reasons of non-deduction of tax by the taxpayer company

Further, after examination of details and information submitted by the taxpayer, no notice under S.122(5) of the Income Tax Ordinance, 2001 confronting the taxpayer with defects, if any, in the details and information was issued although issuance of such notice was mandatory

Appellate Tribunal directed to delete all such disallowances made by the Officer of Inland Revenue and upheld by the First Appellate Authority.

Taxpayer contended that amount of workers profit participation fund was payable as on 30th June was paid in the next financial year; that provision was made by the auditors at the time of finalization of account in the month of September/October; that accounts were prepared on accrual basis and an expense was charged to the relevant year as per International Accounting Standard; and that in case of addition under S.21(c) of the Income Tax Ordinance, 2001, even after passing of any adverse order against the taxpayer, if any payer (claimant of expenditures) subsequently deposited the amount of withholding income tax, before the completion of assessment proceedings then resultant addition of S.21(c) of the Income Tax Ordinance, 2001 could not be made and the claim should have been allowed in full in accordance with the provisions of Income Tax Ordinance, 2001

Validity

Since the case of the taxpayer had not been considered on said two points judiciously by the assessing authority who was the basic fact finding authority under the law, assessing authority was directed by the Appellate Tribunal to start the proceedings afresh subject to all due exceptions after giving proper opportunity of being heard to the taxpayer, who stated that he had all the necessary proof of payments and evidence which may be verified properly and then pass a judicious order

Taxpayer was also directed to cooperate with the assessing authority for finalization of re-assessment proceedings on said score and provide all data/proof of payments made on account of Workers Profit Participation Fund and income tax deduction with respect of the addition made under S.21(c) of the Income Tax Ordinance, 2001.

Addition of said items for the reason that the taxpayer failed to substantiate the stance due to the reason that the same were not actually disposed of and no loss was determinable at present point of time; and claim was to be viewed when the actual disposal would take place

Validity

Propriety of the expenditure had not been challenged by the Taxation Officer but he required the taxpayer to claim the expenditure on the actual disposal of the stores and spares

Taxpayer claimed that the deduction of expenditure in the tax year 2003 had been claimed on accrual basis of accounting regularly employed by the taxpayer

Evidence had been produced that the actual disposal of the obsolete stores and spares had been subsequently taken place and the receipts in this respect had also been recognized as income, which showed the fair conduct of the taxpayer in that respect

Addition deleted by the First Appellate Authority was not interfered by the Appellate Tribunal and appeals of the department were dismissed.

Taxpayer contended that accounts were maintained on mercantile basis and every year certain contributions were made to the employees' retirement medical benefits plan as an ascertained liability; and that disallowance was made more than the confronted amount after considering the reply

Validity

Addition was not maintainable for the simple reason that the taxpayer was never confronted for the addition of the disallowed amount.

Department contended that First Appellate Authority was not justified to remand the issue on account of payment to forwarding agents that as the power of remand had been withdrawn by Finance Act, 2005; that deletion of tax charged on account of repair and maintenance, travelling and conveyance allowance and entertainment, the Assessing Officer had already given margin to the taxpayer regarding below taxable limit purchases; that order was fully justified and reasonable; and that with regard to deletion of tax charged on account of newspaper and periodicals and purchase of Yarn, Assessing Officer had rightly charged tax @ 5% which had wrongly been deleted by the First Appellate Authority without giving any reasons

Taxpayer contended that assessing officer wrongly disallowed 30% of the claim in any arbitrary manner on account of repair and maintenance, travelling and conveyance allowance and entertainment expense which had rightly been deleted by the First Appellate Authority; and tax charged on account of newspaper and periodical and purchase of yarn @ 5% had also rightly been deleted as the payments did not come under the category of services as the assessing officer charged tax under the head services

Validity

Order of First Appellate Authority on the issue of Repair and Maintenance, Travelling and Conveyance and Entertainment and Newspapers was well reasoned and did not require any interference being justified and Taxation Officer had made the additions without legal reasons.

Assessee contended that sales tax liability for the current crushing season and also for the earlier years were payable, but could not be paid and although installments for payment of sales tax liability was allowed, but due to financial crises, the installments could not be paid; that for delayed payment, additional tax as surcharge was levied which the auditors had termed as penalty; that additional tax paid did not represent penalty for any violation for the reason that as per S.21(g) of the Income Tax Ordinance, 2001, the inadmissibility of any expenditure was restricted if the payment was in respect of fine or penalty or payable due to violation of any law or rule or regulation, but if there was no violation of any law, neither the provision of S.21(g) of the Income Tax Ordinance, 2001 could be invoked nor the claim could be disallowed as the same was an admissible deduction under S.21(1) of the Income Tax Ordinance, 2001; that although for non-payment of installment of sales tax, additional tax was levied and paid which was incorrectly termed as penalty, but in fact the payments had been made on the basis of amnesty scheme and concession allowed by the Federal Board of Revenue through various SROs whereby additional tax and penalty was exempted if the amount of sales tax not paid or adjustment of inadmissible input tax was paid along with 25% as additional tax; that the claim of additional tax and even penalty was an admissible deduction and could not be disallowed; that in view of S. 21(g) of the Income Tax Ordinance, 2001 which excludes the application of any other law for the time being force, the provision of S.21(g) of the Income Tax Ordinance, 2001 could not be invoked as there was no violation of any provisions of Income Tax Ordinance, 2001; that violation if any was that if Sales Tax Act, 1990 and not that of Income Tax Ordinance, 2001; that further, additional tax or even if termed as penalty for non-payment or delay in payment of sales tax liability could not be disallowed as there was neither criminal infraction, nor violation of any law, the deduction was held as an admissible deduction/ expenditure incurred wholly and exclusively for the purpose of business

Validity

Any expenditure incurred on account of criminal infringement or violation of law was not allowable as an admissible deduction and not otherwise

Auditors had used the word penalty which had been rebutted by the taxpayer

Provisions of S.21(g) of the Income Tax Ordinance, 2001 was wrongly invoked which was confirmed by the First Appellate Authority

Neither of the officers below could prove any violation, infraction or infringement of law

Addition was deleted by the Appellate Tribunal and order of First Appellate Authority was set aside.

Taxpayer contended that loans had been allowed against credit balance in provident and gratuity funds of employees which had been deducted from wages and salaries; and provisions of S.21(g) of the Income Tax Ordinance, 2001 was not applicable

Revenue contended that as interest free loans had been advanced to employees, interest on these loans had been correctly charged and confirmed by the First Appellate Authority

Validity

After decisions of superior Courts the earlier decision of Appellate Tribunal, referred in the amended order, stood overruled and was not applicable

As the fact of the taxpayer's case and of the case decided by the Superior Court were the same which had not been disputed, by following the decision of superior courts, appeals were allowed

Additions were deleted by the Appellate Tribunal and order of First Appellate Authority confirming the addition were set aside.

Provision for gratuity had been allowed in the amended order, which proved that S.21(e) of the Income Tax Ordinance, 2001 was wrongly invoked

Claim related to tax year 2005 and was recorded in cash flow for the said year

Disallowance made did not relate to tax year 2006

Disallowance made was deleted by the Appellate Tribunal and orders of lower forums were set aside.

Taxpayer contended that in financial statements it was mentioned as provision of gratuity and the word "provision" was in fact "payable"; that gratuity fund was an approved fund and under S.21(e) of the Income Tax Ordinance, 2001 such provision could only be disallowed in case of unapproved fund; and that since gratuity was an approved fund, the add back could be upheld by the First Appellate Authority

Validity

Gratuity claimed by the taxpayer on account of contribution to approved gratuity fund had been disallowed, in financial statement it was mentioned as provision of gratuity, it was ascertained liability for gratuity which was an approved fund and under S.21(e) of the Income Tax Ordinance, 2001 such provision could only be disallowed in case of unapproved fund

Such figure was allowable in view of calculation for entitlements of gratuity of various employees

Issue was answered in favour of taxpayer and against the department.

Amounts under the heads; "entertainment"; "conveyance"; "travelling fare"; "staff training"; "staff refreshment" and "staff uniform" were treated as perquisites and added in income

Taxpayer contended that these expenses were incurred wholly and exclusively in relation to performing of duties by the employees and by no stretch of imagination could be construed as allowance, perquisites or benefit within the meaning of S.21(k) of the Income Tax Ordinance, 2001

First Appellate Authority observed that on same grounds additions made were set aside and department accepted bank's point of view and did not make any addition

Validity

Expenses were not allowances, perquisites or benefits within the meaning of S.21(k) of the Income Tax Ordinance, 2001

No infirmity in the order of First Appellate Authority having been found its order was confirmed by the Appellate Tribunal.

Revenue contended that in Income Tax Ordinance, 1979 no parallel provision was available, but in Income Tax Ordinance, 2001, S.13(7) brings such loans within the purview of taxation

Validity

Contention of revenue was not valid as S.13(7) of the Income Tax Ordinance, 2001 dealt with income in the hands of employees, whereas the issue in the present case was treatment of concessional loans in the hands of employers

Bank did not claim any expenses, the issue of disallowance would not arise

Departmental appeal was dismissed on the issue.

Taxpayer contended that company had provided vehicles to its few executive staff members for official duties besides allowing them personal use thereof to some extent as per terms of employment; that allocation of such vehicles was a part of remuneration of employees against their services; that vehicles were owned by the company and used for the purposes of business, the claim of amount of repair and maintenance on these vehicles was business expense of the company; that personal use of vehicles by the employees was in accordance with the terms of employment contract and its value could be treated only as perquisite/benefit to employees, chargeable to tax under the head salary; that company was also taxed on account of excess perquisites; that while calculating amount of excess perquisites department had also made addition of the value of conveyance provided to different executive staff members while computing the excess perquisites; and that disallowance of expense on account of repair and maintenance on such vehicles was against the law

Validity

Submission made by the taxpayer was without any substance

Taxpayer had not provided any detail of expenses incurred on repair and maintenance of vehicles provided to the employees and Directors

Addition was made on account of running and maintenance of vehicles provided to the Directors

Appellate Tribunal maintained the treatment meted out by the authorities below and addition made were maintained.

Revenue authority contended that First Appellate Authority was not justified in restricting the disallowance made out of salaries paid to the employees; that S.21(m) of the Income Tax Ordinance, 2001 clearly stated that no salaries expenses could be allowed if the amount paid other than cheque exceeded Rupees ten thousand, and that entire amount was to be disallowed rather than restricting the same

Taxpayer contended that First Appellate Authority was justified in restricting the disallowance exceeding Rupees ten thousand paid other than crossed cheque; and correctly worked out the disallowance to be made

Validity

While calculating the income from business the deduction should not be allowed, if salary exceeding Rupees ten thousand was paid other than by a crossed cheque

Admittedly in the present case salaries were paid in cash and exceeded Rupees ten thousand, therefore the same could not be allowed as business expense under the provision of S.21(m) of the Income Tax Ordinance, 2001

First Appellate Authority mis-interpreted the law and restricted the disallowance made by the Taxation officer

Section 21(m) of Income Tax Ordinance, 2001 was enacted purposely to thwart fraudulent or sham transactions

Section 21(m) of the Income Tax Ordinance, 2001 might be read in conjunction with main S.21 of the Income Tax Ordinance, 2001 which unequivocally stated that "no deductions shall be allowed in computing the income from Business", if any salary paid or payable exceeded Rupees ten thousand per month other than through crossed cheque

First Appellate Authority misinterpreted the law by restricting the disallowance

Salaries paid to employees in cash were not allowable expenditure

Order of First Appellate Authority was vacated, wherein it, had restricted the disallowance and that of Taxation Officer was restored

Appeal was disposed of accordingly.

Expenses claimed on account of late payment charges was disallowed and added back on the ground that contractual obligations were being discharged under the Contract Act, 1872 and violation of the contract, entered into between the parties, was violation of the Contract Act and late payment charges were paid for that contravention and expenses on account of late payment charges was in contravention of S.21(g) of the Income Tax Ordinance, 2001 being fine paid for violation of law of land i.e. Contract Act, 1872

Taxpayer contended that S.20 of the Income Tax Ordinance, 2001 stipulated that a person may be allowed a deduction for any expenditure incurred wholly and exclusively for the purpose of business unless specifically disallowed by the Income Tax Ordinance, 2001; that provisions of S.21 of the Income Tax Ordinance, 2001 envisaged disallowance of fine or penalties in violation of any law, rule or regulation; and that late payment charges were not in respect of violation any law, rule or regulation and such like expenditure was a common feature of contracts

Validity

Clause of contract providing interest on the delayed payment was one of the terms and conditions of the contract between two parties; and said clause was neither a provision of any statute/law, rule or regulation; and provisions of Cl.(g) of S.21 of the Income Tax Ordinance, 2001 disallowed a deduction for any fine or penalty paid or payable by the person for violation of any law, rule or regulation

Clause (g) of S.21 of the Income Tax Ordinance, 2001 clearly provided that the fine or penalty paid or payable by the person was for violation of any law, rule or regulation

Clause of a contract between the parties was neither law, rule or regulation

Three expressions "law", "rule" or "regulations" imply codified provisions, may it be a primary legislation by the legislature or a subordinate one by other authorities to whom legislature had delegated its power to make rules or regulations

Contract Act, 1872 had not been correctly construed by the forums below for the same regulated the relationship between a promiser and a promisee, envisaging certain conditions for execution of the contract

Contractual rights and liabilities were justiceable when the relationship came into being in accordance with the provisions of the Contract Act

No doubt it was not a statute/law providing specific penalties including fine in case of non compliance of the contractual obligations, party in default had to perform his part of contract which might be got enforced in terms of actual performance or if the same was not possible, by compensation appropriate in each case

Violation of the terms of a contract, as executed in line with the provisions of the Contract Act was not a violation of any law, rule or regulation

Late payment charges paid by the taxpayer did not fall within mischief of Cl.(g) of S.21 of the Income Tax Ordinance, 2001 and could not be disallowed

Appeal of the taxpayer was accepted by the Appellate Tribunal.

Claim of bad debts was disallowed by observing that the claim was premature and once the taxpayer had transferred the rights of its recovery to the successor company in which the taxpayer with all of its assets and liabilities had been merged, the claim of bad-debts on provisional basis was legally valid

First Appellate Authority upheld the disallowance of the claim of bad-debts by holding the action of the Taxation Officer to be valid in law

Validity

Action of Taxation Officer in disallowing bad debts which was confirmed by the First Appellate Authority was upheld by the Appellate Tribunal for the reason that after merger/amalgamation the right to recover the bad-debts rested with the new company formed as a result of the merger

Appeal of the taxpayer was dismissed by the Appellate Tribunal.

Department contended that transactions of amount to Rs.1,9633,929 were made in cash in respect of expenses, which had been disallowed but First Appellate Authority without any justification had restricted disallowance to Rs.816,956

Taxpayer contended that all the amounts paid were below the threshold limit of Rs.10,000 but these amounts were paid through single voucher; and admittedly the payments made were below the threshold of taxable limit which fulfilled the conditions laid down by law; that Taxation Officer had not denied that these expenses related to the business purposes; and that instead of deleting the addition, First Appellate Authority had only restricted the addition at 50% of the claim

Validity

Taxation Officer had nowhere observed that expenses claimed were not related to the business purposes

Most of the expenses were below taxable limit and paid for the purpose of factory petty cash electricity account etc.

Taxation Officer had failed to confront the taxpayer specifically regarding the claim of the amount exceeding the taxable limit

First Appellate Authority had rightly restricted the disallowance to the 50% of the claim

Order of First Appellate Authority was not interfered by Appellate Tribunal.

Revenue contended that vouchers regarding the payments were not furnished and taxpayer failed to furnish the supporting evidence in respect of such amounts of expenses and expenses in this regard were treated to be not genuine and were disallowed

Deletion of add backs made out of profit and loss expenses were supported by the taxpayer by books of accounts, vouchers and other relevant documents were provided and there was no justification for such add backs; and Taxation Officer had made the lump sum addition using of stock phrases without considering the fact that most of the expenses so claimed, were made through cross cheques

Validity

Admittedly, taxpayer provided books of accounts, vouchers and other relevant documents but Taxation Officer had made lump sum addition using stock phrases without pointing out the specific heads

First Appellate Authority had rightly knocked off addition which required no interference.

Revenue contended that under S.13(7) of the Income Tax Ordinance, 2001 the deference of benchmark rate as profit on any interest free loans provided to the employees was perquisite and taxpayer had paid interest free loans to the employees which were recoverable in installments and, as such, the profit on loan as computed at the benchmark rate of 8% being a perquisite of the employees was taxable under S.13(7) of the Income Tax Ordinance, 2001; that taxpayer had failed to furnish evidence in respect of inclusion of such amount of perquisite in the salaries of employees and that the Taxation Officer had rightly made the addition in this respect, the amount of loans being inadmissible expense in terms of the provisions of S.21(c) of the Income Tax Ordinance, 2001

Taxpayer contended that since interest free loan had been provided to the employees which were in the shape of perquisites, which otherwise, after inclusion benchmark interest @ 8%, the salaries remained below the threshold of taxable limit; that there was no obligation to deduct tax thereon; and that there was no justification for the disallowances made by the Taxation Officer invoking Cl.(c) of S.21 of the Income Tax Ordinance, 2001 which had rightly been deleted by the First Appellate Authority

Validity

Interest free loan had admittedly been provided by the taxpayer which constituted perquisite in terms of subsection (7) of S.13 of the Income Tax Ordinance, 2001 which, was admittedly taxable but the Taxation Officer without establishing the fact that after inclusion of interest, the salaries of the employees were above threshold of the taxable limit, had made addition in that respect

Salaries of the employees remained below the threshold of taxable limit and therefore the taxpayer company was not under obligation to deduct tax thereon

First Appellate Authority rightly deleted the addition.