Apportionment of Expenses against dividend

[Sayub]

Please help me on the following,

whether apportionment of expenses (u/s 67 read with Rule 13) is required to be done against dividend received by a Company as dividend falls under NTR for Company, but taxed as separate block of income @ 10%.

[LapTop]

ORDER

MRS. ZAREEN SALEEM ANSARI, ACCOUNTANT MEMBER.---This appeal has been filed by the Department against the order of the learned C.I.T.(A) dated 1-12-2005 on the following grounds--

(1) That the learned C.I.T.(A) has erred in deleting the Financial Expenses of Rs.569,435 allocated Dividend Income and Exempt Capital Gain as per provisions of section 67 of the Income Tax Ordinance, 2001 read with Rule-13 of the Income Tax Rules, 2002;

(2) That the learned C.I.T.(A) has erred in directing the Taxation Officer to treat the amount of export rebate/duty drawback as export profit by ignoring Rule 231(1)(b) of the Income Tax Rules, 2002.

2. On the date of hearing, Mr. Rahmatullah Khan Wazir and Mr. Farrukh Ansari appeared on behalf of the Department whereas the respondent/assessee was represented by Mr. Irfan Saadat Khan, Advocate and both the sides have been heard in detail.

3. Brief facts of the case are that the respondent/assessee is a public limited company engaged in the manufacturing and sale of paper sacks mostly to cement industries. The deemed assessment was found to be erroneous in so far as prejudicial to the interest of the revenue on certain points thereby show cause notice under section 122(5A) read with section 122(9) was issued on 7-5-2005 and after detailed discussion the order thereof was passed under the provisions of section 122(5A) of the Ordinance on 27-8-2005. Being aggrieved with the order passed by the Taxation Officer, an appeal was preferred before the learned C.I.T.(A) who after detailed examination of the case allowed the appeal filed by the assessee. Hence, the Department has now filed the present appeal.

4. The learned DRs have argued that the learned C.I.T.(A) was not justified in directing not to apportion the expense against the exempt income declared by the assessee as according to them a perusal of section 67 of the Ordinance read with Rule 13 of the Income Tax Rules, 2002 clearly stipulated allocation of the expenses relatable to a particular head of income. The learned D.Rs. reiterated the observations made by the Taxation Officer and submitted that the financial charges incurred by the assessee have to be apportioned between the normal business income and the dividend income and the exempt capital gain claimed by the assessee. It was further submitted that in computing the profit attributable to export sales, the export rebate does not form part of the export sales hence on this plane also the learned C.I.T.(A) was not justified in granting relief to the assessee by considering the export rebate/duty draw back to be falling under Final Taxation Regime. In the end the D.Rs. prayed for restoration-of the order passed by the Taxation Officer.

5. On the other hand, the learned counsel appearing on behalf of the respondent/assessee has supported the order of the learned C.I.T.(A) and submitted that the Taxation Officer while passing the order has misconstrued not only the provisions of section 67 of the Ordinance but also Rule 13 of the Income Tax Rules, 2002. It was submitted that section 67 provides apportionment of a particular expenditure when the same is incurred for more than one head of income. It 'was specially pointed out by the A.R. that the Taxation Officer, has accepted that all the administrative and selling expenses incurred by the assessee were for earning normal business income and does not require any apportionment under section 67 of the Ordinance. However it is only with regard to financial expenses that the Taxation Officer drew adverse inference by mentioning in the order that "had the taxpayer not invested in the shares then the fund so available would have been invested by him in the manufacturing activity and he would not have borrowed the amount on which financial charges were incurred". The A.R. continues to argue that the assessee company has two independent divisions which have no common financial link except that both are segments of the same company. It was explained that all the investment activity relates to "Stepped End Division" 'which does not have any financial facility from the Bank and which position is evident from the audited statements of accounts. All the financial expenses relate to the other division which have neither earned any dividend nor have declared any exempt capital gain. The financial expenses declared are nothing but mark up expenses and no Bank charges/commission, etc. has been charged by the assessee.

6. The learned A.R. has further submits that the Taxation Officer has not only misinterpreted section 67 but has also failed to understand Rule 13. This section speaks of apportionment of the "common expenses" whereas in the instant case there was no such common expenditure which relates to normal business activity and to the dividend and exempt capital gain claimed by the assessee. The Financial charges claimed by the company relates exclusively to normal business activity and no portion thereof could be relatable to either dividend income or to the exempt capital gain claimed by the assessee. The A.R. submitted that the order passed by the Taxation Officer is self contradictory as at one place he has specifically mentioned that the investment was made by the assessee in the previous years which has always been accepted by the Department in the past. However during the year under question the Taxation Officer under the same set of facts has apportioned imaginary expenditure against the said dividend income and the exempt capital gain which is not only illegal but also uncalled for.

7. The learned, A.R. has further argued that the action taken by the Taxation Officer with regard to treating export rebate/duty draw back to be a part of the export sales is concerned, it was explained by the A.R. that the said treatment meted out by the Taxation Officer is not only against Rule 231(1)(b) of the Rules but is also a complete negation of the CBR's Circular No.1 of 1996 wherein it has specifically been mentioned by the FBR that the export rebate/duty draw back shall be deemed to be covered under Presumptive Tax Regime. Hence, it was finally submitted by the A.R. that the learned C.I.T.(A) was fully justified in giving relief to the assessee on both the above issues and the order passed by the C.I.T.(A) may kindly be confirmed.

8. We have heard both the learned counsel and have also considered the arguments advanced by both the learned D. Rs. and the A.R. and have also perused the order passed by the two authorities below and have gone through the various case laws cited at the bar and the facts and circumstances of the case. Before reaching to any conclusion it would be pertinent to first peruse the provisions of section 67 of the Ordinance, which are reproduced as under-

67. Apportionment of deductions.---(1) Subject to this Ordinance, where expenditure relates to-

(a) the derivation of more than one head of income; or

(ab) derivation of income comprising of taxable income and any class of income to which subsections (4) and (5) of section 4 apply; or

(b) the derivation of income chargeable to tax under a head of income and to some other purpose, the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates.

(2) The Central Board of Revenue may make rules under section 237 for the purposes of apportioning deductions.

9. A perusal of the above section 67 reveals that expenditure has to be apportioned on a reasonable basis after taking into consideration and account the relative nature and the size of the activities to which the amount relates. We find force in the contention of the learned A.R. that the Taxation Officer has failed to point out a single expense which relates to either dividend income or the exempt capital gain declared by the assessee. It appears that the Taxation Officer has apportioned the expenditure only on the premise and the assumption that" had the taxpayer not invested in the shares then the fund so available would have been invested in business" which shows that the Taxation Officer could not bring on record any evidence to justify his above action. The alleged apportionment is found to have been made on imagination only. We also agree with the contention of the A.R. that the Taxation Officer has failed to prove "relative nature" and size of the activities to which the amount relates, which is an essential requirement as per the provisions of section 67 of the Ordinance. We also find that the claim of the assessee "that the two divisions have no internal financial link" has not been controverted by the Taxation Officer evidently in view of the above narrated facts. Hence we find that the said apportionment made by the Taxation Officer has rightly been deleted by the learned C.I.T.(A) and no interference in this regard is required. Thus the appeal filed by the Department on this issue is found to be devoid of merit and is hereby dismissed.

10. Now coming to second ground raised by the Department with regard to treating export rebate as part of the normal business profit of the company. Here again we find ourselves to be in agreement with the arguments advanced by the learned A.R. that the Taxation Officer has misinterpreted Rule 231(1)(b) of the Rules, 2002 by bringing export rebate within the ambit of total profit which is contrary to the provisions of section 154(4) of the Ordinance which clearly stipulated that tax deducted under subsection (1), (3) (3a) or (3b) shall be final tax on the income arising from the export since the FBR has also clarified the issue vide its Circular No.1 of 1996 wherein duty draw back etc. has been made part of the income falling under Presumptive Tax Regime i.e. section 80CC of the repealed Ordinance and it is needless to state that the instructions of the FBR are binding on the Officers of the Tax Department we consider that the learned C.I.T.(A),was fully justified in granting relief to the assessee on this issue as well and we do not find anything wrong with the finding recorded by the learned C.I.T.(A) in this regard. Hence in view of the above observations the order passed by the learned C.I.T. (A) on this score is also confirmed with the result that the Departmental appeal on this issue is also hereby dismissed.

11. The above appeal is disposed of to the extent and manner as indicated above.

[Sayub]

Thanks laptop for sharing, but what I think is that in the case shared by you, financial expenses were not allowed to apportioned to dividend income on the grounds that same were not incurred for earning dividend. But what about common expenditures incurred by a Company engaged in earning dividend as well income falling under different heads of Income?.

Waiting for valuable opinion or sharing.

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by LapTop</i>
<br />ORDER

MRS. ZAREEN SALEEM ANSARI, ACCOUNTANT MEMBER.---This appeal has been filed by the Department against the order of the learned C.I.T.(A) dated 1-12-2005 on the following grounds--

(1) That the learned C.I.T.(A) has erred in deleting the Financial Expenses of Rs.569,435 allocated Dividend Income and Exempt Capital Gain as per provisions of section 67 of the Income Tax Ordinance, 2001 read with Rule-13 of the Income Tax Rules, 2002;

(2) That the learned C.I.T.(A) has erred in directing the Taxation Officer to treat the amount of export rebate/duty drawback as export profit by ignoring Rule 231(1)(b) of the Income Tax Rules, 2002.

2. On the date of hearing, Mr. Rahmatullah Khan Wazir and Mr. Farrukh Ansari appeared on behalf of the Department whereas the respondent/assessee was represented by Mr. Irfan Saadat Khan, Advocate and both the sides have been heard in detail.

3. Brief facts of the case are that the respondent/assessee is a public limited company engaged in the manufacturing and sale of paper sacks mostly to cement industries. The deemed assessment was found to be erroneous in so far as prejudicial to the interest of the revenue on certain points thereby show cause notice under section 122(5A) read with section 122(9) was issued on 7-5-2005 and after detailed discussion the order thereof was passed under the provisions of section 122(5A) of the Ordinance on 27-8-2005. Being aggrieved with the order passed by the Taxation Officer, an appeal was preferred before the learned C.I.T.(A) who after detailed examination of the case allowed the appeal filed by the assessee. Hence, the Department has now filed the present appeal.

4. The learned DRs have argued that the learned C.I.T.(A) was not justified in directing not to apportion the expense against the exempt income declared by the assessee as according to them a perusal of section 67 of the Ordinance read with Rule 13 of the Income Tax Rules, 2002 clearly stipulated allocation of the expenses relatable to a particular head of income. The learned D.Rs. reiterated the observations made by the Taxation Officer and submitted that the financial charges incurred by the assessee have to be apportioned between the normal business income and the dividend income and the exempt capital gain claimed by the assessee. It was further submitted that in computing the profit attributable to export sales, the export rebate does not form part of the export sales hence on this plane also the learned C.I.T.(A) was not justified in granting relief to the assessee by considering the export rebate/duty draw back to be falling under Final Taxation Regime. In the end the D.Rs. prayed for restoration-of the order passed by the Taxation Officer.

5. On the other hand, the learned counsel appearing on behalf of the respondent/assessee has supported the order of the learned C.I.T.(A) and submitted that the Taxation Officer while passing the order has misconstrued not only the provisions of section 67 of the Ordinance but also Rule 13 of the Income Tax Rules, 2002. It was submitted that section 67 provides apportionment of a particular expenditure when the same is incurred for more than one head of income. It 'was specially pointed out by the A.R. that the Taxation Officer, has accepted that all the administrative and selling expenses incurred by the assessee were for earning normal business income and does not require any apportionment under section 67 of the Ordinance. However it is only with regard to financial expenses that the Taxation Officer drew adverse inference by mentioning in the order that "had the taxpayer not invested in the shares then the fund so available would have been invested by him in the manufacturing activity and he would not have borrowed the amount on which financial charges were incurred". The A.R. continues to argue that the assessee company has two independent divisions which have no common financial link except that both are segments of the same company. It was explained that all the investment activity relates to "Stepped End Division" 'which does not have any financial facility from the Bank and which position is evident from the audited statements of accounts. All the financial expenses relate to the other division which have neither earned any dividend nor have declared any exempt capital gain. The financial expenses declared are nothing but mark up expenses and no Bank charges/commission, etc. has been charged by the assessee.

6. The learned A.R. has further submits that the Taxation Officer has not only misinterpreted section 67 but has also failed to understand Rule 13. This section speaks of apportionment of the "common expenses" whereas in the instant case there was no such common expenditure which relates to normal business activity and to the dividend and exempt capital gain claimed by the assessee. The Financial charges claimed by the company relates exclusively to normal business activity and no portion thereof could be relatable to either dividend income or to the exempt capital gain claimed by the assessee. The A.R. submitted that the order passed by the Taxation Officer is self contradictory as at one place he has specifically mentioned that the investment was made by the assessee in the previous years which has always been accepted by the Department in the past. However during the year under question the Taxation Officer under the same set of facts has apportioned imaginary expenditure against the said dividend income and the exempt capital gain which is not only illegal but also uncalled for.

7. The learned, A.R. has further argued that the action taken by the Taxation Officer with regard to treating export rebate/duty draw back to be a part of the export sales is concerned, it was explained by the A.R. that the said treatment meted out by the Taxation Officer is not only against Rule 231(1)(b) of the Rules but is also a complete negation of the CBR's Circular No.1 of 1996 wherein it has specifically been mentioned by the FBR that the export rebate/duty draw back shall be deemed to be covered under Presumptive Tax Regime. Hence, it was finally submitted by the A.R. that the learned C.I.T.(A) was fully justified in giving relief to the assessee on both the above issues and the order passed by the C.I.T.(A) may kindly be confirmed.

8. We have heard both the learned counsel and have also considered the arguments advanced by both the learned D. Rs. and the A.R. and have also perused the order passed by the two authorities below and have gone through the various case laws cited at the bar and the facts and circumstances of the case. Before reaching to any conclusion it would be pertinent to first peruse the provisions of section 67 of the Ordinance, which are reproduced as under-

67. Apportionment of deductions.---(1) Subject to this Ordinance, where expenditure relates to-

(a) the derivation of more than one head of income; or

(ab) derivation of income comprising of taxable income and any class of income to which subsections (4) and (5) of section 4 apply; or

(b) the derivation of income chargeable to tax under a head of income and to some other purpose, the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates.

(2) The Central Board of Revenue may make rules under section 237 for the purposes of apportioning deductions.

9. A perusal of the above section 67 reveals that expenditure has to be apportioned on a reasonable basis after taking into consideration and account the relative nature and the size of the activities to which the amount relates. We find force in the contention of the learned A.R. that the Taxation Officer has failed to point out a single expense which relates to either dividend income or the exempt capital gain declared by the assessee. It appears that the Taxation Officer has apportioned the expenditure only on the premise and the assumption that" had the taxpayer not invested in the shares then the fund so available would have been invested in business" which shows that the Taxation Officer could not bring on record any evidence to justify his above action. The alleged apportionment is found to have been made on imagination only. We also agree with the contention of the A.R. that the Taxation Officer has failed to prove "relative nature" and size of the activities to which the amount relates, which is an essential requirement as per the provisions of section 67 of the Ordinance. We also find that the claim of the assessee "that the two divisions have no internal financial link" has not been controverted by the Taxation Officer evidently in view of the above narrated facts. Hence we find that the said apportionment made by the Taxation Officer has rightly been deleted by the learned C.I.T.(A) and no interference in this regard is required. Thus the appeal filed by the Department on this issue is found to be devoid of merit and is hereby dismissed.

10. Now coming to second ground raised by the Department with regard to treating export rebate as part of the normal business profit of the company. Here again we find ourselves to be in agreement with the arguments advanced by the learned A.R. that the Taxation Officer has misinterpreted Rule 231(1)(b) of the Rules, 2002 by bringing export rebate within the ambit of total profit which is contrary to the provisions of section 154(4) of the Ordinance which clearly stipulated that tax deducted under subsection (1), (3) (3a) or (3b) shall be final tax on the income arising from the export since the FBR has also clarified the issue vide its Circular No.1 of 1996 wherein duty draw back etc. has been made part of the income falling under Presumptive Tax Regime i.e. section 80CC of the repealed Ordinance and it is needless to state that the instructions of the FBR are binding on the Officers of the Tax Department we consider that the learned C.I.T.(A),was fully justified in granting relief to the assessee on this issue as well and we do not find anything wrong with the finding recorded by the learned C.I.T.(A) in this regard. Hence in view of the above observations the order passed by the learned C.I.T. (A) on this score is also confirmed with the result that the Departmental appeal on this issue is also hereby dismissed.

11. The above appeal is disposed of to the extent and manner as indicated above.


<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

[LapTop]

----S.67---Income Tax Rules, 2002, R.13 (3) (a)---Apportionment of deductions---Dividend income---Allocation of administrative expenses to dividend income proportionately---Validity---Section 67 of the Income Tax Ordinance, 2001 specifically required that the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of activity to which the amount relate---Catch provided in law was determination of nature and size of activity involved for earning an income and incurrence of expense in relation to size and nature of the activity---Earning of dividend needed no hectic activity---Formula provided in R.13(3)(a) of the Income Tax Rules, 2002 could not be applied blindly---Rule 13(4) of the Income Tax Rules, 2002 specifically draws attention of the Authority to consider the nature and source of each class of income---While earning dividend income, a very little activity was required as compared to earning of business income; both could be taken or considered on equal footing---Having announced dividend the dividend warrants were dispatched to the share-holders, which was deposited into bank and the amount was realized by bank itself---Even tax was deducted before issuance of warrant---Practically, a very little expenditure was involved---Taxation Officer without consideration of nature and source of income had unilaterally reckoned the activity involved for earning dividend income and unilaterally applied the formula given in R.13(3)(a) of the Income Tax Rules, 2002---Apportionment of administrative expenses was found not on reasonable basis and could not be sustained in the eyes of law---Addition was not upheld by the Appellate Tribunal in toto and was maintained to the extent of Rs.5000, 000.

2009 PTD (Trib.) 869 and 2005 PTD (Trib.) 2161 ref.

Shahbaz Butt and Hamid Masood, F.C.A. for Appellants.

M. Asif, D.R. and Sajjad Haider Rizvi, LA for Respondents.

[Sayub]

Thanks laptop, got your point. But you must have experienced that taxation officer always tends to disallow total administrative expenses against business income on the grounds that some of these expenditures should be allocated to dividend income.

The motive behind doing this, is to increase the amount of tax payable as a result of apportionment of expenses to dividend.

So, in this case can we say that apportionment is not in accordance with the Income Tax Rules?? or you have any other solid reasons in addition to what you have shared in your two last posts.

Waiting for you opinion.

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by LapTop</i>
<br />----S.67---Income Tax Rules, 2002, R.13 (3) (a)---Apportionment of deductions---Dividend income---Allocation of administrative expenses to dividend income proportionately---Validity---Section 67 of the Income Tax Ordinance, 2001 specifically required that the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of activity to which the amount relate---Catch provided in law was determination of nature and size of activity involved for earning an income and incurrence of expense in relation to size and nature of the activity---Earning of dividend needed no hectic activity---Formula provided in R.13(3)(a) of the Income Tax Rules, 2002 could not be applied blindly---Rule 13(4) of the Income Tax Rules, 2002 specifically draws attention of the Authority to consider the nature and source of each class of income---While earning dividend income, a very little activity was required as compared to earning of business income; both could be taken or considered on equal footing---Having announced dividend the dividend warrants were dispatched to the share-holders, which was deposited into bank and the amount was realized by bank itself---Even tax was deducted before issuance of warrant---Practically, a very little expenditure was involved---Taxation Officer without consideration of nature and source of income had unilaterally reckoned the activity involved for earning dividend income and unilaterally applied the formula given in R.13(3)(a) of the Income Tax Rules, 2002---Apportionment of administrative expenses was found not on reasonable basis and could not be sustained in the eyes of law---Addition was not upheld by the Appellate Tribunal in toto and was maintained to the extent of Rs.5000, 000.

2009 PTD (Trib.) 869 and 2005 PTD (Trib.) 2161 ref.

Shahbaz Butt and Hamid Masood, F.C.A. for Appellants.

M. Asif, D.R. and Sajjad Haider Rizvi, LA for Respondents.


<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">