ORDER

The appellant M/s. A&A (Pvt.) Ltd., Lahore is a Private Limited

company deriving income from construction and development
projects. Brief facts giving rise to the present appeal by the
appellant, are that the returns of income for the Tax years 2004,
2005, 2006 were filled by the tax payer declaring following results;
Tax year 2004 Nil
Tax year 2005 (13,571,547)
Tax year 2006 (28,046,784)
2. These returns of income tax were treated as assessment order
u/S. 120 of the Income Tax Ordinance 2001. The cases of
appellant were selected for audit u/S. 177 of the Income Tax
Ordinance, 2001 for all the tax years as stated above. During the
course of audit the assessing officer raised certain issues which
shall be discussed in detail in ensuing paras and passed amended
assessment orders u/S. 122(1) and 122(5) of the Income Tax
Ordinance, 2001 by making certain additions to income in Tax
years 2004, 2005, 2006.
3. Being aggrieved with this treatment, the tax payer filed appeal
with learned Commissioner Inland Revenue Appeals-ll, RTO
Lahore who upheld the impugned order passed by assessing
officer u/S. 122(5).
4. This resulted in present appeal by the appellant against the
order of learned Commissioner Appeals-ll, RTO Lahore. Since
three tax years are involved, therefore, issues raised in these years
are discussed separately under the relevant headings of each tax
years.
TAX YEAR 2004
5. The main issue in the present appeal was that Tax payer
claimed Rs. 2,655,401/- as pre-commencement expenses u/S. 25
of the Income Tax Ordinance, 2001, the detail of which is given
herewith:
1. Salaries & Wages 300,000
2. Company registration expense 289,600
3. Loan administration charges 2,065,801
6. The assessing officer rejected the claim on a plea that these
were incurred prior to incorporation of the company and are not
allowable expense under Section 25 of the Ordinance.

7. The learned A.R. Mr. Qamar Rashid, FCA agitated the treatment
of assessing officer and argued that it was against the law and
spirit of Section 25 of Income Tax Ordinance 2001 and case-law of
superior Courts on the issue. He argued that the salaries and
wages of Rs. 300,000/- were paid in pre-incorporation period to the
staff hired by the company for preparation of initial setup and for
company incorporation. Company's registration charges of Rs.
289,600/- were paid as the expenses incurred on the incorporation
of the company and fee paid to increase the authorized capital of
the company. Loan administration charges such as feasibility study
of proposed projects of the company, consultancy charges, loan
documentation charges etc. were made directly to financial
consultants and legal advisers of the company for obtaining loan
for the company. Company was incorporated on 21.11.2003 and
loan was sanctioned on 23.11.2003 only two days after
incorporation which proves that all the related expenses in
obtaining loan were incurred prior to incorporation. Moreover, he
pointed out that Section 25 deals with pre-commencement
expenses which simply means that all the expenses incurred by an
enterprise before the commencement of its business operations
are included in this category. This Section does not exclude preincorporation expenses from this category. He also referred to
Section 25(5) where pre-commencement expenses have been
defined as expenditure incurred before the commencement of a
business wholly and exclusively to derive income chargeable to
tax, including the cost of feasibility studies, construction of
prototypes, and trial production activities, but shall not include any
expenditure which is incurred in acquiring land, or which is
depreciated or amortized under Section 22 or 24. He stated that
expenses on feasibility study are part of pre-commencement
expenditures whereas feasibility studies are normally prepared
before incorporation of company to determine the viability of
business and if business is feasible then management proceeds to
incorporate company to legitimize the legal set up of business.
Only exclusion mentioned in the aforesaid Section is any
expenditure which is incurred in acquiring land, or which is
depreciated or amortized under Section 22 or 24. He concluded
that treatment of assessing officer is based on misconstruction and
misunderstanding of Section 25 and should not be maintained. The
AR also argued that the action of the Taxation Officer was against
the spirit of decision/judgments of higher Courts as cited 1991 PTD
1043 (ITAT) in which preliminary expenses incurred for the purpose
of forming a new company were allowed by the Income Tax
Appellate Tribunal to be capitalized in the cost of plant and
machinery, which was to be depreciated in profit and loss
subsequently.
8. The learned DR pleaded for maintaining the impugned order
being in consonance with the law. It was contended by the learned
DR that assessing officer has rightly passed order by disallowing
aforesaid expenses and his treatment is in accordance with law.
9. We have heard the arguments of learned counsels for both the
parties and have also gone through the relevant order alongwith
case-laws cited at bar. We are of considered view that the

arguments advanced by the learned A.R. carry weight. Section 25

deals with pre-commencement expenses. By referring to the
dictionary meaning of the term "pre-commencement" it transpires
that it simply means "before the commencement of business
operations". Moreover, Section 25(5) defines pre-commencement
expenses as:
"Expenditure incurred before the commencement of a business
wholly and exclusively to derive income chargeable to tax,
including the cost of feasibility studies, construction of prototypes,
and trial production activities, but shall not include any expenditure
which is incurred in acquiring land, or which is depreciated or
amortized under Section 22 or 24".
9. Therefore, all the directly attributable expenses incurred by an
enterprise before commencement of business are to be included in
this category. This Section does not specifically exclude preincorporation expenses from the aforesaid category which
definitely means that pre-incorporation expenses, if qualify the
definition of pre-commencement expenses, can be the part of this
category.
10. The arguments of AR as regards inclusion of expenses on
feasibility study as part of pre-commencement expenditures is also
convincing. It is frivolous to assume that if expenses on feasibility
study were incurred before incorporation of company then these
shall not be allowed as pre-commencement expenses in presence
of express inclusion of said expense in Section 25. Moreover, only
exclusion from these expenses as mentioned in the said Section is
expenditure incurred in acquiring land, or on asset which is
depreciated or amortized under Section 22 or 24. The case-law
cited as 1991 PTD 1043 (ITAT) by the AR is also relevant. In this
case, the Tribunal held that preliminary expenses incurred for the
purpose of forming a new company were allowed to be capitalized
in the cost of plant and machinery, which is depreciated in profit
and loss in future periods. Based on above, we are of considered
view that all the aforesaid expenses qualify the definition of precommencement expenses u/S. 25 being directly related to the
prospective business of the company and for earning future
income therefrom.
11. In the light of supra discussion and case-law cited at the bar
the order of Additional Commissioner of Income Tax u/S. 122(5)
and learned CIT appeals is hereby deleted and the relevant
assessing officer is directed to allow these expenses as precommencement expenses u/S. 25 of the Income Tax Ordinance,
2001.
TAX YEAR 2005
12. The only issue agitated by the AR of the tax payer for the said
tax period was the taxability of receipts against sale of farm house
under presumptive tax regime. During the course of audit
proceedings, the assessing officer observed that the gross receipts
representing sale of houses at Rs. 43,110,000 included an amount

of Rs. 13,000,000/-, which was received from M/s. Vision

Developers (Pvt.) Ltd. He treated the arrangement between the tax
payer and the said company as of employer and contractor instead
of seller and buyer and taxed the receipts of Rs. 7 million, after
deducting purchase cost of land of Rs. 6 million, under Section
153(6) of Income Tax Ordinance, 2001 as final discharge of tax
liability on the aforesaid transaction.
13. The learned A.R. agitated the treatment of assessing officer
and argued that it was against the law and spirit of Section 153(6)
of Income Tax Ordinance, 2001 and case-law of superior Courts on
the issue. He argued that the assessing officer's treatment is based
on assumption, surmises and suppositions which cannot be made
subject matter for passing assessment order u/S. 122(5) where
definite factual or legal information is required for amendment in
the order. He argued that sale of Farm House to M/s. Vision
Developers (Pvt.) Ltd. at Rs. 13,000,000/- was a consolidated
transaction in which responsibility of the company was to purchase
land, construct farm house and then deliver it to customer in
complete and finished form at an agreement price. Under the terms
of the contract land was arranged by the company, payment
against the purchase of land was made by the company and land
was directly transferred to the name of customer M/s. Vision
Developers (Pvt.) Ltd. at the end of contract. He also produced the
certificate from M/s. Vision Developers (Pvt.) Ltd. in which the said
company confirmed that it never purchased the land under
question and the title of land was transferred in its name at the end
of contract after making full payment. He also pointed out that
assessing officer has himself admitted the aforesaid fact in the
following para:
However, the contention of the AR that the sale proceeds of Rs.
13,000,000/- include the cost of land at Rs. 6 million, have to be
excluded in case, the transaction under reference is to be taxed
under presumptive tax regime was found to be supported by the
documentary evidence in the shape of vouchers, copy of ledger
account and letter from M/s. Vision Developers (Pvt.) Ltd. The
explanation offered by the AR is found satisfactory to the extant of
exclusion of the amount of Rs. 6 million which has been credited in
the sales value as well as debited in the cost. Tax liability on Gross
contractual receipts, accordingly works out at Rs. 420,000 @ 6% of
the receipts of Rs. 7 Million.
14. He pointed out that assessing officer arbitrarily excluded cost of
purchase of land from aforesaid receipts thus assuming that
company did not earn any profit on land component of this
transaction. He agitated that this capricious and arbitrary treatment
of assessing officer has resulted in taxability of profit earned on
land component u/S. 153 which is against the spirit of law and
case-law of superior Courts on the issue. He concluded his
argument by submitting that company earned overall gross profit
margin of 10% on sale transaction of farm house valuing Rs. 13
million and exclusion of land component from this transaction is
against the facts of the case and based on supposition, surmise

and guesswork and order passed u/S. 122(5) is defective being not
based on definite information.
15. He also agitated the treatment of assessing officer on legal
premises and stated that provisions of Section 153 are not
applicable in this case because Section 153 is not applicable on
combined transaction of sale/purchase of land alongwith
construction thereon. Section 153 is not a charging Section as
compared to Section 80C of Income Tax Ordinance, 1979 by virtue
of its sub-section (4) and there is no comparable provision in
Section 153. Section 153(6) is applicable only if tax is deduction
under any of the provisions of the said Section. If no tax is
deducted u/S. 153 by withholding agent due to its understanding
as regards applicability of withholding tax provisions or otherwise,
tax payer cannot be treated under presumption tax regime by
charging tax @ 6% u/S. 153 by the department.
16. The learned DR pleaded for maintaining the impugned order
being in consonance with the law. It was contended by the learned
DR that since land was directly transferred in the name of M/s.
Vision Developers (Pvt.) Ltd. Therefore, assessing officer has
rightly passed order by treating Rs. 7 million as construction
receipts and his treatment is in accordance with law.
17. We have heard the arguments of learned counsels for both the
parties and have also gone through the relevant order alongwith
case-laws cited at bar. We agree with the contention of AR that
provisions of Section 153(1)(c) are applicable on situations where
land has already been purchased by the company and afterwards
it awards a construction contract to a contractor for construction of
building or development of real estate. All the payments under this
contract of construction shall attract the provisions of Section
153(1)(c) for deduction of tax which shall be treated as final
discharge of tax liability by virtue of Section 153(6) of the
contractor. Whereas in the present case, situation is altogether
different. The buyer company has certified that it never purchased
the land under question directly from original seller. The land was
purchased by the tax payer and title of land was transferred at the
end of the term of contract when full payment under the contract
was made to tax payer. This fact was also admitted by the
assessing officer on the basis of plausible documentary evidences.
It is a normal practice in real estate transactions that developers
companies purchase land under "an agreement to purchase" from
original seller, title is not transferred in their name to save
incidence of transfer fees and related costs which vary between 6
to 10% of value of land, construction or development work is
completed on the said land and title of land is directly transferred in
the name of purchaser from original seller upon delivering
possession of aforesaid property. There is a similar situation in the
present case and the tax payer has essentially acted as
developer/seller of constructed property on which provision of
Section 153(1) are not applicable. Moreover, the treatment of
assessing officer in which he implicitly assumed that company did
not earn any profit on land component and excluded the cost of
purchase of land from over all receipts of the project being arbitrary

and illogical in nature is also not supported by Section 122(5)

wherein he can only proceed on the basis of definite information as
to the nature of transaction. In addition to above, it has also been
laid down by superior Courts through judgments cited as 1999-80
TAX 262 (High Court), 2005 91 Tax 399 (Trib.) and 2004 89 Tax
316 (Trib.) that transaction involving land and building are not liable
for deduction of tax under Section 50(4) of repealed Income Tax
Ordinance, 1979. In our opinion, the purchaser company acted in
accordance with law by not deducting tax on payment against the
impugned transaction u/S. 153(1)(c) and the action of assessing
officer by charging tax @ 6% u/S. 153(6) is technically erroneous
and does not have any legal support. We also feel persuaded by
the second limb of arguments of the learned A.R. that Section 80-C
of Repealed Ordinance, 1979 was a charging Section by virtue of
its sub-section (4) whereas there is no equivalent provision in
Section 153 which creates it a charging Section. In Repealed
Ordinance, 1979 Section 50(4) dealt only with the deduction of
income tax at source against payments on account of supply of
goods, services rendered and execution of contract. Relevant
provisions of Section 50(4) are given hereunder:
(4) Notwithstanding anything contained in this Ordinance,(a) any person responsible for making any payment in full or in part
(including a payment by way of an advance) to any person [, being
resident,] (hereinafter referred to respectively as "payer" and
"recipient"), on account of the supply of goods or for service
rendered to, or the execution of a contract with the Government, or
a local authority, or [a company] [or a registered firm,] or any
foreign contractor or consultant or consortium shall, [ ] deduct
advance tax, at the time of making such payment, at the rate
specified in the First Schedule, and credit for the tax so deducted
in any financial year shall, subject to the provisions of Section 53,
be given in computing the tax payable by the recipient for the
assessment year commencing on the first day of July next
following the said financial year, or in the case of an assessee to
whom Section 72 or Section 81 applies, the assessment year, if
any, in which the "said date", as referred to therein, falls, whichever
is the later:
19. Section 153(1) is equivalent provision to aforesaid Section in
Income Tax Ordinance, 2001. Section 80C of repealed Ordinance
1979 dealt with the treatment of tax deducted at source under
various Sections of repealed Ordinance 1979 in the hand of tax
payers whose tax was deducted. Sub-section (4) of the aforesaid
Section specified certain tax deductions under Section 50 to be
treated as final discharge of tax liability in the hand of recipient of
payment. Relevant provisions are reproduced hereunder:
80C(4) Where the assessee has no income other than the income
referred to in sub-section (1) in respect of which tax has been
deducted or collected, the tax deducted or collected under Section
50 shall be deemed to be the final discharge of his tax liability
under this Ordinance and he shall not be required to file the return
of total income under Section 55 [:]

[Provided further that where the tax deducted or collected under

any sub-section of Section 50 specified in clause (a) of sub-section
(2) is, for any reason, not collected or deducted in accordance with
the said sub-section or the tax so deducted in less than the amount
deductible or collectable, the assessee shall be required to pay the
said amount.
20. Proviso contained in the aforesaid sub-section made it
charging Section which consequently empowered the assessing
officers to charge tax if tax was not deducted by deducting
authorities. Whereas Section 153(6) which is partially equivalent to
Section 80C(4) does not contain any such provision. This subsection is reproduced hereunder:
153(6) The tax deducted under this Section shall be a final tax on
the income of a resident person arising from transactions referred
to in sub-section (1) or (1A):
21. Aforesaid sub-section clearly states that only tax deducted by
prescribed person under this Section shall be final discharge of tax
liability. This sub-section does not contain any proviso which
makes Section 153 a charging Section. If tax is not deducted u/S.
153 by withholding agent due to its legal understanding as regards
applicability of withholding tax provisions or otherwise, tax payer
cannot be treated under presumption tax regime by charging tax @
6% u/S. 153 by the department. It was held in the judgment of the
Hon'ble Supreme Court cited as 1993 SCMR 1523 that what is
expressly excluded cannot be included on any principle of
interpretation. In our opinion, the action of assessing officer by
charging tax @ 6% u/S. 153(6) is erroneous in law since the same
is not supported by said sub-section.
22. In light of supra discussion and case-law cited at the bar the
order of Additional Commissioner of Income Tax u/S. 122(5) and
learned CIT Appeals is hereby deleted and the relevant assessing
officer is directed to tax the impugned transaction under normal tax
regime of the Income Tax Ordinance, 2001.
TAX YEAR 2006
23. The first issue agitated by the AR of the tax payer in this tax
period was the taxability of receipts against sale of farm house
under presumptive tax regime. During the course of audit
proceedings, the assessing officer observed that the gross receipts
representing sale of houses at Rs. 35,389,076 were received from
M/s. Vision Developers (Pvt.) Ltd. He treated the arrangement
between the tax payer and the said company as of employer and
contractor instead of seller and buyer and taxed the receipts of Rs.
21.389 million, after deducting purchase cost of land of Rs. 14
million, under Section 153(6) of Income Tax Ordinance, 2001 as
final discharge of tax liability.
24. Taxability of such type of transactions has been discussed in
detail in year 2005. In light of supra discussion on the same issue

in Tax Year 2005, the order of Additional Commissioner of Income

Tax u/S. 122(5) and learned CIT appeals is hereby deleted and the
relevant assessing officer is directed to tax the impugned
transaction under normal tax regime of the Income Tax Ordinance,
2001.
25. The other issue agitated by the AR of the Tax payer related
with the share deposit money of Rs. 13,000,000 which wasprima
facie received by the company from one of its director by way of
cash instead of through crossed banking channels and was taxed
by the assessing officer u/s. 39(3) of the Income Tax Ordinance,
2001 as "income from other sources".
26. The A.R. of the taxpayer agitated the proposed treatment while
contending that cash credits as disclosed in bank statement of Rs.
13,000,000/- were all paid by Mrs. Naseem Khan, one of the
director of the company. He also stated that Mrs. Naseem Khan
availed the benefits of investment tax scheme u/S. 120A of the
Income Tax Ordinance, 2001 in respect of her undisclosed income
which was invested in movable property i.e. share deposit money
of A&A (Pvt.) Ltd. The said amount was incorporated in the books
of Mrs. Naseem Khan as investment in A & A (Pvt.) Ltd with the
corresponding entry in the books of company as share deposit
money. The AR also contended that provision of Section 39(3) is
not applicable in this case as Section 120A sub-section (3) and (4)
give exemption from Section 111 and other deeming provisions if
undisclosed income is disclosed under the provisions of Section
120A read with Circular 3 of 2008 rules 2 and 5. AR also presented
two case-laws of honorable High Court cited as 2006 PTD 2602
and 2006 PTD 415 in which honourable High Court decided that
Section 12(18) was introduced with a specific purpose which was
to check fictitious loans and to discourage introduction of
backdated cash credits to meet financial liabilities. It was also
declared that that the Assessing Officer cannot make addition
under Section 12(18) of Income Tax Ordinance, 1979, if the
amount received is from verifiable party and from its genuine
sources and there is no element of factitiousness in the impugned
transaction.
27. The learned DR pleaded for maintaining the impugned order
being in consonance with the law. It was contended by the learned
DR the share deposit money of Rs. 13,000,000 received by the
company by way of cash instead of through crossed banking
channels was rightly taxed by the assessing officer u/S. 39(3) of
the Income Tax Ordinance, 2001 as "income from other sources".
28. We have heard the arguments of learned counsels for both the
parties and have also gone through the relevant order alongwith
case-laws cited at bar. The learned AR referred provisions of
Section 120A read with Circular 3 of 2008 rule 2 and 5 and cited
two case-laws of honourable High Court cited as 2006 PTD 2602
and 2006 PTD 415. Relevant extracts from aforesaid legal
provisions and case-laws are reproduced hereunder:
2006 PTD 2602 (High Court)

Assessee claimed to have obtained loan from his company through

two bearer cheques. Although genuineness of both the cheques
was beyond doubt, yet Assessing Officer declined to give any
benefit to the assesse for the reason that the cheques were not
crossed, as required under Section 12(18) of Income Tax
Ordinance, 1979. Plea raised by assessee was that sub-section
(18) had been introduced with a specific purpose which was to
check fictitious loans and to discourage introduction of back dated
cash credits to meet financial liabilities. Validity Central Board of
Revenue committed no excess of jurisdiction in issuing Circular
No. 3 of 1992, dated 27.1.1992. As the assessee had obtained
loan through bearer cheques, which fact was verified by the
concerned bank, therefore, order passed by Income Tax Appellate
Tribunal was set aside---High Court declared that the Assessing
Officer could not make addition under Section 12(18) of Income
Tax Ordinance, 1979, of the amount received by assessee through
bearer cheques.
2006 PTD 2602 (High Court)
Company received cash loans from directors. The assessing
officer made addition u/S. 12(18). It was held that Income Tax
Appellate Tribunal in the circumstances of the case was justified to
confirm the order of Commissioner Income Tax (Appeal) regarding
deletion of addition under Section 12(18) of Income Tax Ordinance,
1979, made by Assessing Officer to assessee Company's income
on account of cash loans declared in balance-sheet as having
been received from directors.
120A. INVESTMENT TAX ON INCOME.--(1) Subject to this Ordinance, the Board may make a scheme of
payment of investment tax in respect of undisclosed income,
representing any amount or investment made in movable or
immovable assets.
(2) Where any person declares undisclosed income under subsection (1) in accordance with the scheme and the rules, the tax on
such income called investment tax shall be charged at such rate as
may be prescribed.
(3) Where a person has paid tax on his undisclosed income in
accordance with the scheme and the rules, he shall --(a) be entitled to incorporate in his books of account such
undisclosed income in tangible form; and
(b) not be liable to pay any tax, charge, levy, penalty or prosecution
in respect of such income under this Ordinance.
(4) For the purposes of this Section--(i) undisclosed income means any income, including any
investment to be deemed as income under Section 111 or any

other deemed income, for any year or years, which was

chargeable to tax but was not so charged; and
(ii) investment tax means tax chargeable on the undisclosed
income under the scheme under sub-section (1) and shall have the
same meaning as given in clause (63) of Section 2 of the Income
Tax Ordinance, 2001.
29. The argument of AR is convincing in view of both the aforesaid
case-laws of honourable High Court cited at bar. Share deposit
money under consideration was given by one of the directors of the
company from her declared sources under investment tax scheme.
The assessing officer could not prove that the amount received in
the impugned transaction is from unverifiable party and is a
factitious transaction. Moreover declaration u/Ss 120A was
accepted by the department and achieved its finality in view of
clause 6 of Circular 3 of 2008. Both the aforesaid case-laws are
squarely relevant in the present case and the action of assessing
officer treating share deposit money as deemed income u/S. 39(3)
of the Income Tax Ordinance, 2001 as "income from other sources"
is not justified and against the decision of superior Courts
quotedsupra.
30. The AR of the tax payer could not propound convincing
arguments against the disallowance of expenses of Rs.
1,422,889/- in tax year 2005 hence the said disallowance is hereby
confirmed and the order of assessing officer is maintained in this
regard.
Appeals allowed.