Income from business
Income from business legal meaning, translation and judicial precedents.
Meaning & Judicial Interpretation: (اردو مفہوم اور قانونی تشریح)
Commissioner Inland Revenue (Appeals) upheld the impugned disallowance by observing that the taxpayer could not rebut the calculation/basis established by the officer and that the taxpayer had not given any calculation to establish that the interest offered for tax at Rs.28,905,058/- was not at arm's length transaction within terms of S. 108 of the Ordinance 2001
Summary of calculation of mark-up submitted by appellant / taxpayer indicates that loan to subsidiary company vary from date to date but assessment order depicts that the Assessing Officer misconceived the calculation of mark up of short term borrowing as per record submitted by the appellant / taxpayer
Appellate Tribunal Inland Revenue set-aside the impugned order and remanded the matter back to the Assessing Officer for reappraisal and decision while directing taxpayer /appellant to submit the complete summary of calculation of mark up to the Assessing Officer to reach out a just conclusion
Appeal, filed by Taxpayer, was disposed of accordingly.
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.
Whether the increase in the fair market value of the subsidiary company's shares held by the taxpayer-respondent as long-term investment was taxable under the head "income from business" in terms of section 18(1)(d) of the Income Tax Ordinance, 2001
Held, that section 18(1)(d) of the Income Tax Ordinance, 2001 prescribes a two-pronged test for bringing income under the head "income from business" ; first is that any benefit or perquisite must have a fair market value, not necessarily whether it can be converted into money; second is that a person may have received the value of that benefit or perquisite during or under a past, present, or prospective business relationship
Coexistence of both is necessary and the absence of one of them will not constitute income from a business
As regards the first constituent component of the test, the notional gain derived by the taxpayer from the increase in the fair market value of its shares may in appropriate circumstances be counted as "benefit"
However, no definite answer need be given on this, in the facts and circumstances of the present case
With respect to the second constituent component of the test, the principle to be applied for purposes of present case is whether the investment which led to the notional gain was connected with the carrying on of the taxpayer's business
It bears mentioning that enhanced fair market value of any benefit or prerequisite may be so assessable under Section 18(1)(d) of the Income Tax Ordinance, 2001, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business
In the present case, the Revenue has not brought any material on record which discloses definite information that the taxpayer had made the said investment in furtherance of its business or in connection therewith
Given this scenario, the relationship between the taxpayer and its subsidiary may be held to be contractual, and governed by articles of association
So viewed, the facts of this case do not meet the test for section 18(1)(d) of the Income Tax Ordinance, 2001, and thus, the taxpayer's gain from its investment cannot be treated as business income in terms of section 18(1)(d)
Furthermore, according to section 122(5) of the Income Tax Ordinance, 2001, two conditions have to be complied with before a Taxation Officer acquires jurisdiction to issue notice under section 122(9) in respect of an assessment beyond the period of five years from the end of the relevant financial year
These two conditions are: firstly, that the Taxation Officer must have obtained definite information from the audit or otherwise; and secondly, that on that basis he must also be satisfied that income chargeable to tax had escaped assessment or total income has been undervalued, or assessed at too low a rate, or has been the subject of excessive relief or refund or any amount under a head of income has been misclassified
In the present case the two conditions of section 122(5) were not adhered to while assuming jurisdiction to amend the original assessment order
Show cause notice and the order amending the original assessment speaks elaborately that the Taxation Officer had not acquired any definite information subsequent to the original assessment order
On the contrary, the Taxation Officer based on the information provided in the return and documents attached to it by the taxpayer, proceeded to amend the assessment
Taxation Officer had only made reanalysis of existing information and came to a conclusion that was different from the one that was drawn in the original assessment order
Notice issued under section 122(9) of the Income Tax Ordinance, 2001 was without jurisdiction, and the order passed in consequence of it was also void
Appeal was dismissed accordingly.
Whether the increase in the fair market value of the subsidiary company's shares held by the taxpayer-respondent as long-term investment was taxable under the head "income from business" in terms of section 18(1)(d) of the Income Tax Ordinance, 2001
Held, that section 18(1)(d) of the Income Tax Ordinance, 2001 prescribes a two-pronged test for bringing income under the head "income from business" ; first is that any benefit or perquisite must have a fair market value, not necessarily whether it can be converted into money; second is that a person may have received the value of that benefit or perquisite during or under a past, present, or prospective business relationship
Coexistence of both is necessary and the absence of one of them will not constitute income from a business
As regards the first constituent component of the test, the notional gain derived by the taxpayer from the increase in the fair market value of its shares may in appropriate circumstances be counted as "benefit"
However, no definite answer need be given on this, in the facts and circumstances of the present case
With respect to the second constituent component of the test, the principle to be applied for purposes of present case is whether the investment which led to the notional gain was connected with the carrying on of the taxpayer's business
It bears mentioning that enhanced fair market value of any benefit or prerequisite may be so assessable under Section 18(1)(d) of the Income Tax Ordinance, 2001, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business
In the present case, the Revenue has not brought any material on record which discloses definite information that the taxpayer had made the said investment in furtherance of its business or in connection therewith
Given this scenario, the relationship between the taxpayer and its subsidiary may be held to be contractual, and governed by articles of association
So viewed, the facts of this case do not meet the test for section 18(1)(d) of the Income Tax Ordinance, 2001, and thus, the taxpayer's gain from its investment cannot be treated as business income in terms of section 18(1)(d)
Furthermore, according to section 122(5) of the Income Tax Ordinance, 2001, two conditions have to be complied with before a Taxation Officer acquires jurisdiction to issue notice under section 122(9) in respect of an assessment beyond the period of five years from the end of the relevant financial year
These two conditions are: firstly, that the Taxation Officer must have obtained definite information from the audit or otherwise; and secondly, that on that basis he must also be satisfied that income chargeable to tax had escaped assessment or total income has been undervalued, or assessed at too low a rate, or has been the subject of excessive relief or refund or any amount under a head of income has been misclassified
In the present case the two conditions of section 122(5) were not adhered to while assuming jurisdiction to amend the original assessment order
Show cause notice and the order amending the original assessment speaks elaborately that the Taxation Officer had not acquired any definite information subsequent to the original assessment order
On the contrary, the Taxation Officer based on the information provided in the return and documents attached to it by the taxpayer, proceeded to amend the assessment
Taxation Officer had only made reanalysis of existing information and came to a conclusion that was different from the one that was drawn in the original assessment order
Notice issued under section 122(9) of the Income Tax Ordinance, 2001 was without jurisdiction, and the order passed in consequence of it was also void
Appeal was dismissed accordingly.
Gross sales of a person cannot be treated as total income chargeable to tax instead it is the net profit earned from the business which has to be taxed.
Liability as to tax on income from business must be created on the mechanism as enshrined in the Part-IV, Division-I and Division-II of the Income Tax Ordinance, 2001, whereunder, Ss.18 & 20 of the Income Tax Ordinance, 2001, when read in conjunction with each other facilities deductions of business expenditures incurred on income earned and it is the net profit which has to be taxed and not the gross sales deeming them as undisclosed income.
Onus to dispute the said expense, so claimed by a taxpayer, had been cast upon the Revenue department, thus, it was for the Revenue department to show that the expenditure so claimed by the taxpayer was not permissible, or was excluded from deduction under the Income Tax Ordinance, 2001, and in particular, S. 21 thereof.
Onus to dispute the said expense, so claimed by a taxpayer, had been cast upon the Revenue department, thus, it was for the Revenue department to show that the expenditure so claimed by the taxpayer was not permissible, or was excluded from deduction under the Income Tax Ordinance, 2001, and in particular, S. 21 thereof.
Administrative expenses deducted by taxpayer were disallowed by Additional Commissioner Inland Revenue on the ground that taxpayer had not declared any business income under S. 18, Income Tax Ordinance, 2001 but income from other sources under S. 39, Income Tax Ordinance, 2001 was declared
Appeal filed by taxpayer was allowed by Commissioner (Appeals)
Validity
Additional Commissioner Inland Revenue had disallowed the expenses under various heads despite the fact that the same was attributable to the "business income" while taking a lenient view meaning thereby the Additional Commissioner Inland Revenue had no definite information regarding assessment order being erroneous and his action in disallowing the said expenses was totally based on mere presumption and guess work which had no place in the Income Tax Ordinance, 2001
Additional Commissioner Inland Revenue had disallowed administrative expenses under various heads totally on presumption by adopting 1/3rd formula, which was nothing but shooting in the dark and made the lump-sum ad hoc additions in a total void manner and in contravention of the procedure as laid down in S. 174, Income Tax Ordinance, 2001
Additional Commissioner Inland Revenue was required to confront the taxpayer by way of a specific notice and to express his intention to disbelieve any part of the disclosed version duly supported with documentary evidence
Appeal was dismissed, in circumstances.
Taxpayer had agitated confirmation of authorities below regarding disallowing of unrealized exchange loss of being notional in nature, and not allowable under S.34(3) of Income Tax Ordinance, 2001
Held, that section 34(3) of Income Tax Ordinance, 2001, envisaged certain parameters to be observed by the taxpayers who were maintaining their accounts on accrual basis
Taxpayer, had himself admitted that there was a certain amount of unrealized exchange loss
Assessing Officer, though confronted the taxpayer at disallowance of exchange loss but following the submission of break up by the taxpayer certain amount was unrealized exchange loss which did not conform to the provisions of S.34(3) of the Income Tax Ordinance, 2001, which allowed to record the liability for the persons, maintaining the accounts on the accrual basis, when all the events that determine the liability, had occurred
Exchange loss recorded, in the present case, pertained to unrealized exchange loss
No legal infirmity was in the order of authorities below which were maintained.
If main source of income fell under S. 18(2) of Income Tax Ordinance 2001, S. 39 of Income Tax Ordinance, 2001 dealing with other source of income attained character of residuary.
Taxation Officer as well as First Appellate Authority based their orders on that if the taxpayer would have obtained loan from unrelated parties, it would have required to bear the brunt of financial cost by payment of mark-up at market rates; and creditors who had advanced loans to the taxpayer would have received mark up/profit which would have been included in their taxable income and would have been an engine for increase in their tax liability; that provisions deal with benefit in an economic sense and not from point of view of tax benefit; and that addition made by the Taxation Officer was upheld by the First Appellate Authority being patently in accordance with provisions of law
Taxpayer contended that it was mandatorily required under the principles of accounting and law to charge interest on borrowed money, the interest would have paid being allowable/admissible expense will resultantly reduce the taxable income as well as tax liability of the taxpayer; and the treatment given by the assessing officer to the transactions was against the principles of basic accountancy and provisions of law
Validity
Clause (d) of Sub-S.(1) of S.18 of the Income Tax Ordinance, 2001 provided that the fair market value of any benefit or perquisite, whether convertible into money or not arising in the course of, or by virtue of a past, present or prospective business relationship shall be income from business and was chargeable to tax in the Income Tax Ordinance, 2001
Both the officers below fell in grave error in misconceiving the accounting principles and relevant law on the issue and as such "deemed income" was wrongly charged to tax by invoking provision of S.18(1)(d) of the Income Tax Ordinance, 2001
Observations made by the Taxation Officer reflected lack of understanding on the facts as well as law "the provisions dealt with benefit in an economic sense and not from the point of view of tax benefit"
Interest/mark-up if not paid by the taxpayer was a financial benefit at one part while on the other part it was quite obvious that the taxpayer must charge the same amount in its accounts as expenditure and under the Income Tax Ordinance, 2001 the revenue would allow the same as an admissible deduction
In actual fact it was a benefit/income in shape of not claiming/charging the expenses/liability under the head mark-up on interest free loans
Deemed mark-up again was a double jeopardy by taxing one thing twice
If revenue preferred to treat said deemed interest/markup as taxable business income under S.18(1)(d) of the Income Tax Ordinance, 2001 then it would also be a lawful right of the taxpayer to reduce its business income by claiming/deducting same amount
Was not the choice of pick and choose by treating the same as business income and charged to tax separately in isolation without realizing the basic accounting principles that at the same time it was also a deductible admissible allowance in the hands of taxpayer
Order passed was patently illegal and violative of the law, especially express provisions and spirit of the law, which order if allowed to stay would intact would tantamount to and caused prejudice and serious breach of legal rights of taxpayers/citizens
Orders passed by authorities below were perverse, erroneous, factually incorrect and had resulted in great miscarriage of justice and were squarely in conflict with statutory stipulation and fatally flawed, which must be struck down decisively
Addition made was patently illegal and nullity in the eyes of law
Section 18(1)(d) of the Income Tax Ordinance, 2001 had no application whatsoever to the present case, where interest free loan was received by the taxpayer
Orders passed by the authorities below were cancelled by the Appellate Tribunal.
Taxpayer contended that excess liquidity available with the taxpayer company was as a matter of prudence could be an interest appearing in a bank account and was the business income under S.18 of the Income Tax Ordinance, 2001; as the taxpayer in the present case had deposited in the bank the surplus cash generated from normal business activities of the taxpayer and the interest income was not from cash deposit which was the capital of the company
Validity
Interest/ profit/mark-up on bank deposits was income from other sources chargeable under S.39 of the Income Tax Ordinance, 2001
Order of First Appellate Authority was upheld and the appeal filed by the assessee was dismissed by the Appellate Tribunal.
Department in its appeal filed before Appellate Tribunal had assailed the issues i.e. allowability of expense against interest income; taxation of gain on sale of fixed assets; taxation of exchange gain; taxation of liabilities written back; taxation of scrap sales; and minimum tax liability
Impugned order showed that first Appellate Authority, though agreed with the Additional Commissioner regarding non-availability of exemption under cl. (132) of Schedule Second, Part I of Income Tax Ordinance, 2001, but issued direction to the taxpayer that documentary evidence should be produced regarding interest expenses incurred in connection with earning of interest income and held that expense to that extent should be allowed
Said matter had already been decided in the taxpayer's own case by Appellate Tribunal which decision of the Tribunal, was to be followed
Appeals filed by the department on that issue, failed
Plea of department was that first Appellate Authority was not justified in holding that gain on sale of fixed assets remained covered by the exemption proviso
First Appellate Authority observed in the impugned order that since in terms of provisions of S.22 of Income Tax Ordinance, 2001 gain resulting from sale of fixed assets remained strictly, and exclusively chargeable to tax as income from business, exemption was fully applicable
In the present case subject gain fell within the scope of S.18 of Income Tax Ordinance, 2001 dealing with income from business
No exemption was allowed in the impugned order
Issue of taxation of liabilities written back having properly been dealt with by First Appellate Authority, no interference was warranted in the order of the First Appellate Authority which was upheld
Income from sale of scrap was again charged to tax by Additional Commissioner by relying upon the decision of Tribunal in case 2006 PTD (Trib.) 288
Basis for imposing tax was that Income was in the nature of ancillary income; First Appellate Authority decided the matter in favour of the taxpayer by relying upon the latter decision of the Tribunal in case 2011 PTD 2440, which being subsequent in time, would take lead over the one primarily relied upon by the Additional Commissioner
Decision of First Appellate Authority was found to be fair, and not open to any exception
Order of First Appellate Authority was upheld on that issue
Matter related to charge of minimum tax on capacity revenues and taxpayer being engaged exclusively in the business of sale of electricity, all other forms of revenue, contemplated in the Power Purchase Agreement, were nothing, but consideration for sale of electricity
All receipts under the Power Purchase Agreement would be treated as consideration for sale of electricity; since exemption from levy of minimum tax was available to sale revenue, same would also apply to other type of revenues
Appeal on that issue also failed.
Taxpayer contended that Taxation Officer was not justified to refuse adjustment of profit on bank deposits in the brought forward business losses on the ground that profit of bank deposit was assessable under S.39 of the Income Tax Ordinance, 2001 whereas the interest on bank deposit was business income of the taxpayer on the surplus funds deposited by the taxpayer in the bank
Revenue authorities contended that profit on bank deposits was separately assessable under S.39 of the Income Tax Ordinance, 2001 and could not be adjusted in the brought forward business losses
Validity
Business income was assessable under S.18 of the Income Tax Ordinance, 2001 whereas the profit on debt was assessable under S.39 of the Income Tax Ordinance, 2001
Taxpayer itself had declared the interest income as other income in statement of accounts
When law provided that things were to be done in a particular manner it had to be done in that particular manner
Contention of Revenue authorities that profit on debt was assessable under S.18 of the Income Tax Ordinance, 2001 had force
Brought forward business losses could not be adjusted against the interest income which was separately assessed under S.18 of the Income Tax Ordinance, 2001
Order of First Appellate Authority was not interfered with, which was upheld by the Appellate Tribunal
Appeal filed by the taxpayer on the issue was dismissed.
"Income from business", Pakistan Law Portal, available at: https://paklawportal.com/words-terms-maxims/124939489
Precedents & Case Laws citing "Income from business"
2021 P T D 1951
The COMMISSIONER OF INCOME TAX Versus Messrs FAUJI FOUNDATION
Court: Islamabad High Court2001 P T D 2208
COMMISSIONER OF INCOME‑TAX Versus DISTRICT COOPERATIVE BANK LTD.
Court: 239 I T R 7002022 P T D 558
ALLIED ENGINEERING AND SERVICES LTD. through Attorney Versus The COMMISSIONER INLAND REVENUE, ZONE-II and another
Court: Sindh High Court2005 P T D 2216
Messrs PAKISTAN REFINERY LTD. Versus COMMISSIONER OF INCOME TAX, COMPANIES-V KARACHI
Court: Karachi High Court2017 P T D 2227
Messrs SAINDAK METALS LTD. through Managing Director Versus CHAIRMAN, FEDERAL BOARD OF REVENUE and 3 others
Court: Balochistan High Court2017 P T D 864
COMMISSIONER INLAND REVENUE, ZONE-II Versus LUCKY COTTON MILLS (PVT.) LTD.
Court: Sindh High Court1997 P T D 658
COMMISSIONER OF INCOME TAX Versus PARK HOTEL (P.) LTD.
Court: 218 I T R 2211997 P T D 508
COMMISSIONER OF INCOME-TAX Versus ARVINDKUMAR ODHAVJI
Court: 213 I T R 5512022 P T D (Trib
Messrs SHAHPOSH GARMENTS, GUJRANWALA Versus The CIR ZONE-II, RTO, GUJRANWALA
Court: Inland Revenue Appellate Tribunal2011 PTD 637
Messrs LALAZAR SHIPPING (PVT.) LTD. through Chairman/Chief Executive Officer, Karachi Versus COMMISSIONER INCOME TAX
Court: Sindh High Court