Wrong, unfair disallowances of claims
Wednesday, 12 November 2008
Akhter Zamil
SOME examples of the nature can be cited about disallowances of claims by the assesses that are frequently made by the Tax officials without explaining their arguments in defending their action. It will be clear from the examples, how the foul play creates impediments as opposed to Govt. policy in the matter of revenue collections.
Bad Debt Written off: A few days back, an article was published in the columns of this paper regarding disallowance of Bad Debt Written-off, resulting in unnecessary taxation, According to tax officials, such claims are not admissible under Tax Law. Under section 29 of the Ordinance, it is explicitly expressed that in order to compute the income under the head "Income from business or profession'', the following allowance and deductions will be allowed to the assessee (unquote). From the above viewpoint the claimed amount of bad debt of banking business should be allowed under section 19(l) (xv) (xvi) and (xvii) of the 1. T. Ordinance 1984. It is a loss very much relating to the business. The question of tax on the said loss is nothing but unnecessary and unjust taxation.
But the Tax officials are always reluctant to accept the claim on the plea that Bad Debt claims by assessees need to be proved that such amount have really been irrecoverable. On the other hand, the Bangladesh Bank which controls all the scheduled banks has reportedly issued instructions to all banks to enter into a Memorandum of Understanding (MOU) with the defaulting customers to realise the outstanding and part of the interest receivable. Bad Debt Written-off does not mean that bank has foregone its right to realise the loan. Here, the possibility of recovery of advance fully exists. But in case of any assets lost by fire, the tax authority accepts the loss without raising any question about the loss. Similarly, embezzlement of office cash is also accepted by the Tax authority and there is no requirement of evidence except a simple first information report (FIR) from police station. Tax authority can easily accept the loss by taking an undertaking from the assessee that on realisation of the writtenoff amount, that would be credited to income account and tax be paid as per third provision of section 29(i)(xviiiaa).
Bad Debt Writtenoff is a legitimate claim by a bank admissible under third provision of the above section to credit into income amount on recovery of the amount. In some cases, as assessee had to pay the tax on the said amount when it was disallowed by Tax authority, prior to introduction of such section in the year 1990-1991. Non-acceptance of the claim by Tax Department helps the assessees to resort to the litigation and consequently, the tax revenue falls in arrear, at least, for 10 to 15 years before final decisions of the Honourable High Court. Hence, time, efforts, energy, labour and money become an uncertainty from the viewpoint of realisation of Tax Revenue.
Any expenses claimed by an assessee can be accepted under section 29 (xxvi) by the tax authority unless such expenses are of capital nature or personal expenses of the assessee and if such expenses expended wholly and exclusive for the purpose of the business or profession of the business.
If this section is taken into consideration, the tax officials can easily admit any expenses subject to authenticity of the expenses by the auditors of the organisations.
Interest on Securities u/s 20 (b): Now, we would like to discuss about "Interest on Securities" shown under section 20 of the Income Tax (IT) Ordinance 1984.
Section 20 (b) relating to computation of Income from interest on securities has defined it for the purpose of computation of total income of an assessee as under:
'Interest on securities shall be treated as income receivable from any security of the Govt. or any security approved by the Govt., interest received from Debenture or other securities of money issued by or on behalf of a local authority or company shall also be treated as income in the hands of the assessee.'
The circular No. 15/1954 issued by the then Board has stated the unanimous decision of the Court that interest income from securities and debenture should be considered on actual receipt basis and not on receivable basis. Because receivable refer to the quantum of income only which has not yet been received as yet. Receivable income is nothing but a part of income which has not been received during the year under consideration while income is taken into income including receivable income. Tax is not payable on receivable income on account of interest on securities as the amount which has not been actually received. This decision has been accepted by the then Revenue Board because of the rulings given by the Honourable High Courts in the famous cases like (a) Arunachalarn Chettsar & Sons vs. CIT, onadres (31TR 414) (b) Sethlalbhai Dalpat Bhai vs. CIT, Bombay (22. ITR414). (c) Central Exchange Bank Ltd., Lahore, Pakistan
Since then, such rulings were followed consistently for quite a long time and had been applied while computing the total income of the assessee. But very recently some of the officials, are found reluctant to accept the actual receipt basis, rather they prefer to take the entire amount of interest as income without giving any justification. This instigated some dissatisfaction among the assessee leading to tax cases in different Courts. This is a decided case and every one should respect the Court decision. In this way, unnecessary taxation is being created. A clarification of the NBR may resolve the dispute forever.
Income from Capital Gain (u/s 20 (f): Heads of income u/s 20 includes different nature of incomes under separate and distinct heads. Of them "Income from business and profession" and "Capital Gains" are two major heads of income. But tax officials arguably consider capital gain as business income and impose tax rate as applicable for the business income. Although, tax rate applicable for capital gain is 25% in case of individual whereas as per second schedule (u/s 16 (3) 2 (ii) of the I. T. Ordinance 1984, tax rate on capital gain is 15% in case of company. But income on sale of shares and securities of listed companies is exempted u/s 32(7).
As contrary to above section, the tax officials instead of allowing tax exemption flatly apply company rate on such capital gain which is more detrimental to the assessee. These two heads of income are different from each other and capital gain can not be considered to be the "Income from business and profession". The income from business and profession does not include the gain from capital assets which is capital gain u/s 31. The income from sale of shares and securities are treated as capital gain and u/s 32 (7) and is exempted for tax purposes.
There has been no restriction on the exemption of income from sales of shares and securities except in case of non-resident assessees. To consider income from capital gain, the following words are important. The words -- sale, transfer, exchange, to and from capital assets -- are relevant to consider a transaction under the head capital gains. Here the assessee fulfilled the conditions that gain from sale of shares and securities were made out of the sales of shares of listed companies dealt in Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange (CSE) but the tax officials mistakenly confounded the income with business income. This is nothing but inane action of the Tax officer. This is another case of unnecessary taxation. The above position should be thoroughly clarified by the NBR for the interest of the assessee. The assessee should not be harassed by misdefining the transactions of different nature when the law is clear for each case.
Interest charged by banks and leasing companies -u/s 19 (11): As for another instance, the Tax official rejects interest charged for loan taken from a leasing company by submitting a number of advance cheques against loan amount to cover the lease period as per system of the lease financing procedures. The assessee company on taking loan from lease company accounts for the entire loan amount together with interest on the credit side while interest which is payable in future has been considered as deferred interest.
Every year the company, while preparing accounts charges a portion of the amount on yearly basis interest in the P/L account by crediting Deferred Interest account. But this transaction is not acceptable to tax official and by disallowing the amount a demand is created by way of unnecessary taxation of the amount. The official should apply his judicial mind. He should know the operational system of lease financing. This problem can only be resolved by Honourable Court unless Tax official accept the system. It means the assessee is to wait for long time or to accept unjust taxation.
Bank Interest on long term loan u/s 19 (15aa): In another case, we observed that interest paid after lapse of four years is disallowed u/s 19 (15aa) by tax officials. But he failed to follow the "Provision" of the said section 19 (15aa) wherein interest paid in a subsequent year, the amount so paid shall be deducted in computing the income in respect of any year. The tax officials could easily avoid the unnecessary transaction in this head of expenses, if he could go through the "Provision" referred to in the 1. T. Ordinance 1984.
Disallowances of claim u/s 30(aa): (a) Under section 30(aa) of the 1. T. Ordinance 1984 an assessee is subjected to payment of tax and VAT on the claim of expenses.
An assessee is required to deduct or collect Tax at source while making payment of the expenses under section 29 on the claim in the accounts. These expenses are amount of salaries claimed, payment made to any person, payment of interest, salary, commission or remuneration paid to partners/ members of non-association, brokerage or commission paid to a non-resident, non-arrangement to deduct tax from any payments made from Provident Fund (P.F.) or other Fund being taxable income falling under the head "Salaries" excess perquisites etc.
But perquisites paid to employees in pursuance of any Govt. decision published in the official gazette as recommended by the Wages Board constituted by the Govt. will not be subject to tax and VAT at source. Any amount paid in excess of the prescribed limit will be subject to Tax in the case of sales or services liable to excise duty supported by excise stamp or sales in the cases of (1) entertainment, foreign travels by employees and dependent, distribution on free samples, Head office expenses beyond 10% of the profit by a company not incorporated under Companies Act 1994, payment of royalty, technical services fee, Technical know-how fees or Technical assistance fees exceeding 5% of the profit. Any payment of salaries or remuneration made otherwise than crossed cheque or bank transfer having gross salary of taka fifteen thousand or more, incentive bonus exceeding 10 per cent of the disclosed net profit, any expenditure by way of overseas travelling exceeding one per cent of the disclosed turnover etc.
The assessee-company always follows the law in its truest spirit but some times, inadvertently or otherwise fail to deduct tax at source from these heads partially or for a negligible amount of tax. But Tax officials disallow the entire amount of expenses claimed by the assessee showing him defaulter in payment of Tax/VAT for a low amount as compared to expenses claimed. Such disallowances of expenses by the Tax officials appear to be great hardship for the assessee. Although under section 57 (b) and section 6 and sub-section 4AA, 1. T. & VAT Act respectively there is a provision to pay the unpaid tax for such expenses with interest @ 2% per month until it is paid subsequently. If the assessee is allowed these claims of expenses in full with advice to pay the unpaid tax with interest following the section 57 (b) and section 6 (4 Gaa (4 Ka Ka and Aaa), it will be great relief to the assessees, and from the next time assessees would be more careful and cautious in this respect.
It is also noted that assessees pay the VAT & Tax on the expenses but sometime it falls below the required amount of Tax and VAT and under this situation, the tax officials disallow the entire amount of expenses claimed. This is unjust and unfair from the viewpoint of the taxation policy while section 57 (b) and section 6 (4 Gaa) (4 Ka Ka and Aaa) of the 1. T. Ordinance are in force. This sort of discrepancies should be removed to avoid Court cases and early recovery of Revenue for the government.
To be continued. The writer is a senior partner, Howladar,
Younus & Co.
SOME examples of the nature can be cited about disallowances of claims by the assesses that are frequently made by the Tax officials without explaining their arguments in defending their action. It will be clear from the examples, how the foul play creates impediments as opposed to Govt. policy in the matter of revenue collections.
Bad Debt Written off: A few days back, an article was published in the columns of this paper regarding disallowance of Bad Debt Written-off, resulting in unnecessary taxation, According to tax officials, such claims are not admissible under Tax Law. Under section 29 of the Ordinance, it is explicitly expressed that in order to compute the income under the head "Income from business or profession'', the following allowance and deductions will be allowed to the assessee (unquote). From the above viewpoint the claimed amount of bad debt of banking business should be allowed under section 19(l) (xv) (xvi) and (xvii) of the 1. T. Ordinance 1984. It is a loss very much relating to the business. The question of tax on the said loss is nothing but unnecessary and unjust taxation.
But the Tax officials are always reluctant to accept the claim on the plea that Bad Debt claims by assessees need to be proved that such amount have really been irrecoverable. On the other hand, the Bangladesh Bank which controls all the scheduled banks has reportedly issued instructions to all banks to enter into a Memorandum of Understanding (MOU) with the defaulting customers to realise the outstanding and part of the interest receivable. Bad Debt Written-off does not mean that bank has foregone its right to realise the loan. Here, the possibility of recovery of advance fully exists. But in case of any assets lost by fire, the tax authority accepts the loss without raising any question about the loss. Similarly, embezzlement of office cash is also accepted by the Tax authority and there is no requirement of evidence except a simple first information report (FIR) from police station. Tax authority can easily accept the loss by taking an undertaking from the assessee that on realisation of the writtenoff amount, that would be credited to income account and tax be paid as per third provision of section 29(i)(xviiiaa).
Bad Debt Writtenoff is a legitimate claim by a bank admissible under third provision of the above section to credit into income amount on recovery of the amount. In some cases, as assessee had to pay the tax on the said amount when it was disallowed by Tax authority, prior to introduction of such section in the year 1990-1991. Non-acceptance of the claim by Tax Department helps the assessees to resort to the litigation and consequently, the tax revenue falls in arrear, at least, for 10 to 15 years before final decisions of the Honourable High Court. Hence, time, efforts, energy, labour and money become an uncertainty from the viewpoint of realisation of Tax Revenue.
Any expenses claimed by an assessee can be accepted under section 29 (xxvi) by the tax authority unless such expenses are of capital nature or personal expenses of the assessee and if such expenses expended wholly and exclusive for the purpose of the business or profession of the business.
If this section is taken into consideration, the tax officials can easily admit any expenses subject to authenticity of the expenses by the auditors of the organisations.
Interest on Securities u/s 20 (b): Now, we would like to discuss about "Interest on Securities" shown under section 20 of the Income Tax (IT) Ordinance 1984.
Section 20 (b) relating to computation of Income from interest on securities has defined it for the purpose of computation of total income of an assessee as under:
'Interest on securities shall be treated as income receivable from any security of the Govt. or any security approved by the Govt., interest received from Debenture or other securities of money issued by or on behalf of a local authority or company shall also be treated as income in the hands of the assessee.'
The circular No. 15/1954 issued by the then Board has stated the unanimous decision of the Court that interest income from securities and debenture should be considered on actual receipt basis and not on receivable basis. Because receivable refer to the quantum of income only which has not yet been received as yet. Receivable income is nothing but a part of income which has not been received during the year under consideration while income is taken into income including receivable income. Tax is not payable on receivable income on account of interest on securities as the amount which has not been actually received. This decision has been accepted by the then Revenue Board because of the rulings given by the Honourable High Courts in the famous cases like (a) Arunachalarn Chettsar & Sons vs. CIT, onadres (31TR 414) (b) Sethlalbhai Dalpat Bhai vs. CIT, Bombay (22. ITR414). (c) Central Exchange Bank Ltd., Lahore, Pakistan
Since then, such rulings were followed consistently for quite a long time and had been applied while computing the total income of the assessee. But very recently some of the officials, are found reluctant to accept the actual receipt basis, rather they prefer to take the entire amount of interest as income without giving any justification. This instigated some dissatisfaction among the assessee leading to tax cases in different Courts. This is a decided case and every one should respect the Court decision. In this way, unnecessary taxation is being created. A clarification of the NBR may resolve the dispute forever.
Income from Capital Gain (u/s 20 (f): Heads of income u/s 20 includes different nature of incomes under separate and distinct heads. Of them "Income from business and profession" and "Capital Gains" are two major heads of income. But tax officials arguably consider capital gain as business income and impose tax rate as applicable for the business income. Although, tax rate applicable for capital gain is 25% in case of individual whereas as per second schedule (u/s 16 (3) 2 (ii) of the I. T. Ordinance 1984, tax rate on capital gain is 15% in case of company. But income on sale of shares and securities of listed companies is exempted u/s 32(7).
As contrary to above section, the tax officials instead of allowing tax exemption flatly apply company rate on such capital gain which is more detrimental to the assessee. These two heads of income are different from each other and capital gain can not be considered to be the "Income from business and profession". The income from business and profession does not include the gain from capital assets which is capital gain u/s 31. The income from sale of shares and securities are treated as capital gain and u/s 32 (7) and is exempted for tax purposes.
There has been no restriction on the exemption of income from sales of shares and securities except in case of non-resident assessees. To consider income from capital gain, the following words are important. The words -- sale, transfer, exchange, to and from capital assets -- are relevant to consider a transaction under the head capital gains. Here the assessee fulfilled the conditions that gain from sale of shares and securities were made out of the sales of shares of listed companies dealt in Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange (CSE) but the tax officials mistakenly confounded the income with business income. This is nothing but inane action of the Tax officer. This is another case of unnecessary taxation. The above position should be thoroughly clarified by the NBR for the interest of the assessee. The assessee should not be harassed by misdefining the transactions of different nature when the law is clear for each case.
Interest charged by banks and leasing companies -u/s 19 (11): As for another instance, the Tax official rejects interest charged for loan taken from a leasing company by submitting a number of advance cheques against loan amount to cover the lease period as per system of the lease financing procedures. The assessee company on taking loan from lease company accounts for the entire loan amount together with interest on the credit side while interest which is payable in future has been considered as deferred interest.
Every year the company, while preparing accounts charges a portion of the amount on yearly basis interest in the P/L account by crediting Deferred Interest account. But this transaction is not acceptable to tax official and by disallowing the amount a demand is created by way of unnecessary taxation of the amount. The official should apply his judicial mind. He should know the operational system of lease financing. This problem can only be resolved by Honourable Court unless Tax official accept the system. It means the assessee is to wait for long time or to accept unjust taxation.
Bank Interest on long term loan u/s 19 (15aa): In another case, we observed that interest paid after lapse of four years is disallowed u/s 19 (15aa) by tax officials. But he failed to follow the "Provision" of the said section 19 (15aa) wherein interest paid in a subsequent year, the amount so paid shall be deducted in computing the income in respect of any year. The tax officials could easily avoid the unnecessary transaction in this head of expenses, if he could go through the "Provision" referred to in the 1. T. Ordinance 1984.
Disallowances of claim u/s 30(aa): (a) Under section 30(aa) of the 1. T. Ordinance 1984 an assessee is subjected to payment of tax and VAT on the claim of expenses.
An assessee is required to deduct or collect Tax at source while making payment of the expenses under section 29 on the claim in the accounts. These expenses are amount of salaries claimed, payment made to any person, payment of interest, salary, commission or remuneration paid to partners/ members of non-association, brokerage or commission paid to a non-resident, non-arrangement to deduct tax from any payments made from Provident Fund (P.F.) or other Fund being taxable income falling under the head "Salaries" excess perquisites etc.
But perquisites paid to employees in pursuance of any Govt. decision published in the official gazette as recommended by the Wages Board constituted by the Govt. will not be subject to tax and VAT at source. Any amount paid in excess of the prescribed limit will be subject to Tax in the case of sales or services liable to excise duty supported by excise stamp or sales in the cases of (1) entertainment, foreign travels by employees and dependent, distribution on free samples, Head office expenses beyond 10% of the profit by a company not incorporated under Companies Act 1994, payment of royalty, technical services fee, Technical know-how fees or Technical assistance fees exceeding 5% of the profit. Any payment of salaries or remuneration made otherwise than crossed cheque or bank transfer having gross salary of taka fifteen thousand or more, incentive bonus exceeding 10 per cent of the disclosed net profit, any expenditure by way of overseas travelling exceeding one per cent of the disclosed turnover etc.
The assessee-company always follows the law in its truest spirit but some times, inadvertently or otherwise fail to deduct tax at source from these heads partially or for a negligible amount of tax. But Tax officials disallow the entire amount of expenses claimed by the assessee showing him defaulter in payment of Tax/VAT for a low amount as compared to expenses claimed. Such disallowances of expenses by the Tax officials appear to be great hardship for the assessee. Although under section 57 (b) and section 6 and sub-section 4AA, 1. T. & VAT Act respectively there is a provision to pay the unpaid tax for such expenses with interest @ 2% per month until it is paid subsequently. If the assessee is allowed these claims of expenses in full with advice to pay the unpaid tax with interest following the section 57 (b) and section 6 (4 Gaa (4 Ka Ka and Aaa), it will be great relief to the assessees, and from the next time assessees would be more careful and cautious in this respect.
It is also noted that assessees pay the VAT & Tax on the expenses but sometime it falls below the required amount of Tax and VAT and under this situation, the tax officials disallow the entire amount of expenses claimed. This is unjust and unfair from the viewpoint of the taxation policy while section 57 (b) and section 6 (4 Gaa) (4 Ka Ka and Aaa) of the 1. T. Ordinance are in force. This sort of discrepancies should be removed to avoid Court cases and early recovery of Revenue for the government.
To be continued. The writer is a senior partner, Howladar,
Younus & Co.