COMMISSIONER OF INCOME TAX, LARGE TAXPAYERS UNIT, KARACHI VS INTERNATIONAL POWER GLOBAL DEVELOPMENTS LIMITED, KARACHI, 2018 PTD-SUPREME-COURT 1128 (2018)

(On appeal against the judgment dated 09.10.2008 passed by the High Court of Sindh, Karachi in I.T.R.A. No. 186 of 2017)

Income Tax Ordinance (XXXI of 1979) [since repealed]---

----S. 23(xviii)---Income from business, computation of---Deductions allowed---Scope---Expenditure incurred for setting up a sports and recreational facility for employees---Respondent-company derived its income by rendering operational and maintenance service to a power production company---In the subject assessment year the respondent incurred an expenditure of Rs.1,200,000/- for setting up a sports and recreational facility for its employees who resided within its residential colony---Respondent deducted such expense while computing its income---Tax department while passing the assessment order disallowed such deduction, which order was upheld up to the Appellate Tribunal---High Court decided the matter in favour of the respondent and allowed the deduction of such expenditure; held, that plain reading of S. 23 of the Income Tax Ordinance, 1979 showed that only such allowances and deductions were permissible which in some manner had nexus with the income that was derived from a business or profession---Expense in question was not a part of the salary or perk or privilege which the respondent paid to its employees under the contractual obligations for rendering service---Said expenditure was simply incurred to setup a complimentary facility for the employees which had no direct nexus with the generation of the respondent's income derived from rendering operational and maintenance services to a power production company---Expense in dispute neither fell under S. 23(xviii) of the Income Tax Ordinance, 1979 nor any other category of allowances or deductibles listed in rest of the provisions of S. 23, so as to justify its deduction while computing respondent's income---Expenditure in question, therefore, could not be taken into consideration while computing business income of the respondent---Impugned judgment of High Court was set aside and that of the Appellate Tribunal restored---Appeal was allowed accordingly.

Dr. Farhat Zafar, Advocate Supreme Court and Raja Abdul Ghafoor, Advocate-on-Record for Appellant.

Muhammad Idris, Advocate Supreme Court for Respondent.

Date of hearing: 21st February, 2018.

JUDGMENT

FAISAL ARAB, J.---The appellant has called in question the decision of the High Court of Sindh rendered in an Income Tax Reference Appeal (I.T.R.A. No.186 of 2007). The subject matter of this appeal is the question of law that was decided against the department and in favour of the respondent, same is reproduced as follows:-

"Whether on the facts and circumstance of the case the Hon'ble Tribunal was not justified in disallowing deduction on the applicant's business expenditure the expenses incurred by the applicant on events of sports and social activities organized for the benefit of the applicant personnel and members of their family."

2.The facts of the case are that respondent derives its income by rendering operational and maintenance service to the Hub-Power Company Limited. In the assessment year 2001-2002 the respondent incurred an expenditure of Rs.1,200,000/- for setting up a sports and recreational facility for its employees who reside within its residential colony. The respondent deducted this expense while computing its income. The Tax department while passing the assessment order disallowed such deduction, which was challenged without success upto the stage of Income Tax Appellate Tribunal. The respondent then challenged the decision of the tribunal in the High Court of Sindh, which answered the question of law in the affirmative in favour of the respondent and against the tax department vide judgment dated 09.10.2008, hence this appeal with the leave of this Court.

3.Section 15 of the Income Tax Ordinance, 1979 classifies various heads of income, which includes 'income from business and profession'. Section 22 of the said Ordinance describes various sources of income that are chargeable to tax under the head 'income from business and profession' and respondent's business falls under section 22. Section 23 describes various allowances and other deductibles that can be deducted while computing the income derived from business or profession falling within the ambit of section 22. Such deductibles include, any rent paid for the premises in which such business or profession is carried on; any amount paid for repairs on the premises or any other machinery, plant, furniture or fittings used for the purpose of business; any premium paid in respect of insurance against risk of damage or destruction to any building, machinery, plant, furniture or fittings, or stocks and stores used for the purposes of business or profession; depreciation expense; any expenditure (not being in the nature of capital expenditure or personal expenses of the assesse) laid out or expended wholly and exclusively for the purpose of such business or profession. Section 23(xviii) of the 1979 Ordinance is more significant to examine the controversy in hand. It states "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" shall be made in computing income.

4.A plain reading of section 23 of the 1979 Ordinance shows that it specifically spells out in minute detail the types of allowances or deductions that can be made in computing the income under the head "Income from business or profession", which means that any allowance or expenditure that falls outside the pale of section 23 has to be treated as not deductible from the income. In other words, only such allowances and deductions are permissible which in some manner have nexus with the income that is derived from a business or profession.

5.Learned counsel for the respondent in support of the reasoning given in the impugned judgment has heavily relied upon the provision of section 23(xviii) of the 1979 Ordinance. The only question that needs to be answered in the present case, therefore, is whether the expense of Rs.1,200,000/- incurred by the respondent in providing a facility for sports and social activities for its employees can be deducted while computing income on the strength of the provisions of section 23(xviii). Undeniably the expense in question is not a part of the salary or perk or privilege which the respondent pays to its employees under the contractual obligations for rendering service. It was simply incurred to setup a complimentary facility for the employees which has no direct nexus with the generation of the respondent's income derived from rendering operational and maintenance services to the Hub-Power Company Limited. Hence, on the face of it, the expense in dispute neither falls under section 23(xviii) of the 1979 Ordinance nor any other category of allowances or deductibles listed in rest of the provisions of section 23, so as to justify its deduction while computing respondent's income. The High Court of Sindh allowed its adjustment simply on the ground that sports and social activities boost mental and physical health of a person by answering the question of law in the affirmative. This may be so but that ipso facto cannot be regarded as a type of allowance that can be directly correlated to any category of allowances and deductibles listed in section 23 of the 1979 Ordinance with the business activity of the respondent, which is rendering of operational and maintenance services to a power generating company. The conclusion of the High Court being totally misconceived and not based on any provision of section 23 is not sustainable in law. The expenditure in question, therefore, cannot be taken into consideration while computing business income of the respondent.

6.For what has been discussed above, this appeal is allowed, the impugned judgment is set aside and the decision of the Tribunal is restored.

MWA/C-3/SC Appeal allowed.