Versus State
ORDER
CH. SHAHID IQBAL DHILLON, JUDICIAL MEMBER.--- The captioned appeals, filed by a limited company engaged in the business of manufacturing of bathroom accessories, impugned appellate order dated 27-6-2013 passed by the CIR (Appeals), Gujranwala under section 122(5A) of the Income Tax Ordinance, 2001 "Ordinance" in respect of tax years 2007 and 2011.
2. Facts leading to the instant appeals, briefly stated, are that the Additional CIR in the amended orders charged to the tax the deemed income by invoking the provisions of section 18(1)(d) of the Ordinance, and also made addition of unpaid Workers Profit Participation Fund (WPPF) and addition under section 21(c) of the Ordinance for both the years. Being aggrieved, the appellant taxpayer filed appeals before the learned CIR(A) who vide his combined impugned order dated 27-6-2013 upheld the order passed by the Addl. CIR. Resultantly taxpayer has come up in further appeals before us.
3. Initiating the arguments, the learned AR of the appellant contended that proceedings initiated and concluded by the Additional-CIR, being based on vague and self assumed legal foundation, having no effect in the eyes of law. This fact has arbitrarily been skipped by the learned CIR(A) in a mechanical manner and he dismissed the appeals by simply saying additions are patently legal.
4. The learned counsel representing the appellant on the facts of the case has further contended that in the present case, action under section 122(5A) of the Ordinance has been taken solely on presumption of law by misinterpreting the provisions of section 18(1)(d). As a matter of fact, the impugned order shows that the Additional-CIR has not considered the case records of the appellant judiciously with open mind. He has contended that such action is not only violative of the principles of natural justice but it is also against the dispensation of justice. He has argued that a huge addition has been made under section 18(1)(d) without any lawful reasoning and by ignoring the factual position which action shows the arbitrariness and mala fide on the part of the Additional CIR. In a taxing statute, one can only look at the language used in the law, since there is no room for any intendment or presumption in the interpretation of law. The same rule of taxation i.e. a person sought to be taxed can only be taxed when he comes within the letter of law, which is squarely applicable. As such, the action of the Additional CIR with regard to taxing the interest free loans taken from directors as taxable income under section 18(1)(d) of the Ordinance is totally illegal, void ab-initio and equivalent to severe maladministration of justice.
5. The learned AR further argued that methodology adopted by the Additional CIR is not warranted under the facts and the law. In this case deemed benefit or perquisite for the argument sake, if may be classified as an income at one part, however, at the same time it would also be allowable as admissible deduction on other part against taxable income. By adding again that part of benefit into taxable income is equivalent to double taxation which is not permissible under the law. He also contended that any benefit or perquisite, if any, arises for providing interest free loan to the company that may accrue or arise to the directors of the company and not to the company itself. Finally learned AR presented following illustration to clarify the legal as well as factual position:--
Proposition A (As adopted by Appellant)
Interest free loan from Directors
50,000,000
Mark up/Interest
Nil
Income Declared (without paying any interest)
10,000,000
Tax payable @ 35%
3500,000 A
Proposition B (As per Wisdom of Ad
Interest free Loan from Directors
50,000,000
Markup/Interest @ 17%
8,500,000
Income Declared (before markup on directors loans)
10,000,000
Markup/Interest paid to Directors (Admissible Deduction)
8,500,000
Net Taxable Income
1,500,000
Tax payable @ 35%
525,000 B
Extra tax paid by appellant---(A - B)
2,975,000
---by NOT charging Interest/Markup on Directors Loan
6. Learned AR after concluding his arguments has prayed for annulment of orders passed by both authorities below as the Additional CIR has dragged the appellant taxpayer unnecessarily into litigation, which is a clear abuse of law and misuse of the powers available with IRS officials.
7. The arguments of the respective parties have been heard and due consideration has been given to the facts of the case. The grounds of appeal, in the light of the pleadings of the learned representatives, are taken up and disposed of in terms of observation recorded as under:
8. So far as the question of whether section 18(1)(d) of the Ordinance provides that the fair market value of any benefit or perquisite, whether convertible into money or not, will be income from business of the taxpayer Clause (d) speaks as under:--
"The fair market value of any benefit or perquisite; whether convertible into money or not, derived by a person in the course of, or by virtue of, a past, present, or prospective business relationship."
9. Section 18 of the Ordinance deals with "income from business" and clause (d) of subsection (1) therefore, says that the fair market value of any benefit or perquisite, whether convertible into money or not arising in the course of, or by virtue of a past, present or prospective business relationship shall be income from business and is chargeable to tax under the Ordinance. In the un-disputed facts of the present case, the appellant had taken interest free cash loan from its directors. The assessing officer as well as the CIR(A) have based their orders that if the appellant would have obtained loan from unrelated parties, it would have required to bear the brunt of financial cost by payment of mark-up at market rates. Resultantly, the creditors who have advanced loans to the appellant would have received mark up/profit which would have been included in their taxable income and would have been an engine for increase in their tax liability. The assertion of the assessing officer regarding the spirit of provisions of said clause is that provisions deal with benefit in an economic sense and not from point of view of tax benefit. The CIR(A) agreed with the findings of the assessing officer with the assertion that the benefit availed by the appellant company should be offered for taxation and that the addition made by the assessing officer being patently in accordance with provisions of law and hence he upheld the treatment meted out by the Assessing Officer.
10. The contention of the AR of the appellant is that findings of the assessing officer on the facts of the instant case is devoid of accounting principles. He argued that if for argument sake, it is mandatorily required under the principles of accounting and law to charge interest on borrowed money, the interest would have paid being allowable/admissible expense will resultantly reduce the taxable income as well as tax liability of the appellant. Hence the treatment given by the assessing officer to the transactions is against the principles of basic accountancy and provisions of law.
11. A perusal of the assessment order as well as the first appellate order shows that both the learned two officers fell in grave error in misconceiving the accounting principles and relevant law on the issue and as such deemed income was wrongly charged to tax by invoking provisions of section 18(1)(d). Observation made by the Additional CIR reflects lack of understanding on the facts as well as law "the provisions deals with benefit in an economic sense and not from the point of view of tax benefit". It clearly reflects the wrong understanding of the Additional CIR to conceive the issue in hand. In any case interest/mark-up if not paid by the appellant is a financial benefit at one part then on the other part it is quite obvious that the appellant must charge the same amount in its accounts as expenditure and under the Ordinance the revenue would allow it as an admissible deduction. In actual fact it was a benefit/income in shape of not claiming/charging the expenses/liability under the head mark-up on interest free loans. By adding said deemed markup again is a double jeopardy by taxing one thing twice. The pivotal question which requires determination is as to whether the provisions of section 18(1)(d) are attracted in the given circumstances on the amount received by the appellant from its directors as interest free loan? The answer is quite obvious, under any stretch of imagination said transaction cannot be charged to tax by invoking provisions of section 18(1)(d). If this deemed mark-up was to be treated as taxable income under section 18(1)(d) then expenses under the head markup payable to directors should obviously be available to the appellant as an admissible deduction. In fact taxpayer has not charged/claimed the expenses and because of this reason business income has already been offered to tax at higher side when compared with the resultant proposition where appellant was required to pay markup to the directors and then claimed it as admissible deduction against taxable income offered for taxation for that tax year but this is not the case in the instance controversy. If the Revenue prefers to treat said deemed interest/markup as taxable business income under section 18(1)(d) then obviously it would also be a lawful right of the appellant to reduce its business income by claiming/deducting same amount. It is not the choice of pick and choose by treating it as business income and charged to tax separately in isolation without realizing the basic accounting principles that at the same time it is also a deductible admissible allowance in the hands of appellant under the provisions of the Ordinance.
12. Where an order had been passed by any authority, which was patently illegal and violative of the law, especially express provisions and spirit of the law, which order if allowed to stay intact tantamount to and caused prejudice and serious breach of legal rights of taxpayers/citizens. The orders passed by authorities below are perverse, erroneous, factually incorrect and has resulted in great miscarriage of justice. For the detailed reasons recorded supra we have no hesitation in holding that orders passed by both authorities below to be squarely in conflict with statutory stipulation and fatally flawed, it must therefore, be struck down decisively, resultantly, addition made by Additional CIR under section 18(1)(d) of the Ordinance and upheld by the learned CIR (Appeals) is held to be patently illegal and a nullity in the eyes of law.
13. In view of the above facts, we are of the view that section 18(1)(d) has no application whatsoever to the instant case on hand, Where interest free cash loan was received by the taxpayer. Hence, the orders passed by the authorities below on this issue are hereby cancelled and appeal is allowed to this extent.
14. In case of resultant additions on account of WPPF and non-deduction of tax under section 21(c) the learned AR has vehemently contended that amount of WPPF which is payable as on 30th June is paid in the next financial year. The provision was made by the auditors at the time of finalization of account in the month of September/October. The accounts are prepared on accrual basis and an expense is charged to the relevant year as per International Accounting Standard.
15. Similarly in case of addition under section 21(c) it is argued that even after passing of any adverse order against the taxpayer, if any payer (claimant of expenditures) subsequently deposited the amount of withholding income tax, before the completion of assessment proceedings then resultant addition of 21(c) of the Ordinance cannot be made and the claim shall be allowed in full in accordance with the provisions of the Ordinance.
16. Keeping in view the submissions made by both the sides we are of the view since the case of appellant has not been considered on these two points judiciously by the Additional CIR who is the basic fact finding authority under the law. It is deemed necessary to direct the assessing officer to start the proceedings afresh subject to all due exceptions after giving proper opportunity of being heard to the appellant, who says that he has all the necessary proof of payments and evidences which may be verified properly and then pass a judiciously order. The appellant is also directed to cooperate with the assessing officer for finalization of re-assessment proceedings on these score and provide all data/proof of payments made on account of WPPF and income tax deduction with respect to the additions made under section 21(c) of the Ordinance.
17. The appeals filed by the appellant taxpayer are disposed of in the manner and to the extent as cited supra.
CMA/81/Tax(Trib.) Order accordingly.