Where the vires of a particular statute, notification or circular is challenged the only remedy is a writ petition under Article 199 or a suit before a Civil Court - 2002 PTD 679 (H.C.Kar.).
Tax year 2006 has evidenced an enormous growth in the ultra vires circulars issued by the Central Board of Revenue and parts of circular 1 and 3 of 2006 are no exception and the appropriate remedy for the taxpayers is either a writ or suit before civil court.
Although, section 206 of the Income Tax Ordinance, 2001 has not only embraced the precedents of honourable courts whereby it was held that circulars are not binding on the taxpayers, but has also gone a bit further by speaking about the fact that circulars are not binding on CIT appeals.
However, this will serve little purpose when the common innocent taxpayers use the explanatory circulars as a primary means of guidance. This article is an endeavour to analysis how the certain aspects of circular 1 and 3 of 2006 are ultra vires!
PARA 6 OF CIRCULAR NUMBER 1 OF 2006: Para 6 of circular number 1 of 2006 relating to section 21(l) has not only increased the obligation over the taxpayers but also gave explanation which was never the intention of law at the time of introduction of amendment in the said section. The following is an extract from Notes on Clauses of Finance Bill, 2006 for section 21(l).
CLAUSE-17 (4) (II): Seeks to clarify allowability of expenditure made other than through normal banking channels. It is crystal clear from the plain reading of clause 17(4)(ii) of the Finance Act, 2006 that the purpose of bringing the amendment in section 21(l) is to clarify allowability of expenditure made other than through normal banking channels.
However, before moving further towards the intention we must first go through the amended section 21(l) which is read as follows. "(l) any expenditure for a transaction, paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees, made other than by a crossed cheque drawn on a bank or by crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer:
Provided that online transfer of payment from the business account of the payer to the business account of payee as well as payments through credit card shall be treated as transactions through the banking channel, subject to the condition that such transactions are verifiable from the bank statements of the respective payer and the payee: Provided further that this clause shall not apply in the case of-
(a) expenditures not exceeding ten thousand rupees;
(b) expenditures on account of -
(i) utility bills;
(ii) freight charges;
(iii) travel fare;
(iv) postage; and
(v) payment of taxes, duties, fee, fines or any other statutory obligation;";
The plain reading of the amended section 21(l) would reveal the fact that the intention of law is to embody Para 5 of circular 11 of 1998 apart from rephrasing the said section. This conclusion can be deduced from the plain reading of section 24(l), before the amendment brought by Finance Act, 2006, and Para 5 of circular number 11 of 1998.
SECTION 21(L) - BEFORE AMENDMENT: Any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank cheque or crossed bank draft, except expenditures not exceeding ten thousand rupees or on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fee, fines or any other statutory obligation;
PARA 5 OF CIRCULAR NO. 11 OF 1998: Deductibility of expenditure incurred otherwise than through a crossed cheque or a bank draft. [Section 24(ff)].
Any expenditure under a single account head exceeding Rs 50,000 in aggregate, shall not be deductible, if made otherwise than through a crossed cheque or a bank draft.
HOWEVER, THIS CONDITION SHALL NOT APPLY TO:
i) utility bills;
ii) single transactions not exceeding Rs 5000;
iii) Payments on account of freight charges or passenger fare/tickets to an airline or railways or a goods carriage company;
iv) any amount credited by direct transfer of funds to an assessee's employee's bank account for reimbursement of expenses incurred on behalf of the assessee; and
v) Payments made to discharge a statutory obligation like payment of duties, taxes, octroi, export tax, fines, fees, assesses and levies etc.
II) The expenditure on account of travel, hotel charges and entertainment and
Petrol/diesel is usually reimbursed to the employees on production of evidence of such expenditure. Such advance or reimbursements, if exceeding Rs 5,000 would be excluded in computing single account head limit of Rs 50,000, if these are made through crossed cheques or transferred directly to the employees' bank account.
II) It is further clarified that clause (ff) applies to expenditure normally chargeable to profit and loss account. The expenditure which is chargeable to the trading and manufacturing accounts like wages and freight on purchases debatable to the said accounts, falls outside the ambit of the said clause. Similarly, purchases of agricultural products and commodities like milk etc being direct trading or manufacturing expenses, the provisions of clause (ff) shall not apply.
However, Para 6 of circular number 1 of 2006 has crossed all the boundaries and explained the amended section 21(l) in purely a self ordained way as follows.
Rationalisation of provisions relating to deductibility of expense made through banking channel.
[SECTION 21(L)]Any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank cheque or crossed bank draft, except expenditures not exceeding ten thousand rupees or on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fee, fines or any other statutory obligation, was not an allowable deduction up to tax year 2006.
This provision was originally introduced under section 24(ff) in the repealed Ordinance, 1979. It was clarified through CBR's Circular No 11 of 1998 dated July 25, 1998, stating that clause (ff) applies to expenditure normally chargeable to profit and loss account.
The expenditure chargeable to trading and manufacturing accounts (like wages and freight or purchases debitable to the said accounts) fell out side the ambit of the said clause.
Now the language of the section 21(l) has appropriately been amended to include every expenditure whether debitable to trading or manufacturing accounts or profit and loss account will fall within the purview of said section.
Further, the scope of banking transactions has also been expanded to include online transfer of payment from the business account of the payer to the business account of the payee and payment through credit cards subject to the condition that such transactions are verifiable from the bank statement of the respective payer and payee.
This is an elaboration of the definition of banking transactions. It is explicitly clarified that any expenditure paid or payable under a single account head which, in aggregate, exceeds fifty thousand rupees made other than by a crossed bank draft, shall not be an allowable deduction w.e.f. July 1, 2006. The restriction under this provision will not apply (as before) in respect of expenditure which.
(i) does not exceed ten thousand rupees; or;
(ii) is on account of freight charges, travel fare, postage, utilities or payment of taxes, duties, fee, fines or any other statutory obligation;
As a consequence, CBR's Circular No 11 of 1998 dated 25th July, 1998 being contrary to the provision of law is withdrawn, henceforth. In the light of notes to section 21(l), amended clause (l) of section 21 and Para 5 of circular 11 of 1998, let us analyse each paragraph in bold, underlined and italic deduced from Para 6 of Circular 1 of 2006 one by one.
This provision was originally introduced under section 24(ff) in the repealed Ordinance, 1979. It was clarified through CBR's Circular No 11 of 1998 dated July 25, 1998, stating that clause (ff) applies to expenditure normally chargeable to profit and loss account. The expenditure chargeable to trading and manufacturing accounts (like wages and freight or purchases debitable to the said accounts) fell out side the ambit of the said clause.
This Para of said circular has basically equated section 21 (l) of Income Tax Ordinance, 2001 with section 24(ff) of Income Tax Ordinance, 1979. It is worthwhile here to note that section 24(ff) of the Income Tax Ordinance, 1979 has originally been introduced through Finance Act, 1990. The said section was then explained by Central Board of Revenue in Para 4 of circular number 6 dated July 15, 1990 as follows.
PARA 4 OF CIRCULAR 6 OF 1990: A new clause (ff) has been inserted in section 24 of the ordinance which provides that any expenditure incurred by an assessee at any time in a sum exceeding Rs50,000 will not be allowed as deductible unless the payment is made on or after July 1, 1990, through crossed cheque or crossed bank draft. This provision will have restricted application and will relate to profit and loss account expenses like rent, salary, repairs, travelling, advertisement and entertainment and would not affect purchases and other manufacturing or trading account expenses.
It is worthwhile here to note that all the beneficial circulars or extracts of circulars relating to section 24(ff) of Income Tax Ordinance, 1979 are available for the benefit of the taxpayers, that is, Para 5 of circular 11 of 1998 and Para 4 of Circular 6 of 1990. Before digging out some more facts, we must go through section 24(ff) of Income Tax Ordinance, 1979 which is read as follows.
SECTION 24(ff): Any payments, made on or after the first day July, 1998, on account of expenditure under a single account head which, in aggregate, exceed fifty thousand rupees made otherwise than through a crossed bank cheque or by a crossed bank draft except transactions not exceeding five hundred rupees or payment account of postage or utility bills:
Section 24(ff), prima facie, reflects the fact that it is amended by Finance Act, 1998 owing to some practical limitations. These practical problems have been reflected in Para 5 of circular 11 of 1998 dated 25th July, 1998 reproduced above.
The said Para of the circular is also meant for providing the relief to the taxpayers by considering the practical problems. It is also worthwhile here to note that circular 11 of 1998 was originally meant for explaining the important changes brought by Finance Act, 1998 in Income Tax Ordinance, 1979. Now, the two other Paragraphs of Para 6 of circular number 1 of 2006 which require attention are read as follows.
Now the language of the section 21(l) has appropriately been amended to include every expenditure whether debitable to trading or manufacturing accounts or profit and loss account will fall within the purview of said section. As a consequence, CBR's Circular No 11 of 1998 dated 25th July, 1998 being contrary to the provision of law is withdrawn, henceforth.
(To be continued)
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