COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI vs The COMMISSIONER OF INCOME TAX, COMPANIES-III, KA

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COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI VS The COMMISSIONER OF INCOME TAX, COMPANIES-III, KARACHI Ss. 62 & 66-a---Original assessment order , passing of---Revision---Loss suffered---Subsidy being granted---Whether a Revenue receipt or a Capital receipt---Subsidy was granted by the Federal government to reimburse losses suffered by the Taxpayer (M/s. Cotton Export Corporation of Pakistan (Pvt.) Ltd.)---Question was whether the subsidy paid by the Federal Government to the taxpayer was a Revenue receipt or a Capital receipt---Held, that record revealed that the dispute firstly arose in assessment years 1978-1979 to 1980-1981 when the then Income Tax appellate Tribunal ('the Tribunal') came to the conclusion that the subsidy-in-question was paid by the Federal Government due to losses suffered by the taxpayer and in the public interest to reimburse those losses, which in no way could be treated as trading receipt ; it was further observed by the Tribunal that the taxpayer has purchased cotton at a certain price fixed by the Government and since the export price is generally lower than the purchase price, the taxpayer necessarily suffered losses, whereas, it is 100% owned by the Federal Government and therefore re-imbursement of such losses to the taxpayer could not be considered as a trading receipt; it was further observed that all receipts, which are not capital receipts are not necessarily income within the meaning of the Ordinance 1979 ; lastly, it was also observed that all receipts are not always capital receipts or Revenue receipts as some receipts may be neither, but at the same time it may not be income either---Tribunal in the impugned order made some reference to the cases of West Pakistan Road Transport Lahore (reported as PLD 1974 Note 9) and Sindh Industrial Trading Estate (reported as PLD 1975 Kar. 128), however, said judgments had no relevance with the controversy in hand---Thus, the Tribunal has failed to appreciate the dissimilarity in the facts, therefore, impugned order passed by the Tribunal in respect of these assessment years cannot be sustained---In the present case, the intent and purpose behind paying subsidy to taxpayer was to reduce its losses---High Court viewed that the subsidy paid by the Federal Government to the taxpayer was a revenue receipt and was liable to income tax---Thus, the relevant question of law was answered against the Taxpayer and in favour of the Department---Reference filed by the Taxpayer ( M/s Cotton Export Corporation of Pakistan (Pvt) Ltd. ) stood dismissed, whereas, the reference filed by the department was allowed. Citation Name: 2024 PTD 1448 KARACHI-HIGH-COURT-SINDH COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI VS The COMMISSIONER OF INCOME TAX, COMPANIES-III, KARACHI Ss. 62 & 66-a---Original assessment order, passing of---Revision---Inspecting additional Commissioner, jurisdiction /powers of---Whether Inspecting additional Commissioner (IaC) had any jurisdiction to exercise powers under S. 66-a of the Income Tax Ordinance, 1979 ('the Ordinance, 1979')---Case of the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.) was that after passing of the original assessment order under S. 62 of the Ordinance, 1979, it could not have been revised under S. 66-a of the Ordinance, 1979 , as the original assessment order under S.62 was passed with the approval and consent of IaC, and therefore, he could not have reopened the said order---Validity---From perusal of the finding of facts, in the impugned order by the Tribunal, it was reflected that though, initially the Income Tax Officer had sent a draft order to the Commissioner Income Tax (ITO) through IaC for approval; but, admittedly, the same was retuned back with the comments that ITO should decide the case on its own responsibility---Resultantly, when the original assessment order was passed under S. 62 of the Ordinance, 1979 by the concerned ITO, it could not be assumed that it was passed with the approval of the IaC, rather was done by him without involvement of his superior officer---In fact, even if some assistance had been sought by an assessing officer from the IaC, this was not in itself sufficient to preclude the IaC from invoking S. 66-a of the Ordinance, 1979 in relation to that particular case---It would also further have to be shown, as a matter of fact, that the degree of involvement was of such intensity that it would make subsequent recourse to S. 66-a impermissible---This is so because the mere fact of consultation or even approval was not enough---Degree and intensity of the consultation was also to be established and shown to have been of such level that it would preclude the subsequent exercise of powers under S. 66-a of the Ordinance, 1979 ---Therefore, if subsequently, the IaC had revised the order by exercising his powers under S. 66-a of Ordinance, 1979, it cannot be presumed that he had no jurisdiction to do so and that it was an illegality on this ground alone---Thus, the relevant question of law was answered against the Taxpayer and in favour of the Department---all the cases /References filed by the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.) stood dismissed, whereas, the reference filed by the department was allowed. Citation Name: 2024 PTD 1448 KARACHI-HIGH-COURT-SINDH COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI VS The COMMISSIONER OF INCOME TAX, COMPANIES-III, KARACHI Ss. 2(24) (b), 62 & 66-a---Original assessment order , passing of---Revision---Loss suffered---Subsidy being granted---Whether a Revenue receipt or a Capital receipt---Principles of accounting---Subsidy was granted by the Federal government to reimburse losses suffered by the Taxpayer (M/s. Cotton Export Corporation of Pakistan (Pvt.) Ltd.), a Corporation created by law and owned by the Government---Question was whether the subsidy paid by the Federal Government to the taxpayer was a Revenue receipt or a Capital receipt---argument of the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.) was that subsidy paid by the Federal Government year after year to cover up the losses sustained by the taxpayer was a capital receipt and at most a gift but not a Revenue receipt ; and that if at all it is so then the subsidy received is a capital receipt on the ground that 100% shares of the taxpayer were held by the Federal Government and was kind of a subsidiary created by the Federal Government---Held, that if that was so, then induction of this subsidy as a capital would have resulted in the increase of shareholding by way of extra capital, but this is not the case of the taxpayer---By merely arguing that this subsidy was never shown in profit and loss account, but in the appropriation account, hence it was not a Revenue receipt, would not ipso facto make it so---Question has to be decided by a consideration of the true nature and purpose of the payment and the facts and circumstances of the case as there is no single or infallible test which can be applied to resolve the question---Neither the form of the transaction giving rise to the payment, nor the name, which is given to it is relevant in determining the liability of tax---In general, it may be said that what is received for loss of capital is a capital receipt and what is received as profit in trading transaction, is taxable income---as per accounting practice(s) the appropriation account contains both, capital receipts and unappropriated profits usually based on accumulated profits already subjected to tax or untaxed capital gains remaining undistributed during the preceding years till the date of preparation of the appropriation accounts---These could be capital receipts or Revenue receipts and the nature of such receipts has to be looked into---appropriation is primarily an act of setting aside money for a specific purpose---In the present case, it is not the Government itself who is the taxpayer, rather a Corporation created by law, which is owned by the Government---Taxpayer was a concern which operated to make profits, and if any amount was shown as an appropriation, then it had to come from its profits, or as retained earnings, or from its reserves or something which had been kept for debt repayment and to finance capital expenditures---None of these were present in this case---Here, an amount had been received, and when questioned as to its treatment, an argument was being made that it was an item in the appropriation account; hence, cannot be taxed---Said analogy of the taxpayer appeared to be incorrect and against the settled accounting principles even if it was to be shown as an item in the appropriation account---In the present case, the intent and purpose behind paying subsidy to taxpayer was to reduce its losses---High Court viewed that the subsidy paid by the Federal Government to the taxpayer was a revenue receipt and was liable to income tax---Thus, the relevant question of law was answered against the Taxpayer and in favour of the Department---all the cases/References filed by the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.) stood dismissed, whereas, the only reference filed by the department was allowed. Citation Name: 2024 PTD 1448 KARACHI-HIGH-COURT-SINDH COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI VS The COMMISSIONER OF INCOME TAX, COMPANIES-III, KARACHI Ss. 2(24) (b), 62 & 66-a---Original assessment order , passing of---Revision---Loss suffered---Subsidy being granted---Whether a Revenue receipt or a Capital receipt---Subsidy was granted by the Federal government to reimburse losses suffered by the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.)---Question as to whether the subsidy paid by the Federal Government to the taxpayer was a Revenue receipt or a Capital receipt---Held, that in essence, the law is that if the payments received are voluntary without there being any legal obligation upon them to do so, or without there being any liability or obligation to that effect, then in a certain set of facts, it can be held to be anything other than an income---It could be a capital receipt or against any share consideration---In the present case, it was not so---In judging the nature of a receipt, the Courts have to take into account all the circumstances under which the taxpayer may have received the money particularly the purpose for which it was given to the taxpayer---In the present matter, the payment by the Government was thus specifically for the purpose of covering losses and it was for that very purpose that the subsidy had been demanded by the taxpayer; consequently, this amount received was a trading receipt and must be held to be income arising from the business of the taxpayer so that it was taxable as such---The payment was no doubt called a subsidy, but it was clear that it was made specifically with the object of compensating the taxpayer for the loss of certain profits which might have arisen if the cotton was not purchased on the price as directed by the Government---This was, therefore , an income or receipt by the company which was inseparably connected with the conduct of the business of the company and it arose from that business---In the present case, the intent and purpose behind paying subsidy to taxpayer was to reduce its losses---High Court viewed that the subsidy paid by the Federal Government to the taxpayer was a revenue receipt and was liable to income tax---Thus, the relevant question of law was answered against the Taxpayer and in favour of the Department---all the cases/References filed by the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.) stood dismissed, whereas, the reference filed by the department was allowed. Citation Name: 2024 PTD 1448 KARACHI-HIGH-COURT-SINDH COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI VS The COMMISSIONER OF INCOME TAX, COMPANIES-III, KARACHI Ss.2(24)(b), 62 & 66-a---Income---Loss---Original assessment order, amending / correcting of---Ingredients i.e. erroneous and prejudicial to the interest of the Revenue---Inspecting additional Commissioner, jurisdiction /powers of---argument raised by the Taxpayer (M/s. Cotton Export Corporation of Pakistan (Pvt.) Ltd.) was that the order under S.62 of the Income Tax Ordinance, 1979 ('the Ordinance, 1979'), may have been erroneous at best, but was not prejudicial to the interest of the Revenue inasmuch as the assessment order was an order showing losses in its return; hence, S.66-a of the Ordinance, 1979 could not have been invoked---Validity---For invoking the provisions of S.66-a of the Ordinance, 1979 (section 122 of the Income Tax Ordinance, 2001), it is a must that both the ingredients i.e. an assessment order being erroneous and prejudicial to the interest of the Revenue, are fulfilled---Mere erroneous order of an Income Tax Officer without causing prejudice to the interest of the Revenue will not authorize Inspecting additional Commissioner (IaC) to exercise powers under S. 66-a of the Ordinance, 1979 and these ingredients must be satisfied before invoking S.66-a of the Ordinance, 1979---In terms of S. 2(24) (b) of the Ordinance, 1979, the income includes any loss of such income and profits or gains, and therefore, even if a Return is showing losses, assessment can still be prejudicial to the interests of the Revenue and once it is not denied that the original assessment order was erroneous, then by merely arguing that the second condition (to the effect that it was not prejudicial to the interests of the Revenue) is not fulfilled, cannot be sustained---In the present case, both the preconditions for invoking the provision of S.66-a of the Ordinance, 1979 are fulfilled---Furthermore, as the loss, if any, in one income year is carried forward to the next income year, and while computing the income of the subsequent year(s), these losses are permitted to be deducted---Therefore, any such carry forward loss pursuant to some erroneous assessment order will always remain prejudicial to the interest of the Revenue: being liable to correction amendment of the original assessment order after reopening of the same---Therefore, the objection as to the original assessment order not being prejudicial to the interest of Revenue pursuant to a return of loss, and short of meeting the requirement of S.66-a of the Ordinance, 1979 is misconceived---Thus, in the present case, the IaC had jurisdiction to exercise powers under S.66-a of the Ordinance, 1979---Thus, the relevant question of law was answered against the Taxpayer and in favour of the Department---all the cases/References filed by the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.) stood dismissed, whereas, the reference filed by the department was allowed. Citation Name: 2024 PTD 1448 KARACHI-HIGH-COURT-SINDH COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI VS The COMMISSIONER OF INCOME TAX, COMPANIES-III, KARACHI Ss. 2(24) (b), 62 & 66-a---Doctrine of mutuality---Original assessment order, passing of---Revision---Loss suffered---Subsidy being granted---Whether a Revenue receipt or a Capital receipt---Subsidy was granted by the Federal government to reimburse losses suffered by the Taxpayer (M/s. Cotton Export Corporation of Pakistan (Pvt.) Ltd.)---Question as to whether the subsidy paid by the Federal Government to the taxpayer was a Revenue receipt or a Capital receipt---argument being that 100% shares of the Taxpayer are owned by the Federal Government---Validity---It is of relevance to note that as a matter of fact the Federal Government's policy in respect of purchase of cotton requires the taxpayer to purchase it from the grower on fixed notified prices---a times, the cotton is purchased at a higher price as against the price on which it is exported, resulting in losses, and the Federal Government on regular basis, was making payments to the taxpayer to run its affairs smoothly and efficiently---It was also an admitted position that these subsidies given year after year, were not refundable to the Federal Government, whereas, any capital induction was always a liability and it was to be repaid to the contributor---as to the argument that 100% shares were owned by the Federal Government and it was a case, wherein, doctrine of mutuality would apply; it may be of relevance to observe that such doctrine was only applicable when the participants were earning the profits and the beneficiaries were the same---Here it was not so, inasmuch as mere ownership of 100% in the taxpayer /company would not make it a Federal Government---admittedly, the taxpayer was a company incorporated by way of some law having its own identity, different to that of the Federal Government---Undisputedly, the taxpayer was a Company paying taxes all along on its profits and losses---In the present case, the intent and purpose behind paying subsidy to taxpayer was to reduce its losses---High Court viewed that the subsidy paid by the Federal Government to the taxpayer was a revenue receipt and was liable to income tax---Thus, the relevant question of law was answered against the Taxpayer and in favour of the Department---all the cases/References filed by the Taxpayer (M/s Cotton Export Corporation of Pakistan (Pvt.) Ltd.) stood dismissed, whereas, the reference filed by the department was allowed.

COTTON EXPORT CORPORATION OF PAKISTAN (PVT.) LTD. KARACHI vs The COMMISSIONER OF INCOME TAX, COMPANIES-III, KARACHI Ss — 2024 PTD 1448 KARACHI-HIGH-COURT-SINDH

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