Appeal against IHC verdict: SC defines the term ‘first time in a tax year’ explicitly

ISLAMABAD: The Supreme Court has declared that the term “first time in a tax year” in Section 23(1) of Income Tax Ordinance 2001 relates to the first time use of the building by the taxpayer and has no concern with the history of usage of the building prior to it falling in the hands of the taxpayer.

A three-judge bench, headed by Chief Justice Umar Ata Bandial heard the Commissioner of Income Tax (Legal) appeal against the Islamabad High Court’s judgment on the scope of the Section 23 of Income Tax Ordinance, 2001.

The petitioner’s counsel contended “whether the respondent M/s Askari Bank Limited, Rawalpindi taxpayer can claim deduction of initial allowance for an eligible depreciable asset (building) being put to use by the taxpayer for the first time in a tax year, irrespective of the fact that the said building had been in use in the past in the hands of other taxpayers.”

He argued that the phrase “first time in a tax year” in section 23 means that the building must have been put to use for the first time in its life. He stated that in the instant matter, the building has already been put to use earlier by its previous owner or proprietor, the use of the building by the respondent taxpayer is not for the first time, hence, the respondent taxpayer is not entitled to deduct initial allowance regarding the said asset.

The judgment, authored by Justice Syed Mansoor Ali Shah, noted that as per Section 23 (1) of the ITO the term “first time in a tax year” relates to the first time use of the building by the taxpayer and has no concern with the history of usage of the building prior to it falling in the hands of the taxpayer.

The act of placing the eligible depreciable asset into service or use, for the first time in a tax year, is of the taxpayer and it is inconsequential if the same asset/building was earlier put into service or use while it was in the hands of an earlier owner or proprietor.

A taxpayer becomes entitled to deduction of initial allowance if he, through his own act, has placed an eligible depreciable asset into service for the first time in a tax year.

The court noted that this view is fortified from the reading of sub-section (5) of section n 23 which defines “eligible depreciable asset” and specifically excludes a plant or machinery which has been used previously in Pakistan from the definition of “eligible depreciable asset”. A previously used building has not been excluded and is therefore an eligible depreciable asset and if put to use by the taxpayer for the first time in the tax year, irrespective of its previous use, the taxpayer is entitled to deduction of initial allowance.

The bench dismissed the FBR Commissioner Income Tax petition and said it finds no reason to interfere in the well-reasoned judgment of the Islamabad High Court (IHC) dated 19.5.2020 .

Copyright Business Recorder, 2022