COMMISSIONER OF INCOME TAX, SPECIAL ZONE, KARACHI VS DEWAN KHALID TEXTILE MILLS LTD., 2016 PTD-KARACHI-HIGH-COURT-SINDH 1136 (2016)

Income Tax Ordinance (XXXI of 1979)---

----Ss. 23(1)(xviii), 24(a) & 136(1)---Finance Act (XII of 1991), S. 12---Business expenditure---Corporate assets tax---Authorities were aggrieved of order passed by Income Tax Appellate Tribunal directing for allowance for corporate assets tax as expenses allowable under S.23 of Income Tax Ordinance, 1979---Validity---Any expenditure incurred for the purposes of business which was neither capital nor personal was an allowable expenditure under S. 23(1)(xviii) of Income Tax Ordinance, 1979---Only bar which could be imposed was whether such expenditure was incurred in ordinary course of business or not and on the ground of commercial expediency and had a direct nexus and relation with the business or not---While making assessment of a company corporate assets tax had to be given the same treatment as that of wealth tax since it was a direct levy on the assets held by a company---Such was an allowable expenditure and the same was rightly allowed by appellate authority as well as Income Tax Appellate Tribunal---Provisions of S. 24(a) of Income Tax Ordinance, 1979, were not applicable as corporate assets tax was not a tax on the profits and the gains of a company rather it was a direct charge or levy upon the assets held by a company as specified in S. 12 of Finance Act, 1991---High Court answered the question in affirmative against the authorities and in favour of assessee---Reference was dismissed in circumstances.

I.C.C. Textile Ltd. and others v. Federation of Pakistan and others 2001 PTD 1557; Rowlatt J, in IR v. Anglo Brewing Co. Ltd. 12 Tax Case 803; CIT v. Malayalam Plantations Ltd. 53 ITR 140 (SC); Commissioner of Income Tax v. Rajaram Bandekar (1994) 208 ITR 503; International Power Global Developments Ltd. v. Commissioner Income Tax 2009 PTD 50; Commissioner of Income Tax, East Pakistan DACCA v. Engineers Ltd. DACCA (1967) 16 Tax 81; Commissioner of Income Tax, Entral Zone 'B' Karachi v. Zakia Siddiqui 1989 PTD 135; Commissioner of Income Tax, Central Zone 'A' Karachi v. S.M. Naseem Allahwala [(1991) 64 Tax 31] and Commissioner of Income Tax Central Zone 'C' Karachi v. M. Hussain Ahmed 1992 PTD 30 ref.

Nemo for Appellant.

Iqbal Salman Pasha for Respondent.

Date of hearing: 19th January, 2016.

JUDGMENT

IRFAN SAADAT KHAN, J.---This Income Tax Reference (I.T.R) has been filed against the order 21.06.2002 passed by the Income Tax Appellate Tribunal, (ITAT) in R.A. No. 221/ KB of 2002, pertaining to assessment year 1993-94, under section 136(1) of the repealed Income Tax Ordinance, 1979 (hereinafter referred to as Ordinance, 1979), by raising the following question of law:--

"Whether on the facts and in the circumstances of the case the learned ITAT was justified in directing for allowance of Corporate Assets Tax as an expenses allowable under section 23 of the Income Tax Ordinance, 1979 as against the Income of the assessee when the same was capital in nature and not exclusively incurred for earning the profit ?"

2.Briefly stated the facts of the case are that the respondent is a public limited company and is engaged in the manufacturing and sale of yarn of all types. The return for the assessment year 1992-93 was filed on 31.7.1993 by declaring an income of Rs.11,482,367/-. The income pertaining to export sales was declared under section 80-CC of the Ordinance, 1979 being full and final discharge of the tax liability. Subsequently, the return was revised on 1.9.1993 by declaring an income of Rs.14,350,788/-. It was explained that the return was revised in the light of C.B.R. Circular No. 14 of 1992 dated 19.8.1993, whereby it was directed that the export sales for the period of 1.7.1992 to 30.9.1992 were to be restricted under section 80-CC of the Ordinance, 1979 and the remaining export sales pertaining to the period 1.10.1992 to 30.6.1992 were to be considered along with the local sales. The return was accompanied with audited statement of accounts. The Deputy Commissioner of Income Tax, Circle C-6, COS-1, Karachi (DCIT) issued notice under section 61 of the Ordinance, 1979, in response to which, Mr. Salman Pasha, Advocate appeared along with the Chief Accountant of the company. The matter was examined at length and vide assessment order dated 11.8.1994, the income of the respondent was determined at Rs.18,311,357/-. An appeal against the said order was thereafter filed before the Commissioner of Income Tax (Appeals) [CIT (A)] in respect of the various disallowances made in the profit and loss account which included disallowance of the amount of Corporate Assets Tax (CAT), amounting to Rs.5,00,000/-. The learned CIT(A) heard the matter and vide Appellate Order No.169/1994, dated 29.6.1995 allowed the appeal and deleted the addition made by the DCIT by holding that the amount of CAT is an allowable expenditure under section 23(1)(XVIII) of the Ordinance, 1979. Aggrieved with the said order the department preferred an appeal before the ITAT and ITAT too vide order dated 31.10.2001 dismissed the appeal by observing that the payment is neither in the nature of capital nor a tax hence the bar contained under section 24(a) of the Ordinance, 1979 would not be applicable. Aggrieved by the said order of the ITAT the department moved R.A. under section 136(1) of the Ordinance, 1979 before the Tribunal for referring a question of law to the High Court. The said R.A. was also dismissed by the ITAT by observing that the controversy is factual and no question of law is arising out of the order passed by it. Being aggrieved by the said order a direct R.A. under section 136(2) of the Ordinance, 1979 was filed, which matter was admitted for regular hearing vide order dated 8.9.2005.

3.No one is in attendance on behalf of the appellant/ department since the last number of dates.

4.Mr. Salman Pasha has appeared on behalf of the respondent and submitted that the issue under question has already been laid at rest in the decision given in the case of Commissioner of Income Tax, Central Zone 'B' Karachi v. Zakia Siddiqui (59 TAX 79) and requests that in view of this judgment, the question raised in the instant R.A. may be answered in affirmative by dismissing the present R.A.

5.We have heard the learned counsel and have perused the record and the decision relied upon. Before proceeding, we would like to reproduce herein below sections 23(1)(xviii) and 24 (a) of the Ordinance, 1979:--

"23. Deductions.---(1) In computing the income under the head "Income from business or profession", the following allowances and deductions shall be made, namely-

(xviii) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession.

24. Deductions not admissible.---Nothing contained in Section 23 shall be so construed as to authroise the allowance or deduction of-

(a) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed as a percentage, or otherwise on the basis, of any such profits or gains."

6.As per Section 23(1)(xviii) of the Ordinance, 1979 any expenditure which is not in the nature of capital or personal expenditure and is laid out or expended wholly and exclusively for the purposes of business is an allowable expenditure. The important aspect in this section is that an expenditure should not be capital or personal expenditure and should be laid out for the purposes of such business. CAT was introduced vide Section 12 of Finance Act, 1991 which is a one time levy on the assets held by a company on a specific date. As per Subsection (10) of Section 12 a schedule is given wherein the amount of tax payable by a company in respect of the assets owned by it has been tabulated. There are no two opinions on the point that the respondent paid an amount of Rs.5,00,000/- as CAT since its assets were more than Rs.50 million but less than Rs.100 million. Provisions of Section 12 of Finance Act, 1991 further reveals that it was initially the Wealth Tax Officer who was assigned the duty to issue notice to the companies who have not paid the said tax and to determine the tax liability of those companies. The relevant provisions of the Wealth Tax Act, 1963 were made applicable for the proper determination of CAT e.g. appeal, etc. Vide Finance Act, 1993 the words "Wealth Tax Officer" as mentioned in the CAT were replaced by the words "Deputy Commissioner".

7.The levy of the CAT was challenged in various petitions. However, vide judgment given in the case of I.C.C. Textile Ltd. and others v. Federation of Pakistan and others (2001 PTD 1557) this levy was found to be covered under Entry 50 of the Federal Legislative List 1, Fourth Schedule of Republic of Pakistan 1963. In the said judgment it was observed by the Hon'ble Supreme Court that Wealth Tax Officer has been authorized to receive the returns as per Section 12(13) of the Finance Act, 1991 and to deal with it.

8.What is a capital expenditure and what is a revenue expenditure? It is clarified that no criteria could be laid down in this regard. An expenditure could be a capital expenditure in the hands of an assessee but the same could be a revenue expenditure in the case of other assessee and vice versa. Hence, the distinguishing factor between a capital expenditure and revenue expenditure has always been a moot point which has to be determined on the basis of each case separately. Rowlatt J, in IR v. Anglo Brewing Co. Ltd. (12 Tax Cases 803) while defining the term "wholly and exclusively" for the purpose of business has observed that the expenditure for the purpose of keeping the trade going. Suba Rao J, in the case of CIT v. Malayalam Plantations Limited [53 ITR 140 (SC)] observed that "it may include measures for the preservation of the business". He further observed that "it may also comprehend payment of statutory dues and taxes imposed as precondition to commence or for carrying on of a business". In the decision given in the case of Commissioner of Income Tax v. Rajaram Bandekar [(1994) 208 ITR 503] the Bombay High Court observed that "the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader". Hence, in our view, any expenditure incurred for the purposes of business which is neither capital or personal is an allowable expenditure under Section 23(1)(xviii) of the Ordinance, 1979. The only bar which could be imposed is that whether the said expenditure has been incurred in the ordinary course of business or not and on the ground of commercial expediency and has a direct nexus and relation with the business or not? Any expenditure which fulfills the above criteria in our view could be termed as expenditure incurred for the business purposes and is an allowable expenditure.

9.We were able to lay our hands on a decision given in the case of International Power Global Developments Limited v. Commissioner Income Tax (2009 PTD 50) wherein a learned Division Bench of this Court while relying upon a decision given by the Hon'ble Supreme Court of Pakistan in the case of Commissioner of Income Tax, East Pakistan Dacca v. Engineers Limited, Dacca [(1967) 16 TAX 81] allowed the expenses on the training and recruitment of staff as revenue expenditure covered under Section 23(1)(xviii) of the Income Tax Ordinance, 1979.

10.Now coming to the present case it is seen that the main reason given by the DCIT for disallowing the CAT was being that it was a capital expenditure whereas the CIT(A) and the ITAT allowed the same by holding it to be the revenue and a business expenditure.

11.From the discussion made above and from the perusal of Section 12 of the Finance Act, 1991 it is evident that this levy is on the assets of the company and a direct charge on the company to pay this amount of tax as per the schedule which the respondent company had paid. In our view this charge is a direct levy on the company and has rightly been charged in the profit and loss amount of the company showing the same as an expenditure. In the case of Commissioner of Income Tax, Entral Zone 'B' Karachi v. Zakia Siddiqui 1989 PTD 135 referred by the learned counsel for the respondent the wealth tax paid by an assessee is held to be a deductable expenditure since the same is found to be a direct charge on the assets of an assessee. This decision has been followed in the decisions given in the case of Commissioner of Income Tax, Central Zone 'A' Karachi v. S.M. Naseem Allahwala [(1991) 64 Tax 31] and Commissioner of Income Tax Central Zone 'C' Karachi v. M. Hussain Ahmed (1992 PTD 30). Perusal of Section 12 of Finance Act, 1991 clearly reveals that for all practical purposes the Wealth Tax Officer, who subsequently was changed to DCIT, was made responsible for collecting the said tax and for other purposes as already observed by the Hon'ble Supreme Court of Pakistan in the above noted judgment. Hence, in our view while making assessment of a company CAT has to be given the same treatment as that of wealth tax since it is a direct levy on the assets held by a company and in our view is a allowable expenditure and, thus, rightly allowed by the CIT(A) and the ITAT.

12.The provisions of Section 24(a) of the Ordinance, 1979 as pointed out by the DCIT, in our view, would not be applicable on the simple ground that it is not a tax on the profits and gains of a company rather the said tax is a direct charge or levy upon the assets held by a company as clearly specified in Section 12 of Finance Act, 1991.

13.We, therefore, in view of the circumstances answer the question referred in the instant R.A. in affirmative i.e. against the department and in favour of the respondent-company.

14.Above are the reasons of our short order dated 19.01.2016.

MH/C-1/SindhReference dismissed.