Apportionment of deductions

2022 PTD 558 KARACHI-HIGH-COURT-SINDH Judicial Precedent

Ss.67, 169, 18, 20 & 11DeductionsDeductions in computing income chargeable under head "Income from Business"Composite business activitiesExpenses common to income under Normal Business Income and Presumptive Tax RegimeApportionment of deductionsScope

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.

2014 PTD 2085 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.67Apportionment of deductions

Allocation of expenses against exempt capital gain and to dividend income and non-consideration of common expenses against dividend income

Assessing authority allocated expenses to exempt capital gain and dividend

Expenses allocated included financial and administrative expenses

Formula based allocation and the quantum of disallowances made showed that the allocation had not been made in accordance with S.67 of the Income Tax Ordinance, 2001 which envisage that allocation should be on reasonable basis taking account of the relates

Such hypothetical basis to allocate expenses on whole sale basis could not be approved

Taxpayer had already allocated expenses to the income from capital gain, dividend, property and other sources and common expenses against dividend income in accordance with S.67 of the Income Tax Ordinance, 2001

Such allocation was reasonable.

2014 PTD 1303 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.67Income Tax Rules, 2002, Rr.13(3)(a) & 13(4)Apportionment of deductionsReceipt of technical feeInsurance commissionAdministrative expensesApportionment of

Taxpayer contended that administration expenses were not allocable as it did not relate to the receipt of technical fee and insurance commission; that if held to be allocable then these should be prorated by taking into account gross receipts from sale of products instead of gross profit from sale of products as mentioned in R.13(3)(a) of the Income Tax Rules, 2002: and S.67 of the Income Tax Ordinance, 2001 specifically required that the expenditure should be apportioned on any reasonable basis taking into account the relative nature and size of activity to which the amount may relate; that contention of assessing authority that no other basis could adopted when formula for proration had been prescribed in R.13(3)(a) of the Income Tax Rules, 2002, was also contrary to the provision of S.67 of the Income Tax Ordinance, 2001 and R.13(4) of the Income Tax Rules, 2002 which required proration of common expenses in any manner considering the nature and size of activity to which such income relates; that formula provided in R.13(3)(a) of the Income Tax Rules, 2002 could not be applied blindly; that provisions of R.13(3)(b) of the Income Tax Rules, 2002 were an exception to R.13(3)(a) of the Income Tax Rules, 2002 which was of general and wide application; that R.13(3)(b) of the Income Tax Rules, 2002 could only be invoked in specific situations where common expenditures were also to be apportioned against net gains (gross receipts minus direct expenditure) declared by the taxpayer; and that consequently, it was envisaged in R.13(3)(b) of the Income Tax Rules, 2002 that in case of net gains the ratio for apportionment should be of "relevant net gains" and "total net gains and gross profit"

Validity

Technical fees and insurance commission represent gross receipts without deduction of expenses and as such could only be compared with total gross receipts of the taxpayer for the purpose of allocation of common expenses (administration expenses) thereagainst

No net gain being involved, R.13(3)(b) of the Income Tax Rules, 2002 was not applicable

Like should be compared with like

Gross receipts from business (i.e. sales receipts) should be compared with receipts of insurance commission and exempt technical fees which were also gross receipts

Dividend, fee for technical services and insurance commission were gross receipt which could only be compared with total gross receipts and not the gross profit

Assessing authority was directed to make calculations afresh.

2014 PTD 1303 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.67 & 169Income Tax Rules, 2002, R.13Apportionment of deductions

Administrative expenses was allocated between dividend income, fee for technical services and insurance in the manner and on the ground (a) that dividend was a separate class of income against which the common expenses could be prorated (b) that technical fee was an exempt income and also the regular source of income; that said income could not be earned without incurring of the expenses (c) and that commission income also required proration of expenses under the said provisions of law as the said income was covered under S.169 of the Income Tax Ordinance, 2001

Taxpayer contended that S.67 of the Income Tax Ordinance, 2001 provided that expenditure should be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount related; that only expenditure which related to more than one activity would be regarded as common expenditure for allocation under the provisions for S.67 of the Income Tax Ordinance, 2001 read with R.13 of the Income Tax Rules, 2002; that any expenditure which had no nexus to the activity or was exclusively related to a particular class of income could not be regarded as common expenses for allocation under S.67 of the Income Tax Ordinance, 2001 and R.13 of the Income Tax Rules, 2002; that there were only nine transactions of receipt and deposit of dividend warrant during the two tax years for which the expenses of Rs.347,030,000 could not be regarded to have incurred by any stretch of imagination; that in respect of expenses attributed to technical services, the personnel through which services were rendered were stationed outside Pakistan and that all expenses incurred were to be borne by the service recipient in view of specific clause in the agreement; that in respect of expenses attributed to insurance premium, insurance premium was paid by the company on insurance of its assets; and at the time of payment of annual insurance premium to the insurance company; a percentage of the premium was paid back which was recorded as insurance commission; thus, no expenditure was incurred to earn commission income; and that according to provision of S.233 of the Income Tax Ordinance, 2001, as was applicable to tax year 2004, there was no provision available whereby tax deducted on commission income could be considered das final tax

Validity

First Appellate Authority had maintained the order of assessing authority to the extent of apportionment of the expenses against the fee for technical services and commission income

Income attributed to dividends was vaguely represented by the tax payer and First Appellate Authority had also not made any attempt to explore any such details

First Appellate Authority conceded to the extent that apportioning expenditure on dividend income in terms of S.67 of the Income Tax Ordinance, 2001 read with R.13(3) of the Income Tax Rules, 2002, was not appropriate as no investment was made during the particular tax year in subject assessment

First Appellate Authority observed that expenditure under said head was incurred by the organization, which allowed such dividend

Apportionment of expense equally to the ratio of dividend income would not be justified under the attending circumstances

First Appellate Authority had directed the Officer of Inland Revenue to exclude the dividend income and modify the order by revising the proration of expenses

Finding of First Appellate Authority showed that he had logically and rationally upheld the act and decision of assessing authority on the issues of apportionment of expenses by prorating the expenses on fee for technical services and commission income

No reason existed to upset the finding of First Appellate Authority, which was accordingly maintained by the Appellate Tribunal.

2014 PTD 1024 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.67, 114(4), 120, 122(5A), 210, 210(1A), & 211Income Tax Ordinance (XXXI of 1979), Ss. 59(1), 62, 63, 65 & 66AIncome Tax Rules, 2002, R.13Apportionment of deductionsProportionate basisReasonability

Taxpayer contended that company was incorporated to undertake the business of money market activities, capital market activities, project finance activities, corporate finance services and general services; that for such activities, overall business plan was developed and expenditure paid for such development of business and consultancy fee did not relate to earning exempt/Final Tax Regime sources income and was specific to normal tax income and was not required to be apportioned at all being out of ambit of S.67 of the Income Tax Ordinance, 2001 read with R. 13 of the Income Tax Rules, 2002; that expenditure related to normal income and exempt/ Final Tax Regime income were furnished before Taxation Officer with all details and even before First Appellate Authority but both had not considered the details and evidence in this regard; that capital gain (exempt income) was earned in treasury department which made investment in equity; that said department was staffed with few people but had large turnover; and that on the basis of turnover, expenditure could not be allocated to said segment of income

Department contended that where taxpayer derive both Final Tax Regime income and Normal Tax Regime income or taxable income and exempt income, then the same had to be allowed on prorate basis between income covered under Final Tax Regime and Normal Tax Regime and similarly between taxable income and exempt income wherein allowance/deduction/expenditure (by whatever name it is called) was common, the same had to be prorated between the income assessable under Normal Tax Regime and Final Tax Regime on the basis of their ratio of turnover; that such principle was applicable to all types of expenditures where these expenses were common; and that expenses prorated by the Taxation Officer were common and these were to be prorated on the basis of principle of apportionment as envisaged in S.67 of the Income Tax Ordinance, 2001 read with R.13 of the Income Tax Rules, 2002 as where an expenditure/allowance/deduction was exclusively related to any particular head/source of income but wherein deduction/allowance/expenditure was common and it was inseparable the same had to be apportioned/allocated on prorate basis which exactly had been done by the Taxation Officer while allocating common expenses/deduction

Validity

Section 122(5A) of the Income Tax Ordinance, 2001 was invoked for the reason that taxpayer had wrongly apportioned the business expenses against income from other sources

Likewise, expenses had not been properly prorated between commission income and other revenues like fee/service charges which relate both to Final Tax Regime and non Final Tax Regime income and the computation of income had not been made in accordance with the provisions of S.67 of the Income Tax Ordinance, 2001 read with R.13 of the Income Tax Rules, 2002

Diminution in value of investment being a notional loss and merely a provision was not an allowable expenses but had been claimed as expense

Taxation Officer had rightly apportioned common expense/deduction in accordance with the provisions of law and rules

Taxpayer, admittedly did not allocate common expenses to Final Tax Regime and non Final Tax Regime income

First Appellate Authority had rightly found that by not allocating/prorating the common expense the deemed assessment for both the years were definitely erroneous which were also prejudicial to the interest of revenue as well and had rightly been maintained the order of the officer below

Order of First Appellate Authority was upheld and appeals filed by the taxpayer were dismissed by the Appellate Tribunal.

2014 PTD 935 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.67Apportionment of deductions"Reasonable"

"Reasonable" is a relative term and it donates sound thinking within the bond of common sense possessing the faculty of reason

Reasonability is contingent upon time, acts and aggregate facts

Reasonable basis is linked with relative nature and size of business activities as represented by the amount.

2014 PTD 935 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.67Income Tax Rules, 2002, Rr.13(3), 231(1)(a) & 231(1)(b)Apportionment of deductionsComputation of export profits and tax attributable to export salesSeparate accountsSeparate books of accounts

Taxpayer contended that if separate accounts were maintained then the profit on export business was to be determined on the basis of such account, otherwise the profit for export business was to be taken to be an amount determined in the ratio of export sales to total sales; that the tax department was erroneously taking a view that the 'separate accounts' mean 'separate books of accounts'; that though the Refinery had not maintained separate books of accounts for export business, it had made separate accounts for the export business; and that its income for export business was to be determined on the basis of R.231(1)(a) and not R. 231(1)(b) of the Income Tax Rules, 2002

Validity

Question of separate account or separate books was not only irrelevant but also unable to lead towards a definite and undisputed conclusion

Maintenance of separate account of all heads of income, expenditure, assets, liabilities, profits, losses or equity for income derived from exports and income derived from local sales had neither been maintained by the taxpayer nor it was possible in the case of nature of business

Bifurcation of core activity assessable under Normal Tax Regime and Presumptive Tax Regime, ascertaining their mutual ratio, would ultimately provide the basis to allocate inseparable common expenses

In the absence of all "accounts" maintained separately, the methodology given in R.13(3) of the Income Tax Rules, 2002 read with S.67 of the Income Tax Ordinance, 2001 had its universal application.

2014 PTD 935 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.67Apportionment of deductions

Reasonability demands a method comprehendible to all, a basis having universal application at least upon the cases of identical nature, in accordance with all applicable laws, perpetualeteruality in it and prudently meaningful for all the stakeholders and in the context of S.67 of the Income Tax Ordinance, 2001, reasonability is dove-tailed with nature and size of the activities represented by the related amounts.

2014 PTD 935 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.67 & 122(5A)Income Tax Ordinance (XXXI of 1979), First Sched: Part-IVIncome Tax Rules, 2002, Rr.13 & 231Income Tax Rules, 1982, R.216S.R.O. 392(I)/2009 dated 19-5-2009S.R.O. 58(I)/2010 dated 2-1-2010Apportionment of deductionsReasonable basisOil RefineryExportsLocal sale

Taxpayer contended that reasonable basis, in the present case, would be the nature of activity i.e. processing of Crude Oil and size of activity in reference to input of material and output thereof; that expenses incurred whether direct or indirect be apportioned in reference to volume of activity, that output should be a basis of apportionment of all direct and indirect expenses; that this would be a reasonable basis in the context of price ceiling on the sales in the local market and free yield of exported items; that S.67 of the Income Tax Ordinance, 2001 required apportionment of deductions for common expenditure and such apportionment was to be made on a reasonable basis taking account of the relative nature and size of the activities; that though turnover basis of apportionment of deduction was mentioned in R.13(3) of the Income Tax Rules, 2002, a taxpayer could also adopt a different basis if the same was reasonable; that turnover was residuary basis for 'common expenses', mainly being costs other than raw materials, for which reasonable basis could not be ascertained; and in substance, sub-Rule 13(3) of Income Tax Rules, 2002 did not apply for the apportionment of 'cost of raw materials'; where there was almost a certain reasonable basis available for allocation of costs; and that in the return, for the purposes of apportionment of deductions , cost of crude oil was apportioned in the ratio of quantity sold as against the contention of the department that apportionment should have been made in the ratio of turnover

Validity

In the present case, a favourable position of tax payment was dependent upon the fundamental variables i.e. (i) Import price of Crude Oil (Price in the International market) (ii) Local Sale Price of Products (Percentage share of products with or without price ceilings) (iii) Export Sale Price of "Neptha" (iv) Yearly Tax rates applicable on FTR & NTR and (v) Volume of activity

All variables had a complete dependence on amount/currency

Any one of the variables will alter the tax burden on yearly basis/on periodical basis and in that scenario, there could be no permanent basis to apportion the expenses to work out the profits assessable under Presumptive Tax Regime and Normal Tax Regime because due to change in the said variables, one favourable basis would turn into adverse basis and every year a now basis could not be adopted to benefit the taxpayer

Which is highly for seeable in the volatile international oil market

Reasonable basis should have a life and reasonable permanence in it instead of a reasonable basis changing every year

Rupee (Currency) value of sales was the most reasonable denominator to apportion the direct and indirect common expenses

Appeal of the department was allowed by the Appellate Tribunal and that of the taxpayer failed on the issue.

2013 PTD 1083 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.67 & 124AApportionment of deductionsAssessee, a BankAllocation of expenses against dividend, exempt capital gain and Ijara financing incomeDepartment disallowed expenses by allocating expenses to dividend, exempt capital gain and to ijara income

First Appellate Authority disapproved such allocation with the observation that this issue had already been decided by the Appellate Tribunal in favour of taxpayer

Validity

Section 124A of the Income Tax Ordinance, 2001 revealed that said section was aimed at avoiding repetitive appeals on any legal issue on which Appellate Tribunal or High Court had already given a judgment in the case of a taxpayer

No discretion had been given to Commissioner, rather an obligation was imposed

Very purpose of insertion of said section was to avoid repetitive order/appeals on an issue which was sub-judice before a court

Department despite clear remedy provided by the legislature itself under S.124A of the Income Tax Ordinance, 2001 had been repeating the same additions which was not maintainable in the law

Right course for the department was to apply S.124A of the Income Tax Ordinance, 2001 and get the orders reversed from the court where the matter was presently sub-judice

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

2013 PTD 246 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.67 & Seventh Sched., Rr.6 & 9Apportionment of deductionsAllocation of expenses relating to capital gain and presumptive tax regime incomeTax-payer a BankDepartment disallowed expenses for alleged relatedness with exemption capital gain and dividend

Taxpayer contended that as passive incomes, namely capital gain and dividend, were received out of self generated resources, no apportionment was attracted on account of financial charges; and not a single investment was made from borrowed funds; and investment made out of own funds resulted in either capital gain or dividend income without incurring any financial cost; and with regard to allocation of administrative expenses, branch network or head office was not at all engaged in placement of funds; and investment portfolio was handled exclusively by Treasury Department

Validity

Interpretation of department that such allocation could be made under R.9 of the Seventh Schedule of the Income Tax Ordinance, 2001 was untenable under the law

Rule 6 of the Seventh Schedule of the Income Tax Ordinance, 2001 specifically provide that all income should be taxed in the case of banks under the head "income from business"

In the presence of such unambiguous provision of law, resort to S.67 read with R.9 of the Seventh Schedule to the Income Tax Ordinance, 2001 was legally untenable

Allocation of expenses to dividend and capital gains was deleted by the Appellate Tribunal.