Depreciation

2018 PTD 2385 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Depreciation

Connotation.

2017 PTD 891 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S. 20(1)Capital assetsDepreciationIntangible assets, amortization ofDoctrine of commercial expediency and necessityPrincipleDispute was with regard to amortization regarding property purchased from Privatization CommissionPlea raised by assessee was that amortization should be allowed as expensesValidity

Depreciation was allowable on capital assets and amortization was allowable on intangible assets not used as a stock in trade

When an asset was used as stock in trade by taxpayer then, the provisions of depreciation or amortization were not applicable thereto and provision of S.20(1) of Income Tax Ordinance, 2001, which provided for deductions in computing income chargeable to tax under the head 'income from business' for a tax year, a deduction for any expenditure incurred by the person in the year wholly and exclusively for the purpose of business would become applicable

Under the doctrine of commercial expediency and commercial necessity, any expenditure incurred wholly and solely for the purpose of business was deductible expense for the determination of taxable income of the taxpayer

Doctrine of commercial expediency allowed for deduction of any expenditure under the accounting principle

If plea of the assessee is that amortization be allowed as expenses as per accounting principles, even then the plea could not stand as the property was purchased from Privatization Commission for a consideration of Rs. 36,40,00,000 and if the amortization was taken as per 34% of saleable land/building then it should be Rs. 12,37,60,000 out of which Rs. 9,10,00,000 was allocated during the period relevant to assessment year 2001-2002, the balance amount for amortization should stand at Rs. 3,27,60,000 while for subsequent years 2001-2002, 2002-2003, amortization had been claimed and allowed as allowable expense as the cost of land, however, it should be worked out to the extent of 34% of land sold out for which the matter was remanded to adjudicating authority to allow balance cost of land at Rs. 3,27,60,30 to the subsequent years i.e., 2003, 2004 and 2005, however, while calculating cost of land, allowed in previous years should also be taken into account

Appeal was disposed of accordingly.

2015 PTD 2059 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 21(c)(h), (N), 22(13)(a), 122(5-A) & 131, Second Sched., Part III, Clause (8)DeductionDepreciationAmendment of assessmentRespondent/taxpayer company, was distributor of electrical home appliances, manufactured by a manufacturing company

Taxpayer by applying provisions of Cl.(8) of Part III of Second Schedule to Income Tax Ordinance, 2001, claimed rebate of 80% towards minimum tax, which was refused by the department

Appellate authority found that the taxpayer being distributor of consumer's goods, was entitled for 80% rebate towards minimum tax

Validity

Taxpayer as per agreement with manufacturing company, had to bear entire distributory costs, which included "Depreciation", "Advertisement", "Sale Promotion" "FOC brand promotion", "Product business expenses" etc.

No one could go beyond the express words given by the legislature

When legislature, had not linked the consumer's rebate with the gross profit or net profit, there was no justification to allow the rebate only to the consumers enjoying low margin of gross profit

Intention of legislature, was to grant rebate to distributors, as they had heavy turnover, but lesser income so as to pay 1% of turnover as minimum tax

80% distributory rebate was available to the taxpayer company, departmental appeal was rejected on that issue

Taxpayer had claimed depreciation on trucks with value of each truck at Rs.28,43,085, Adjudicating authority restricted the value of trucks at Rs.15,00,000 for allowance of depreciation, resulted into addition of Rs.60,4839 towards income

Appellate Authority, deleted the addition on the ground that as per S.22(13)(a) of Income Tax Ordinance, 2001, restriction of value of vehicles was for passenger transport vehicles, not plying for hire

No reason existed for interference with order of Appellate Authority on that issue

Taxpayer had claimed advertisement and sale promotion expenses at Rs.245,121,888, adjudicating authority concluded that claim of expense was not in accordance with increase in turnover, and made addition of Rs.98,73,4967 under S.21(N) of Income Tax Ordinance, 2001

Appellate Authority found the said addition as unlawful and deleted the same in toto

Amendment of assessment under S.122(5-A) of Income Tax Ordinance, 2001, could not be made on the basis of assumption and guesswork

Taxpayer claimed "FOC brand promotion expenses" at Rs.460,533,868 which had been amortized by Adjudicating Authority over a period of ten years, which resulted into addition of Rs.414,480481 towards declared income

Appellate Authority, deleted said addition

No reason existed to interfere with the treatment given by Appellate Authority

Claim of taxpayer was upheld and departmental appeal was rejected

Taxpayer submitted details, which included initial cost, accumulated depreciation, written down value and sale proceeds to establish that there was no gain on sale of vehicles

Adjudicating authority, calculated depreciation on the basis of unsold vehicles, which resulted addition towards gain on sale of vehicles and depreciation respectively

Such additions, had been upheld by Appellate Authority

Taxpayer claimed expenses under the Head 'Product Manager Business Expenses"

Adjudicating Authority disallowed said claim under S.21(h) of the Income Tax Ordinance, 2001, holding that no product was being manufactured by the company

Addition under S.21(h) of the Income Tax Ordinance, 2001, had been made on the basis of assumption, conjectures and without appreciating the facts of the case

No reason existed for the invocation of S.21(h) of the Income Tax Ordinance, 2001, in rejection of claim

Appellate Tribunal, having already deleted the addition made under S.21(h) of the Income Tax Ordinance, 2001 for tax year 2011, addition under S.21(h) of the Income Tax Ordinance, 2001, was also deleted.

2014 PTD 842 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 18, 22 & 131, Second Sched., Part I, Cl. (132), Part IV, Cl. (11-A)(v)Income from businessDepreciationExemption

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.

2013 PTD 1429 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S. 23(1)Depreciation

Department disallowed depreciation as certain assets such as UPS, furniture fittings, were classified as building, and Commissioner (Appeals) confirmed additions

Plea of Departmental Representative was that building, fittings, computer and furniture etc. were separately classified in Third Schedule of the Ordinance for application of tax depreciation, and same were to be treated accordingly

Tribunal agreed with plea of department and appeal of the taxpayer was dismissed.

2013 PTD 1083 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Third Sched:DepreciationAssessee, a Bank

Department disallowed 50% depreciation and travelling and motor vehicle expenses on vehicles used by directors and executives for their personal use on the ground that vehicles to that extent were used for deriving income of business

First Appellate Authority reduced the disallowance in the light of judgment of Appellate Tribunal

Validity

Vehicles were provided to employees in terms and conditions of the service

If vehicle were used by the employees partly for their personal use, addition could have been made in employees cases under Income Tax Rules and not in taxpayer's case

Additions were deleted by the Appellate Tribunal by following earlier judgments.

2013 PTD 246 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.22(1)(c) & 122(5A)Income Tax Rules, 2002, R.34DepreciationLease operationsLoss

Disallowance on the ground that initial depreciation was claimed by the taxpayer whereas the vehicles were not used by it for hiring

Taxpayer contended that though the vehicle was used by the lessee yet by fiction of law, it was considered as used by the lessor; that assessing authority made fishing enquiries in proceedings under S.122(5A) of the Income Tax Ordinance, 2001 which was not permissible; and that furnishing of depreciation chart was not the requirement of R.34 of the Income Tax Rules, 2002 as there was no annexure relating thereto

Validity

In accordance with S.22(1)(c) of the Income Tax Ordinance, 2001, the asset was treated as used in the lessor's business

Initial allowance available on use of assets was available to it

Entire exercise conducted regarding depreciation chart and entries therein was fishing enquiries which were not permissible in revisionary proceedings under S.122(5A) of the Income Tax Ordinance, 2001

Addition was deleted by the Appellate Tribunal.

2012 PTD 5 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 22 & 122(5A)DepreciationLoss on scrapped assetsAdmissibilityFixed assets having a tax book value were scrapped

Assets were in the nature of jigs, moulds, dyes etc, used to manufacture proprietary items and were required to be scrapped due to change in model of cars

While such assets were no longer required in the manufacturing activity, being items of 'proprietary' nature, these had to be defaced and scrapped so as no unauthorized manufacturing could be undertaken by the buyers of these items; and were sold as 'scrap'

Taxpayer was confronted that since these were assets on which 'depreciation' was earlier allowed, gain/loss on disposal thereof should be commuted by reference to tax written down value and sale proceeds fetched by taxpayer on disposal and claim of entire written down value of assets as an expense under the head 'fixed assets scrapped' could not be allowed

Taxpayer explained that amounts fetched on disposal of such assets had been duly offered for tax as 'scrap revenue' and treatment required to be followed had been meted out

Claim was accepted to the extent of 1/3rd on the grounds that it could not be ascertained that all these items were sold during the period relevant to assessment year and some of these items may have been sold as part of scrap in period subsequent to that relevant assessment year; and balance 2/3rd claim was considered for allowance in next two years in equal proportions

Relief was accorded by the First Appellate Authority on the ground that requisite evidence was duly produced before the taxation officer during the amendment proceedings, which showed that entire defaced items were sold during the period relevant to tax year under consideration; and claim was accepted on merit

Validity

Claim of the taxpayer was proper and legitimate

Sale proceeds of each individual item scrapped was not identifiable as the items were scrapped and sold in bulk

Departmental stance clearly caused an undue hardship to the taxpayer

Entire scraped assets were disposed off in period relevant to tax year under consideration as scrap could not have been carried by taxpayer for the entire year

Taxation officer directed to divide the claim in three tax periods while such a mechanism was detrimental to the interest of taxpayer in terms of tax cash outflows

Position adopted by the taxation officer was unlawful particularly when it was verifiable from the record that the taxpayer had provided the evidence regarding sale of scrap during the year under consideration

Taxation officer was conducting the amendment proceedings under S.122(5A) of the Income Tax Ordinance, 2001, he was not justified in requisitioning the evidence and disallowing the amounts under consideration for want of evidence

Such action was taken outside the legal jurisdiction available to taxation officer

Finding of First Appellate Authority was upheld by the Appellate Tribunal and directed that such claim be allowed to the taxpayer.

2011 PTD 1950 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 24 (11), 22 & 23IntangiblesDepreciationInitial allowanceComputer softwareEmbedded softwares in the equipmentClaim of initial allowance and depreciation

Department contended that taxpayer had wrongly taken his case under Ss.22 & 23 of the Income Tax Ordinance, 2001 as "depreciable assets" instead of resorting to S.24(11) of the Income Tax Ordinance, 2001

Computer softwares were intangibles

Taxpayer declared the softwares as "fixed assets" and claimed initial allowance and tax depreciation on the softwares under head computer and accessories which left no room for escape from the purview of S.24(11) of the Income Tax Ordinance, 2001

Softwares whether embedded or computer software, their basic function performance of compact logical operation in accordance with pre-determined program to obtain desired results

Software which could not run on a computer could be designated as computer software

All softwares whether system softwares or application softwares fully satisfy the definition of "intangibles"

Supplier of these softwares had given license to the taxpayer for both hardware and software parts of the equipment supplied

It gave a similar and identical performance which was developed on a computer system

All the softwares which were capable of transmitting data and voice were basically "computer softwares"

Embedded softwares had separately been declared by the taxpayer in their audited accounts

Taxpayer failed to determine the period for usage of these softwares during the course of proceeding at initial stage, First Appellate Authority and before Appellate Tribunal

Cost of such softwares should have been amortized over a period of ten years as provided under S.24(3) of the Income Tax Ordinance, 2001

Stance of the taxpayer was not in conformity with the provisions of income tax law

Taxation Officer had rightly disallowed initial allowance and tax depreciation and the same was affirmed by the Appellate Tribunal.

2010 PTD 2105 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

DepreciationNormal depreciation and initial allowance

Claim of depreciation as well as initial allowance was disallowed on the ground that taxpayer failed to provide documentary evidence namely: construction plan and completion certificate

First Appellate Authority directed to allow normal depreciation as the machinery was used in the tax year and initial allowance on building

Validity

Assessment order reproduced by the First Appellate Authority made it abundantly clear that the building was in use and the machinery installed therein also resulted in production which was offered for taxation

Departmental grievance was devoid of substance

Order of First Appellate Authority was not interfered on this score by the Appellate Tribunal.

2009 PTD 377 INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN Judicial Precedent

Third Sched.DepreciationDisallowance of

Assessee contended that addition during the previous year on account of plant and machinery was made and the cost of machinery was partly charged in the year 2003 and assessment year 2002-03

Initial deprecation for the tax year 2003 was restricted to amount capitalized on plant and machinery for the year 2003 but the Taxation Officer had disallowed the claim of deprecation without any justification

Department contended that plant and machinery were added in the previous year and no claim in this respect was made

Initial depreciation on the same basis could not be allowed in the. current year

Validity

No interference was made by the Appellate Tribunal in the order or First Appellate Authority in respect of disallowing the claim of initial deprecation on plant and machinery as the First Appellate Authority had rightly upheld the treatment meted out by the Taxation Officer and the observations of the Taxation Officer while disallowing the claim were well founded and legally valid.

1972 PTD 618 SUPREME-COURT-INDIA Judicial Precedent

Income-tax - Depreciation - Balancing charge-Law after .amendment in 1949-Transfer of assets from firm to company Realisation sale-Balancing charge whether leviable-Legal character of transaction whether can be ignored-Income-tax-General principles-Substance against form of transaction-Indian Income tax Act, 1922, S. 10(2)(vii), proviso (ii) (after amendment in 1949).

1969 PTD 528 PUNJAB-AND-HARYANA-HIGH-COURT-INDIA Judicial Precedent

Depreciation

Kohlus let out on hire for sugarcane crushing season alone Depreciation for full year, whether allowable" Seasonal factory", "worked by the assessee", meanings of Indian Income tax Act, 1922, S. 10(2)(vi) Indian Income tax Rules, 1922, r. 8, second proviso.

1969 PTD 775 BOMBAY-HIGH-COURT-INDIA Judicial Precedent

Depreciation Demolition of part of building-Written down value higher than scrap value of demolished part-Excess of written down value over scrap value, whether allowa le "Building" whether includes part of a building-Writing off in books, whether condition precedent-Indian Income-tax Act, 1922, S. 10(2)(vii).

1969 PTD 533 BOMBAY-HIGH-COURT-INDIA Judicial Precedent

Depreciation

Written down value "Actual cost to the assessee" Meaning of "actual cost" Amounts paid to another for helping assessee in preparing plans, securing permits for cement, steel, petrol, import licences, etc. Whether part of actual cost

Cost incurred after commencement of business Whether includible Actual cost determined for one year, whether conclusive for subsequent years Indian Income tax Act, 1922, S.10(2)(vi), (5) (a), (b).

1969 PTD 135 BOMBAY-HIGH-COURT-INDIA Judicial Precedent

Depreciation

Unabsorbed depreciation-Business in regard to which depreciation allowed for earlier year stopped and not carried on in previous year relevant to assessment year-When unabsorbed depreciation can be adjusted-Income-tax Act, 1922, S. 10(2)(vi).

1965 PTD 505 SUPREME-COURT-INDIA Judicial Precedent

Depreciation Depreciation-Balancing charge-Business discontinued prior to accounting year-Excess realised over written down value whether assessable as profits-Scope of amendment of provisions in 1949-Interpretation of statutes-Charging provision-Fiction Proviso-Indian Income-tax Act, 1922, S. 10 (2) (vii) prov. 2.

1965 PTD 161 MYSORE-HIGH-COURT-INDIA Judicial Precedent

Depreciation

Balancing charge-Computation of written down value – Initial depreciation whether taken into account - Indian Income-tax Act, 1922, S. 10 (2) (vi), (vii), Second Proviso.

1961 PTD 171 MADRAS-HIGH-COURT-INDIA Judicial Precedent

S. 10(2)(vi), (S)-Depreciation

­Machinery or plant inherited by assessee-Allowance whether available-"Actual cost to the assessee." An assessee is entitled (under section 10 of the Income-tax Act before clause (c) was inserted in section 10 (5) in 1953) to depreciation allowance in respect of machinery or plant, which he acquires by inheritance. The "actual cost" to such an assessee would be the real value of such property at the time when he acquired it by inheritance.