NAUBAHAR BOTTLING COMPANY (PVT.) LTD. Versus COMMISSIONER INLAND REVENUE, LTO, LAHORE

MALIK JAVID IQBAL WAINS, J.--- Through the instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 ( the Ordinance ), following questions of law, asserted to have arisen out of the impugned order dated 19.08.2024, passed by Appellate Tribunal Inland Revenue, Lahore Bench, Lahore ( The Tribunal ), are pressed and argued for our opinion:-

2.The facts essential for adjudication of the present reference application are that the income tax return for the year 2022 was filed declaring income at Rs.2,295,977,4499/- which was taken as an assessment order in terms of Section 120 of the Ordinance, however, the said return was considered erroneous in so far as prejudicial to the interest of the revenue in terms of Section 122(5A) of the Ordinance. The applicant-taxpayer was served with a show-cause notice dated 26.05.2023 under Section 122(9) read with Section 122(5A) of the Ordinance by respondent No.2, wherein multiple discrepancies were alleged to be noted in the income tax return.

3.The applicant tendered a detailed reply to the show-cause notice contesting both the jurisdiction of the respondents as well as the merits of the allegations. Respondent No.2, however, vide assessment order dated 31.10.2023, rejected the objection of jurisdiction and proceeded to partially accept the applicant's explanation while maintaining certain additions confronted in the show-cause notice. Consequently, an amended assessment order was passed under Section 122(5A) of the Ordinance, enhancing the taxable income of the applicant and created tax demand Rs. 368,723,356/-.

4.The applicant preferred an appeal before the Commissioner Inland Revenue (Appeals) (CIR, Appeals), which was dismissed vide order dated 26.03.2024. Aggrieved thereby, the applicant filed second appeal before the Appellate Tribunal, which was partially allowed vide order dated 19.08.2024 in the following terms: -

5.The applicant, being dissatisfied with the findings of the Tribunal, has filed the instant reference application before this Court.

6.Learned counsel for the applicant contends that the Tribunal has erred in law and fact by misapplying the relevant provisions of the Ordinance. It is argued that the Tribunal failed to properly appreciate that the issue of amortization of publicity expenses under Section 24 of the Ordinance was misconstrued, as the said expenses were incurred wholly and exclusively for business purposes during the relevant tax year, and did not create any enduring or capital asset.

7.Conversely, the learned Legal Advisor for the respondent-department supported the impugned order, contending that the applicant failed to substantiate its claim through documentary evidence, and that the nature of the publicity expenses was enduring and capital in nature, yielding long-term benefits to the brand name of the applicant's products.

8.We have heard the learned counsel for both sides and carefully examined the available record with their assistance.

9.From perusal of record, it reveals that numerous issues raised in the Show Cause Notice by the Additional Commissioner Inland Revenue ( ACIR ) were adequately replied by the applicant and subsequently dropped based on the satisfactory explanations provided. The core issue involves in this case pertains to the legal interpretation of Section 122(5A) of the Ordinance. The applicant company has objected the jurisdiction exercised by the tax authority under the said provision, specifically questioning that the necessary preconditions for invoking this provision were not duly satisfied.

10.Learned counsel for the applicant argued that the ACIR failed to recognize the absence of requisite circumstances that would justify invoking Section 122(5A) of the Ordinance. It is contended that the said provision can only be triggered on the basis of material available on record at the time of assessment and not for initiating a roving inquiry into the affairs of the company. Accordingly, it is urged that the assumption of jurisdiction suffers from illegality.

11.To deal with the afore-noted arguments, suffice it to observe that Section 122(5A) of the Ordinance empowers the CIR to amend an assessment order, if it is erroneous and prejudicial to the interest of revenue. The provision explicitly mandates that no amendment shall be made without affording the taxpayer an opportunity of being heard under Section 122(9) of the Ordinance. In the present case, the ACIR was lawfully obliged to amend the deemed assessment order to bring it in conformity with the law, provided that an opportunity of hearing was granted to the taxpayer. The record demonstrates that the data and information submitted by the applicant in the tax return was subjected to scrutiny for accuracy in computation. This scrutiny, by itself, does not prevent the tax authorities from examining whether the deemed order was passed in accordance with law.

12.The forums below have concurrently found that the applicant failed to compute its tax liability in accordance with statutory provisions. Consequently, the ACIR was justified in amending the assessment order, having determined it to be erroneous and prejudicial to revenue interests. The legal obligation to invoke Section 122(5A) was rightly discharged, and the only statutory condition of affording an opportunity of hearing under Section 122(9) of the Ordinance was fulfilled. Therefore, we hold that no illegality in assumption of jurisdiction by the ACIR is floating on the record.

13.Upon perusal of the impugned order, it is revealed that the applicant had claimed publicity-related expenses amounting to Rs.1,040,023,236/-. These expenses were further bifurcated into two subheads: -

The CIR (Appeals) allowed the first component, i.e. the Bottle Burst Expenses amounting to Rs. 404,790,228/-, in favour of the applicant. However, with respect to the second component of Publicity Expenses amounting to Rs.635,233,008/-, he proceeded to amortize the said amount under the provisions of Section 24 of the Ordinance, holding that such expenditure was of an enduring nature resulting in the creation of intangible assets that yield benefits extending beyond the relevant tax year.

14.The lower fora concurrently concluded that such recurring expenditures, with an indeterminate useful life, clearly fall within the ambit of Section 24(3) of the Ordinance as "intangibles" and are therefore subject to amortization over a prescribed number of years. The applicant's contention that the benefit of such advertising expenses was confined solely to the relevant tax year is without legal or factual merit, particularly when promotional slogans such as Yeh Dil Mangay Aur and Har Ghoont Strong , along with other publicity content, are intended to generate long-term brand value over successive years.

15.For clarity, convenience, and proper understanding of the issue relating to intangible, we deem it appropriate to reproduce the relevant statutory provisions of Section 24(3) and (4) of the Ordinance:-

Where--

B is the normal useful life of the intangible in whole years.

[(4) An intangible that does not have an ascertainable useful life shall be treated as having a normal useful life of twenty-five years.]"

16.Section 24 of the Ordinance governs the amortization of intangible assets and sets out the mechanism by which such expenses may be deducted over a period of time for tax purposes. Subsection (3) of Section 24 of the Ordinance provides the computational framework. It mandates that the amortization deduction allowable to a taxpayer for a given tax year shall be calculated by dividing the cost of the intangible asset (denoted as A ) by its normal useful life in whole years (denoted as B ). The formula A/B prescribes a straight-line amortization method, distributing the total cost evenly across the asset's useful life. This ensures that the deduction reflects the actual consumption of the economic value of the intangible over time.

17.Subsection (4) of Section 24 of the Ordinance introduces a deeming provision that applies in situations where the intangible asset's useful life cannot be reliably determined. In such cases, the law prescribes a fictional or default useful life of twenty-five (25) years, (stood at the relevant tax year in 2022) regardless of the taxpayer's internal assessment or accounting treatment. This provision is designed to prevent the immediate expensing of costs related to intangible assets, whose benefits are spread across multiple tax years, particularly in cases involving goodwill, brand promotion, trademarks, or intellectual property rights. The purpose of these provisions is to ensure fair and orderly recognition of expenses that confer long term economic benefits, preventing taxpayers from front loading deductions to artificially suppress taxable income in a single year.

18.Consequently, we hold that the applicant-taxpayer is not entitled to claim a full deduction of an expense relating to an intangible asset in a single tax year where the asset's utility extends beyond that year. In such circumstances, the ACIR and learned Appellate Tribunal are well within the lawful domain to disallow the immediate deduction and to require that the expense be amortized in accordance with the method prescribed under Section 24(3) of the Ordinance. Furthermore, in cases where the useful life of an intangible asset is not objectively ascertainable, sub-section (4) of Section 24 of the Ordinance mandates that such asset be treated as having a normal useful life of twenty-five years, (stood at relevant tax year in 2022) thereby limiting the taxpayer's entitlement to an annual deduction of 1/25th of the cost.

19.Further, this interpretation carries significant implications in matters involving publicity, advertisement and brand promotion expenses, particularly where such expenditures are directed toward the creation of long term brand value or market positioning, rather than merely serving short term promotional objectives.

20.It is well settled that each tax year is an independent unit of assessment. However, given the nature and impact of the expenditures involved, the concurrent findings of the forums below that the said publicity expenses created long-term brand value and capital assets were legally and factually sound, as for the applicant's assertion that the Appellate Tribunal had rendered findings contrary to the treatment of said expenses as amortizable, a perusal of the impugned order reveals that no such findings were recorded by the Tribunal, thus, no question of law arises in this regard.

21.In view of above narrated facts and circumstances, considering the statutory provisions and the contentions of both parties, we are inclined to hold that the treatment accorded by the tax authorities below is in consonance with the facts of the case as well as with the scheme of the Ordinance. The orders of the authorities below, being well reasoned and supported by the available material, do not suffer from any legal infirmity warranting interference in reference jurisdiction.

22.Admittedly the jurisdiction of this Court in reference proceedings under Section 133 of the Ordinance is confined strictly to questions of law arising out of the order of the Tribunal. Findings of fact recorded by the Tribunal are binding unless demonstrated to be perverse, arbitrary, or contrary to record. The Hon'ble Supreme Court in Messrs F.M.Y. Industries Ltd. v. Deputy Commissioner of Income Tax (2014 SCMR 907) has categorically held that factual controversies stand concluded at the level of the Tribunal, and this Court, in its advisory jurisdiction, cannot reappraise evidence or reassess the facts.

23.In the present case, the impugned order of the Tribunal rests upon concurrent findings of fact rendered by relevant forums below, which are duly supported by the record. The applicant has failed to point out any misapplication of law or perversity in the factual conclusions so drawn. Consequently, no substantial question of law arises from the order of the Tribunal warranting interference by this Court.

24.Resultantly, the Reference Application stands dismissed , being devoid of merits. The impugned order passed by the Tribunal is affirmed, and the reference is answered against the applicant-taxpayer and in favour of the respondent-department

25.Office shall send a copy of this judgment under seal of the Court to learned Appellate Tribunal as per Section 133(8) of the Income Tax Ordinance, 2001.

MQ/N-6/L Reference dismissed.