Versus Muhammad Fareed , Dr. Abdul Sattar Abbasi
ORDER
Through this order we intend to dispose of appeal filed by the Taxpayer against the decision of learned CIT(A) given vide his Order No.88, dated 20-5-2010 for Tax year, 2007. The grounds of appeal filed by the. Taxpayer are reproduced below:--
"(1) That the order passed by the CIT Appeal Zone-II Karachi is bad in law and on facts.
(2) That the learned CIT Appeal has erred in confirming the order passed under section 122(1)(5) of the Income Tax Ordinance, 2001 by the taxation officer/Inland Revenue Officer audit unit-20 audit division II R.T.O. Karachi. Wherein he has added purchases made by the assessee of wheat in cash from the farmers to the tune of rupees 60,864,447 on the plea that since these are made in cash so these are disallowed being more than Rs.50,000 under section 21(1)(l) of the Income Tax Ordinance, 2001 read with para-6 of C.B.R. Circular No.1 of 2006 dated 1-7-2006 hence these are not allowed.
(3) That section 21-(L) read as under;
(4) Any expenditure for a transaction paid or payable under a single account head which in aggregate, exceeds fifty thousand rupees made other than by a crossed cheque drawn on a bank or by crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business. This subsection (L) talks of any expenditure not of purchases so the learned taxation officer and the learned Commissioner of Income Tax (Appeal) are wrong in reading purchases in the words any expenditure does not include purchases.
(5) That the taxation officer and the appellate Commissioner could not understand sections 20 and 21 of the Income Tax Ordinance.
(6) That section 20 of the Income Tax Ordinance, 2001 shows as to how first the gross profit of income from business is to be worked out by deducting purchases from the sales which gives gross profit from business whereas section, 21 talks of expenses to be not allowed from the gross profit as worked out under section 20. It enumerates such expenses which are not allowed as deduction from gross profit, section 21 subsection (L) talks of such expenditure for a transaction paid or payable under a single account head which in aggregate exceed fifty thousands rupees, made other than by a crossed cheque drawn on a bank or by_ Cross bank draft or crossed pay order or any other crossed pay order or any other crossed banking instrument showing transfer of amount.
(7) That the subsection (L) does nowhere talks of purchases. It speaks of only expenditure not of purchases which are considered under section 20 in working out gross profit which is worked out by deducting the purchases from sales.
(8) Thus both taxation officer and learned Commissioner of Income Tax Appeal Zone II were wrong in reading purchases in any expenditure mentioned in subsection (L) which talks of any expenditure for a transaction (which does not include purchases).
(9) That the appellant therefore submits that the addition made on A/C of cash purchases of Rs.60,864,447 is wrong and may kindly be deleted.
(10) That the appellant further requests that he may be allowed to make any additional ground to the grounds of appeal at the time of hearing of appeal if need be."
2. On the date of hearing, the Taxpayer was represented by Mr. Muhammad Fareed Advocate while the Department was represented by Dr. Abdul Sattar Abbasi as D.R.
3. Brief facts of the case as transpired from the record are that the Taxpayer an AOP engaged in business of running Flour Mills had filed return of income for Tax Year, 2007 declaring income of Rs.326,130. The return so filed was selected for audit under provisions of section 177 of the Income Tax Ordinance, 2001 (hereinafter to be referred as the Ordinance) by Commissioner of Income Tax Audit Division-II, RTO, Karachi vide his letter No.168 dated 11-8-2009. Audit proceedings were conducted by the concerned Taxation Officer and who made addition of Rs.60,864,629 on the ground that wheat purchased by the Taxpayer from various local parties during the year was on cash basis therefore, the transaction was hit by provisions of section 21(1) of the Ordinance.
4. Being aggrieved the Taxpayer went in appeal before the learned CIT(A) who vide his impugned order upheld action of the Taxation Officer with the following observations:--
"The arguments advanced by the learned AR of the appellant vis-?-vis submissions of the departmental representative are considered. I do not agree with the contention of the learned AR of the appellant that purchases do not fall under head expenditure and as such section 21(1) does not apply in appellant' s case.
In this context it would be appropriate to go through section 21(1) of the Income Tax Ordinance, 2001 which reads as under:
21. Deduction not allowed .---Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head "Income from Business" for
(1) any expenditure for a transaction, paid or payable under a single account head which, in aggregate exceeds fifty thousands rupees, made other than by a crossed cheques drawn on a Bank or by crossed bank draft or cross pay order or any other crossed banking instruments showing transfer of amount from the business bank account of the taxpayer.
From the reading of the above provision of law, it transpires that no deduction is allowable while computing the income under the head "income from Business" for any expenditure for a transaction, paid or payable under a single account head which, if aggregate exceeds fifty thousand rupees, made other than by a crossed cheque drawn on a Bank or by crossed bank draft or cross pay order or any other crossed banking instruments showing transfer of amount from the business Bank account of the taxpayer. Since admittedly the payments against purchase of wheat exceed the limit of Rupees fifty thousand under single head have been made in cash so the provision of section 21(1) has rightly been invoked by the Taxation Officer in appellant's case.
The Board vide Circular No.1 of 2006 has further clarified this aspect that section 21(1) has appropriately been amended to include every expenditure whether debitable to trading or manufacturing accounts or profit and loss account will fall within the purview of this section.
Therefore, it hardly leaves any justification for the appellant's claim that purchases do not fall under head expenditure and section 21(1) of the Income Tax Ordinance, 2001 does not apply. That is wrong interpretation of the AR of the appellant. Therefore, the action of the Officer Inland Revenue being strictly in accordance with law is hereby upheld.
The appeal of the appellant fails".
5. Being aggrieved the taxpayer has now come in appeal before this forum. During proceedings before this Court the learned counsel for the taxpayer based his arguments on the grounds of appeal filed by the taxpayer. The learned counsel for the taxpayer contended that provisions of section 21(1) of the Ordinance are not applicable to the purchases made by the taxpayer as purchases do not come under definition of expenditure. The learned counsel for the taxpayer contended that section 20 of the Ordinance has laid down as to how first the gross profit of income from business is to be worked out by deducting purchases from the sales which gives gross profit from business whereas section 21 talks of expenses not to be allowed from the gross profit as worked out under section 20. The learned counsel for the taxpayer was therefore of the opinion that under these circumstances the provisions of section 21 pertain to expenditure not to be allowed of the profit and loss account expenses and not of the trading account. It was further argued by the learned counsel for the taxpayer that both the Taxation Officer and the learned CIT(A) misinterpreted the provisions of section 21 and therefore the order of the two officers below may be vacated.
6. The learned D.R. however contended that the action taken by the two officers below is in accordance with provisions of law and in accordance with Board Circular No.1 of 2006 dated July 1st 2006. The learned D.R further contended that the contention of the learned counsel for the taxpayer that section 20 of the Ordinance stipulates as to how the gross profit of income from business is to be worked out by deducting purchases from sales is totally misplaced as perusal of the provisions of section 20 would reveal that there is no such basis provided for working of gross profit in the said section. The learned D. R contended that the words 'any expenditure for a transaction' in section 21(1) cover all expenditures whether trading expenditure or profit and loss account expenditure. The learned D.R further contended that identical provisions of section 24(ff) of the deceased Ordinance, 1979 also dealt with identical transaction but Board vide Circular No.11 of 98 dated 25-7-1998 excluded certain expenditures from purview of operation of section 24(ff) but the language of section 21(1) has been appropriately amended by the legislature to include every expenditure whether debitable to manufacturing account or trading account or profit and loss account and the provisions of this section also exclude specific expenditure from purview of the operation of this section. The learned D.R provided copies of Board Circular No.11 of 2008 dated 25-7-1998 and Board Circular No.1 of 2006 dated 1-7-2006.
8. We have heard to the rival arguments of both the parties and have also perused carefully the case record including order of the Taxation Officer and impugned order of the learned CIT(A). Our findings on the above issue are as under.
9. It would be appropriate to reproduce the relevant provisions of the deceased Ordinance and the obtaining provisions of Income Tax Ordinance, 2001 as under:--
Income Tax Ordinance, 1979
"Section 24 Deductions not admissible .---Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of-
(ff) any payments made on or after the first day of July, 1998, on account of under a single account head which, in aggregate, exceed fifty thousand rupees made otherwise than through a crossed bank cheque or by a crossed bank draft except transactions not exceeding five hundred rupees or payments on account of postage utility bills."
10. Now we would reproduce provisions of section 21(1) of the Income Tax Ordinance, 2001 as under:---
"21. Deductions not allowed .---Except as otherwise provided in this Ordinance no deduction shall be allowed in computing the income of a person under the head "Income from Business" for.
(I) any expenditure for a transaction, paid or payable under a single account head which in aggregate exceeds fifty thousand rupees, made other than by a crossed cheque drawn on a bank or by crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer:
Provided that online transfer of payment from the business account of the payer to the business account of payee as well as payments through credit card shall be treated as transaction through the banking channel subject to the condition that such transactions through the banking channel, subject to the condition that such transactions are verifiable from the bank statements of the respective payer and the payee:
Provided further that this clause shall not apply in the case of--
(a) ? expenditures not exceeding ten thousand rupees;
(b) ? expenditures on account of---
(i) ???????? utility bills;
(ii) ??????? freight charges;
(iii) ?????? Travel fare;
(iv) ?????? postage; and
(v) ??????? payment of taxes, duties, fee, fines or any other statutory obligation;]
11. Now the clarificatory Circular of Board vide Circular No.11 of 1998 is reproduced as under:--
"CIRCULAR NO.11 OF 1998 (INCOME TAX)
SUBJECT: FINANCE ACT, 1998 EXPLANATION OF IMPORTANT PROVISIONS RELATING TO INCOME TAX
The Income Tax Ordinance, 1979 has been amended through the Finance Act, 1998. The important amendments are explained in the following paragraphs:
(1) Audit of certain assessees by Chartered Accountants Firms. [Section 54].
(5) Deductibility of expenditure incurred otherwise than through a crossed cheque or a bank draft [Section 24(ff)]
Any expenditure under a single account head exceeding Rs.50,000 in aggregate, shall not be deductible, if made otherwise than through a crossed cheque or a bank draft. However, this condition shall not apply to:
(i) ???????? utility bills;
(ii) ??????? single transactions not exceeding Rs.5000;
(iii) ?????? Payments on account of freight charges or passenger fare tickets to an airline or railways or a goods carriage company;
(iv) ?????? any amount credited by direct transfer of funds to an assessee's employee's Bank account for reimbursement of expenses incurred on behalf of the assessee: and
(v) ??????? payments made to discharge a statutory obligation like payment of duties, taxes, octroi, export tax. fines. fees, assessees and levies etc.
(I) The expenditure on account of travel, hotel charges and entertainment and petrol/diesel is usually reimbursed to the employees on production of evidence of such expenditure. Such advance or reimbursements if exceeding Rs.50,000 would be excluded in computing single account head limit of Rs.50.000, if these are made through crossed cheques or transferred directly to the employees 's bank account.
(II) It is further clarified that clause (if) applies to expenditure normally chargeable to profit and loss account. The expenditure which is chargeable to the trading and manufacturing accounts like wages and freight on purchases debitable to the said accounts, falls outside the ambit of the said clause. Similarly, purchases of agricultural products and commodities like milk etc. being direct trading or manufacturing expenses the provisions of clause (ff) shall not apply."
12. Board's Circular No.1 of 2006 is reproduced below:
"CIRCULAR NO.1 OF 2006 (INCOME TAX)
SUBJECT: ??? FINANCE ACT, 2006 EXPLANATION OF IMPORTANT PROVISIONS RELATING TO AMENDMENT IN INCOME TAX ORDINANCE, 2001.
The amendments made in the Income Tax Ordinance, 2001, through the Finance Act, 2006 are explained as under:
(6) ?????? RATIONALIZATION OF PROVISIONS RELATING TO DEDUCTIBILITY OF EXPENSES MADE THROUGH BANKING CHANNEL. [section 21(1)1.
Any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank cheque or crossed Bank draft, except expenditures not exceeding ten thousand rupees or on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fee, fines or any other statutory obligation, was not be an allowable deduction upto tax year, 2006.
This provision was originally introduced under section 24(ff) in the repealed Ordinance, 1979. It was clarified through C.B.R's. Circular No. 11 of 1998 dated July 25, 1998, stating that clause (if) applies to expenditure normally chargeable to profit and loss account. The expenditure chargeable to trading and manufacturing accounts (Like wages and freight on purchases debitable to the said accounts) fell out side the ambit of the said clause.
Now the language of the section 21(1) has appropriately been amended to include every expenditure whether debitable to trading or manufacturing accounts or profit and loss account will fall within the purview of said section. Further the scope of banking transactions has also been expanded to include online transfer of payment from the business account of the payer to the business account of the payee and payment through credit cards subject to the condition that such transactions are verifiable from the bank statement of the respective payer and payee. This is an elaboration of the definition of banking transactions. It is explicitly clarified that any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank draft, shall not be an allowable deduction w.e.f July 1, 2006.
The restriction under this provision will not apply (as before) in respect of expenditure which;
(i) ???????? does not exceed ten thousand rupees: or
(ii) ??????? is on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fee, fines or any other statutory obligation;
As a consequence, C.B.R's. Circular No.11 of 1988 dated 25th July, 1998 being contrary to the provision of law is, withdrawn, henceforth.
13. Perusal of the above provisions of law i.e. section 24(ff) of the deceased Ordinance, 1979 and section 21(1) of the Income Tax Ordinance, 2001 and the concerned circulars would reveal that there is marked difference in the scope of the two provisions. For example while implementing provisions of section 24(ff) of the deceased Ordinance, 1979 the Board through Circular 11 of 1998 specifically said that it is further clarified that clause (ff) applies to expenditure normally chargeable to profit and loss account. The expenditure which is chargeable to the trading and manufacturing accounts like wages and freight on purchases debitable to the said accounts, falls outside the ambit of the said clause. Similarly, purchases of agricultural produces and commodities like milk etc. being direct trading or manufacturing expenses, the provisions of clause (ff) shall not apply. Whereas Board Circular 1 of 2006 while dealing with the subject clarified that this provision was originally introduced under section 24(ff) in the repealed Ordinance, 1979. It was clarified through C.B.R's. Circular No. 11 of 1998 dated July 25, 1998, stating that clause (ff) applies to expenditure normally chargeable to profit and loss account. The expenditure chargeable to trading and manufacturing accounts (Like wages and freight or purchases debitable to the said accounts) felt out side the ambit of the said clause. Now the language of the section 21(1) has appropriately been amended to include every expenditure whether debitable to trading or manufacturing, accounts or profit and loss account will fall within the purview of said section.
14. After above clarification by the Board now we would examine the fact whether Board's clarification conforms to provisions of section 21(1) of the Ordinance. In this Section words 'any expenditure for a transaction' have been used.
15. Since the word 'transaction' as used in section 21(1) has not been explained in the Income Tax Ordinance, 2001, according to principles of interpretation of statutes its literal meaning would be taken.
The Black's Law Dictionary (Sixth Edition) defines the words 'transact' and 'transaction' as under:----
"Transact .---To undertake negotiations: to carry on business: to have dealings: to carry through: bring about: perform: to carry on or conduct: to pass back and forth as in negotiations or trade: to bring into actuality or existence. Knoepfle v. Suko ND. 108 N.W 2d 456. 462. The word embraces in its meaning the carrying on or prosecution of business negotiations, but is a broader term than the word "contract" and may involve business negotiations which have been either wholly or partly brought to a conclusion. Bozied v. Edgerton, 239 Minn. 227, 58 N.W. 2d 313. 316 see also Negotiate: Transaction.
Transaction .---Act of transacting or conducting any business: between two or more persons: negotiation: that which is done: an affair."
16. Perusal of the meaning of the two words 'transact' and 'transaction' from the Black's Law Dictionary (Sixth Edition) would reveal that chiefly they mean to carry on business or conducting business, therefore, it is very obvious without any shadow of doubt that the business would include every expenditure appearing in the manufacturing account or trading account or profit and loss account. We therefore see no contradiction in Board's Circular No.1 of 2006 while clarifying provisions of section 21(1) of the Ordinance. The contention of the learned counsel for the taxpayer that the words used in section 21(1) `any expenditure for a transaction' will not apply to trading account and only to profit and loss account expenses is totally out of context and contrary to the meaning of word 'transaction' as discussed above. ?
17. We may observe that interpretation of provisions of section 21(1) given by the learned counsel for the taxpayer restricts the scope of the provisions of law by giving a very narrow and restricted meaning to the words used in the statutes. Such an approach to interpretation of statutes is not approved by the honourable Superior Courts. Reliance can be placed on judgment of the honourable Supreme Court of Pakistan reported as PLD 2000 SC 111 wherein their lordships observed as under:--
"It is the duty of the Court to find out the true meaning of a statute while interpreting the same. The general rule is that the Court adopts as uniform an approach as possible to the reading of ambiguous Acts of Parliament which are some times imperfect, obscure and vague. The primary rule of interpretation of statutes is that meaning of the legislature is to be sought in the actual words used by him which are to be interpreted in their ordinary and natural meanings. The cardinal rule for the construction of Acts of Parliament is that they should be construed according to the intention expressed in the Acts themselves. Where the language of the statute is plain and unambiguous and conveys a clear and definite meaning, there is no occasion for resorting to the rules of statutory interpretation, and the Court has no right to impose another meaning or to read into its limitations which are not there; based on a prior reasoning as to the probable intention of the legislature. Court can resort to the proceedings of the legislature when the language employed is ambiguous."
18. Keeping in view the above case law and discussion we hold that interpretation given by the learned counsel for the Taxpayer is against the intendment of legislature which is accordingly rejected.
19. We also agree to the contention of the learned D.R. that section 20 does not speak of working out the gross profit of income from business by deducting purchases from the sales as was contended by the learned counsel for the Taxpayer.
20. In view of above discussion we see no reason to interfere in the order of the two officers below which are accordingly upheld.
21. Consequently, the appeal filed by the Taxpayer is dismissed. ?
.B.T./164/Tax(Trib.) ???????????????????????????????????????????????????????????????? ??????????? Appeal dismissed.