Payment through banks necessary for admissibility of business expenditure: ITAT

The Income Tax Appellate Tribunal (ITAT) has held that provisions of section 21 (1) of the Income Tax Ordinance 2001 regarding payment for purchases through banking channel for admissibility of expenditure for computing business income is applicable to trading account purchases including purchase of agriculture produce.
Income Tax experts say that this judgement should have far reaching bearing on documentation of economy as well as on tax liability of agro-based industries in case of default as they are making purchasing of agriculture produce worth billions of rupees annually. The appellate tribunal inland revenue comprises Mohammad Iqbal Khan, Accountant Member and Syed Mohaammad Jamil Raza Zaidi, judicial member.
Facts of the relevant case in appeal No 468/KB of 2010 are that a flourmill had made purchases of wheat wherein payments were not made through banking channel. The assessing officer held that expenditure of Rs 60.8 million was legally inadmissible under section 21 (I) of the Income Tax Ordinance 2001 and added the same while computing business income. In appeal, it was argued on behalf of the taxpayer that above provision is not applicable to trading account purchases rather is applicable only to the profit and loss expenditure.
The Appellate Tribunal rejected the contention of the taxpayer with respect to expression "any expenditure for a transaction" used in section 21 of the Income Tax Ordinance observing that "it is very obvious without any doubt that the business would include every expenditure appearing in the manufacturing account or trading account or profit and loss account.
The ITAT did not see any contradiction in Board's circular No 1 of 2006 while clarifying provisions of section 21 (1) of the ordinance. It said "the contention of the taxpayer's counsel that the word used in section 21 (1) "any expenditure for a transaction" will not apply to trading account and only to profit and loss account is totally out of context and contrary to the meaning of word "transaction".
The tribunal further observed that "interpretation of provision of section 21 (1) should not restrict the scope of the provisions of law by giving a very narrow and restricted meaning to the words used in the statues.
When asked to elaborate the judgement, a prominent income tax expert and Advocate High Court, Shahid Pervez Jami said that the provision and its legislative history explicitly require payment through banking channel for purchase of raw material including the agriculture produce for the admissibility of expenditure for computing the business income. The purpose of the provision is to enforce the documentation of economy and to safeguard against the inflated purchases, he added.
He was of the opinion that this provision is equally applicable whether the raw material is agriculture produce or otherwise, unless and until Federal Board of Revenue specifically excludes agriculture produce from the ambit of section 21 (1), sugar mills, flourmills, oil mills, rice mills and feed mills are required to make the payment through banking channel in order to safeguard themselves from very excessive legal addition which have already withstood the test of the appeal.