Proportionate basis

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.