I. T. A. No. 1779/KB of 1999-2000, decided on 17th May, 2001. Versus I. T. A. No. 1779/KB of 1999-2000, decided on 17th May, 2001.
ORDER
1. SHAHID JAMAL (ACCOUNTANT MEMBER).‑‑ ‑This appeal is directed against learned CIT(A)'s order, dated 16‑11‑1999. The main ground taken by the appellant‑company relates to pro‑ration of Selling Exp. between presumptive and normal income. Other grounds relates to add backs from P&L Account which have either been confirmed or set aside.
2. Briefly stated, the facts giving rise to above appeal are as under. The appellant is a Public Ltd. Company, listed on Stock Exchange, engaged in manufacturing and sale of Yarn and Cloth. The income year concerned is year ended 30‑9‑1997 corresponding to assessment year 1998‑99, appellant's trading results, including production results, were accepted by the Department. The main dispute has arisen on treatment of Ocean Freight, Commission and Export Duty, which was held by the DCIT to be wholly relatable to export sales covered under section 80‑CC of the Income Tax Ordinance and not available for pro‑ration. As such gross profit was not given due deduction, in the opinion of the appellant, by the amount of Ocean Freight and other Selling Expenses. In order to bring out the issue clearly, at this stage; we consider it necessary to reproduce the computation of income by the assessee and the computation adopted by the DCIT:‑‑
2. As per Assessee
3. Export
4. Local
5. Total
6. "Ratios
7. Sales
8. Sales
9. Sales
10. 649,777,489
11. 274,518,389
12. Rebate
13. 42,279,645
14. Waste Sales
15. 8,707,102
16. Total
17. 692,057,134
18. 283,225,491
19. Less: Ocean
20. Frieght
21. 18,604,359
22. 673,452,775
23. 283,2‑25,491
24. 956,678,266
25. Ratio
26. 70.39
27. 29.61 %
28. 100%
29. Less: Commission
30. Export duty
31. 639,597.777
32. 283,225.491
33. 922,823,268
34. Less: Cost of Goods Sold
35. 781,612,282
36. Reworked Gross Profit
37. 141,210,986
38. Ratios
39. As per D.C.I.T.
40. Export Sales
41. 649,777,489
42. Rebate
43. 42,279,645
44. 692,057,134
45. Less: Commission & Export Duty
46. 33,193,216
47. 658,863,918
48. 69.98
49. Local Sales
50. 274,518,389
51. Waste Sales
52. 8,707,102
53. 283,225,491
54. Less: Excise Duty & Commission
55. 661,782
56. 282,563,709
57. 30.14
58. 941,427,627
59. 100.00
3. It is clear from the above working that assessee had deducted Ocean Freight from Export Sales to arrive at F.O.B. value of export sales adjusted G.P., whereas the DCIT did not consider it for deduction from G.P. because the entire sale proceeds including proceeds on account of freight, were considered deemed income under section 80‑CC and no expenses were to be allowed against it. Therefore, while dealing with the expense of Rs.2,59,74,161 claimed as Selling expenses D.C.I.T. disallowed Rs.2,18,39,584 to be wholly allowable to exports and not to be considered against local sales income, in the following manner:‑‑‑
60. "Selling expenses
61. Claimed
62. 25,974,161
63. Less:
64. Expenses related to exports covered under section 80‑CC
65. Ocean Freight
66. 18,604,359
67. Shipping & others
68. 3,345,225
69. 21,839,584
70. 4,134,577"
71. As against the above assessee had claimed Selling Expenses of Rs.2,59,74,161 in the following manner:‑‑‑
72. "Ocean Freight debited to G.P.
73. 1,86,04,359
74. Selling Expenses (exclusive of
75. 73,69,802
76. Ocean Freight)
77. 2,59,74,161"
4. The DCIT further made adjustments from Administration Expenses, wherein he disallowed 1/3rd of Postage Rs.5,77,197, 1/5th of Running expense Rs.2,87,126, 25% of Travelling expenses Rs.3,32,272, 1/3rd of Entertainment expenses Rs.68,303, 1/3rd of Repairs Rs:38,776, 1/3rd of Misc. Rs.1, 03,571 and Cartage Rs.7,78;138, all totalling up, to Rs.21,85,383.
5. The appellant‑company felt aggrieved by non‑deduction of Ocean Freight Expenses against G.P., non‑pro‑ration of Other Selling expenses and disallowance of profit and Loss Expenses, and preferred appeal before the First Appellate Authority. It was argued before the learned CIT(A) that local sales of F.O.B. value and export sales of C.N.F. value and for correct working of export and local sales, turnover was to be taken on uniform basis by deducting Ocean Freight from Gross Profit. Reliance was also placed on Tribunal's decision in I.T.A. No.332/KB of 1998‑99, dated 21‑11‑1998 and I.T.A. NoA792/KB and I.T.A. No.1802/KB of 1998. The learned CIT(A), .however, following decisions of this Tribunal in appellant's own case, upheld the treatment given by DCIT in the following manner:‑‑‑
78. "The contentions of the learned A.R. have been carefully considered. However, respectfully following the learned ITAT decision in the appellant's own case quoted supra, the treatment of the learned DCIT is held to 6e correct and no interference is required."
6. As regards P&L Expenses learned CIT(A) confirmed disallowances under the head running expenses, reduced Entertainment disallowance to 25% Postage and Telephone to 15% and set aside, Travelling, Conveyance and Repair and Maintenance. The appellant is not satisfied with learned CIT(A)'s decision and hence this appeal has been preferred before us.
7. Heard Mr. Jawed Zakaria, Advocate, for the appellant and Mr. Qamaruddin, learned D.R. for the respondent.
8. Mr. Jawed Zakaria conceded that he was aware of the decision given, in an earlier year in this very case by this Tribunal in the case reported as 1999 PTD (Trib.) 4100. The principle laid down in that appeal was that bifurcateable or identifiable expenses should be allocated to presumptive tax regime or normal tax regime and only expenses which were not clearly relateable to either presumptive or normal income, should be pro‑rated. This principle was further endorsed in appeals bearing LT.A. No. 1792, 1802/KB of 1998. Subsequently, however, C.B.R. issued ‑Circular No.5 of 2000, dated 6‑3‑2000, wherein C.B.R. clarified that "prorating profit between export sales and local sales in respect of assessee's maintaining books of accounts as to be done in accordance with rule 216 of Income Tax Ordinance, 1982". This Tribunal also in a subsequent appeal bearing I.T.A. No.1693/KB of 1998‑99, dated 27‑11‑1999 directed the DCIT "to re‑compute the proration by reducing the amount of G.P. on account of Freight and Cartage and then allocating G.P. to export account and local sales Account." Arguing that Circular No.5 of 2000 by C.B.R. was a benevolent Circular, the appellant could not be deprived of the benefits. In this connection he referred to this Tribunal's judgment bearing 72 Tax 141 (Trib.), Supreme Court's decision 1992 PTD 1 and a case from Indian jurisdiction 157 ITR 300. Lastly he also relied on Supreme Court of Pakistan's decision of in the case of Ellahi Cotton Mills, reported as 1997 PTD 1555 (SC Pak.).
9. Mr. Qamaruddin, the learned D.R., on the other hand, submitted that based on Tribunal's decision in I.T.A. No. 1792/KB of 1998‑99, the C.B.R. had issued clarificatory letter to all the Regional Commissioner vide No.3(10) SS (WHT) 1998‑99, dated 30‑8‑1999, wherein it was directed, "the expenses which are identifiable should be specifically ascertained. Every identifiable expense pertaining to export should be attributed to export sales and every identifiable expenses pertaining to local sales should be attributable to local sales and the allowability of such expenses should be considered on merits. Unidentifiable expenses should be specified which should be allowed on proportionate basis in accordance with law. He further submitted that the computation made by the D.C.I.T. was strictly in accordance with the principle approved in this very case reported as 1999 PTD (Trib.) 4100.
79. 10 We have considered the issue before us. Although we endorsed the decision taken earlier in this very case reported as 1999 PTD (Trib.) 4100, in principle, yet we feel that the issue has to be further seen in the context of C.B.R. Circular No. 5 of 2000, which is now followed by the Department, being binding on them, and also been in the nature of benevolent Circular. We agree with the observation contained in our case reported as 1972 Tax 141 (Trib.) "if a beneficial view is taken by the C.B.R. in favour of the assessee, it would not be proper on our part to deprive the assessees of such beneficial treatment in exercise of our judicial discretion." The C.B.R. vide aforementioned circular, as directed all the subordinate officers pro rate profits between export and local sales as per rule 216 of the Income Tax Rules, 1982, which in turn requires, in a case where accounts are jointly maintained for export and local sales, to evaluate profit as per F.O.B. value of export. It is clearly, therefore that adjustment of G.P. has to be made in the ratio of F.O.B. value of export and ex factory price of goods sold in Pakistan. During the course of argument Mr. Jawed Zakaria has informed us, and even supplied copy of assessment in a case bearing NTN 14‑11‑0803203, that Department, having accepted the direction of the C.B.R. was making proration of profit as per F.O.B. value of export, and the learned D.R, also conceded to it, as this, practice was a matter of fact. We may, at this stage, record to the observation made by DCIT in respect of allocation of income and proration of expenses in above referred case where accounts of exports and local sales were not separately mentioned:‑‑‑
80. "The C.B.R. vide Circular No.5 of 2000 has directed that the income between export sales and local sales may be allocated as per rule 216 which provides for allocation of combined income on prorata basis. In view of this the disallowances made last year are not being made during this year and pro rated income is being computed or the basis of rule 216. The rule 216 provides for allocation of combined income on the basis of F.O.B. value of export and local sales. Therefore, for the purposes of allocation of FOB value of export and local sales is computed as under:
81. Export sales realied during the year
82. 587,659,048
83. Less export Freight
84. 13,594,027
85. F.O.B value of the export
86. 574,065,031
87. Add Local sales declared net
88. 410,267,097
89. Total Sales
90. 984,332,128"
11. Referring to the leading judgment in this very case, we find that the issue with regard to F.O.B./C&F value of export was not addressed specifically because Circular No.5 of 2000 had by then been issued. So, in view of this Circular our judgment needs to be modified to the extent that F.O.B. value of export, as per rule 216, has to be considered for allocation of G.P. and pro‑ration of expenses, we therefore, following principle endorsed in this very case, but also keeping in view our decisions in I.T.A. No.547/KB of 1999‑2000, dated 10‑2‑2002 and I.T.A. No. 1693/KB of 1998‑99, dated 27‑11‑1999, directed that, at the first instance F.O.B. value of export and ex factory price of local sales/has to be worked out, then ratio of such exports and local sales has to be determined and then in that ratio only such expenses have to be pro‑rated which are otherwise not identifiable or bifurcatable. All expenses relatable to export sales should be allocated to exports, all expenses relatable to local sales have to be allocated to local sales, and only expenses which are common or not clearly bifurcated, should be pro‑rated in the ratio of F.O.B. export/ex factory local sales. Although in such a treatment there is an anomaly that assessee would have paid tax on that portion of export proceed which represents Freight and Ocean charges, being part of overall export proceeds, yet for purposes of allocation of G.P. and pro‑ration of non‑identifiable expenses, it is F.O.B. value of export as per rule 216 which is to be considered, even though axon such expense have been recovered. Needless to say that the tax so collected on the portion representing Freight and Ocean Charges cannot be refunded in view of the presumptive regime in respect of entire export proceeds.
12. In view of the above discussion, we set aside the assessment with direction that F.O.B. value of exports, ex factory sale value of local goods be determined, their ratio be ascertained and non‑identifiable expenses should be pro‑rated to respective ratio of sales. The appeal is, therefore, disposed off as set aside.
91. C.M.A./613/Tax (Trib.) Appeal accepted.