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I.T.A. No.1230/LB of 2010, decided on 30th October, 2014.

----Ss. 114, 120 & 122(5-A)---Amendment of assessment---Revenue expenditure---Determination---Scope---Assessee/company, filed Income Tax return declaring loss---Assessment made by Assessing Officer was found erroneous and prejudicial to the interest of revenue, on the ground that the mark-up claimed on borrowed capital for expansion of the plant, was capital expenditure, and could not be reduced from taxable income---Such assessment order was annulled by Appellate Authority below, and department had filed appeal before Appellate Tribunal---Contention of Departmental representative was, that as assessee company had itself declared the mark-up on the loan borrowed for expenditure in the capital account, as per audited accounts, company was not entitled to claim its direct deduction while computing the income as revenue expense---Contention was repelled, as in the audited accounts, the entries were recorded on the basis of "International Account Standards (IAS)", whereas in the income tax return, the entries were recorded in accordance with income tax law and procedure---Under International Account Standards, mark-up payable to the bank, could be capital expenditure, but under the Income Tax Law, that could be claimed as a revenue expenditure. 1989 PTD 500 rel. Mrs. Samia Ejaz, D.R. for Appellant. Shahid Pervez Jami for Respondent. Date of hearing: 29th October, 2014.

This single appeal filed at the instance of revenue/department, against the findings recorded by the learned CIR(Appeals)., Faisalabad on 23-6-2010 vide Order No. 3744 pertaining to Tax Year 2007. The single ground as set forth in the memo. of appeal before us in respect of Tax Year 2007 is as under:-- "That the learned CIR[A] was not justified to annul the order passed under section 122(5A) of the Income Tax Ordinance, 2001." The appellant, a limited company, derives income from manufacturing and sale of sugar. Briefly stated the relevant facts of the case are that return for Tax Year 2007 was filed declaring loss of (Rs.5,86,52,540). The deemed order passed under section 120 of Income Tax Ordinance, 2001 was found erroneous and prejudicial to the interest of revenue. On the ground that the mark up claimed on borrowed capital for expansion of the plant was capital expenditure and hence could not be reduced from taxable income (actually loss). Therefore, show cause notice was issued vide No. 485 dated 27-10-2009, in response to which reply of the taxpayer was discarded. For the reasons recorded in the body of order amended assessment order under section 122(5A) of Income Tax Ordinance, 2001 was passed. 2. On first appeal, the learned CIR[A] placing reliance on 1989 PTD 500 (SC) annulled the impugned order for the year under consideration with the following observation:-- "The appellant company was expanding the capacity of Sugar production and for that purpose obtained loan from the Bank and financial charges on the said loan were claimed as revenue expenditure. In this regard, arguments advanced by the learned AR are quite convincing. Therefore, considering the facts of the case and by placing reliance the judgment of Hon"ble Supreme Court of Pakistan and other case-law quoted supra, the impugned order under section 122(5A) of Income Tax Ordinance 2001 is annulled being illegal." 3. Hence this appeal by the revenue/department. 4. In response to call notice, Mr. Shahid Pervez Jami, Advocate appeared on behalf of respondent/taxpayer while Mrs. Samia Ejaz, DR appeared on behalf of revenue/department. Both of them were heard. 5. We have heard the arguments of both the rival parties at length and also perused the available record. 6. At the time of hearing the learned DR submitted that the appellant himself had declared the mark-up on the loan borrowed for expenditure in the capital account as per the audited accounts. He, therefore, was not entitled to claim its direct deduction while computing the income, as revenue expense. 7 We are not inclined to accept the contention of the learned AR, as in our considered opinion, this agreement is misconceived. In the audited accounts the entries are recorded on the basis of international account standards (IAS) whereas in the income tax return the entries are recorded in accordance with Income Tax law and procedure. Under IAS mark-up payable to the bank, in this situation, may be capital expenditure but under the Income Tax law, as held by the Honorable Supreme Court, this can be claimed as a revenue expenditure. The learned DR failed to distinguish the law laid down by the honorable Supreme Court in re: 1989 PTD 500 (SC) as under:-- "Amount of interest paid by the purchaser of an industrial concern to the vendor on the unpaid price being an integral part of the profits earning process as it was related to the carrying on or conduct of business satisfies the test laid down for bringing the case within the fold of section 10(2)(vii)--- Assessee was operating the business and was entitled to appropriate the profits and bear the losses even before the execution of sales-deed which operation continued after the execution of the sale-deed---Assessee claimed interest on the unpaid balance as revenue expenditure for the subsequent charge years---Years---Held, such expenditure was not for the acquisition of any property but was so closely related to the business that it could be viewed as an integral part of the conduct of the business and satisfied the test to bring it within the four corners of section 10(2)(xvi) as revenue expenditure laid out wholly and exclusively for the purpose of business"- 8. Consequently, the appeal fails. HBT/139/Tax(Trib.) Appeal dismissed.

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