MINUTES OF DAC MEETING REGARDING AUDIT REPORT 2007-08

IN RESPECT OF RTO, MULTAN

(HELD ON 07.09.2015 AT LAHORE)
Short levy of tax due to inadmissible deductions
S.#

Para/
PDP #

Name of taxpayer

Asst:
Year

1.1/244

Hyundai
Engineering
Construction
Ltd

2001-02
&
Co,

Loss of
revenue
reported
by audit
(Rs)
32,243,73
0

Departmental Compliance
08.06.2012

Audit Remarks 11.06.2012 to

13.06.2012

DAC Directives
09.07.2012

The
unrealized
foreign
exchange
loss
of
Rs.307,543,558/-relates to assets & liability of the
taxpayer which was receivable/payable in foreign
currency has duly been added in the income of the
taxpayer company as per order u/s 66A of the
Repealed Ordinance, 1979 vide DCR No.4 dated
30.12.2011 by the Additional Commissioner Inland
Revenue Audit Range, Zone-II, RTO, Multan and loss
is determined as under:-

The RTO Multan informed that

the case amended u/s 135/66A
vide DCR No.4/30-12-2011
and
an
amount
of
Rs.307543558/- added back in
the taxable income on account
of foreign exchange loss and
loss reduced.

The DAC directed the RTO to

ascertain the facts of the case
with higher authorities and submit
a detail report
along with
supporting
evidence
to
audit/FBR.

Assessed Loss as per order u/s

135 dated 15.06.2010
Add foreign exchange Loss

(Rs.27,292,267/-)
Rs.307,543,558/-

Income assessed as per order

u/s 66A dated 30.12.2011
Less B/F loss after ignoring
expired loss 1994-95
Loss C/F for asstt. year 02-03

Rs.280,251,291/(Rs.982,004,459/-)
(Rs.701,753,168/-)

Action completed loss reduced. Therefore, para may

be settled.

07-09-2015
Necessary compliance has already been made
in respect of the said audit para and department

23.04.2015
The department was required
to intimate the reason for
allowing BF loss adjustment
against
other
income,
otherwise it should have been
taxed and demand was to be
created in the year under
consideration. Case is referred
to DAC.
04.09.2015
The case had already been
referred to the DAC. DAC is
requested to examine the fate
of para.

The DAC further directed to

explain
the
contradiction
regarding
the
notional/real
income/loss and explain how
come 66/A was invoked.
The DAC further directed that
how come the B/F business loss
was adjusted against income
earned as other income. The
report should be submitted by the
Chief Commissioner of the RTO
concerned
positively
by
09.08.2012.
DAC 03.03.2014
The RTO informed that the record is
being traced out which take some
time and sought time in this regard.
The DAC directed the RTO to provide
the relevant record to audit for
verification by 31.03.2014.

DAC Directive
05.05.2015

dated

The DAC directed the RTO to

complete assessment proceedings

in its earlier written response has already taken a

stance that unrealized foreign exchange gain
could be set off against business income as is
apparent from the order finalized by the
department u/s 66A/132 of the Repealed
Ordinance dated 30-12-2011. Law recognizes all
kinds of receipts connected with a taxpayers
normal courts of business activities as taxable
under the head Income from business. It is,
therefore, once again reiterated that necessary
compliance has already been made in respect of
the said audit para and foreign exchange gain in
part and parcel of the business income/loss as
declared by the taxpayer due to the following
reasons:
The above contention is endorsed through
International Accounting Standard IAS-21. The
relevant extract is reproduced as under:
Para 28 Exchange differences arising on
the settlement of monetary items or on
translating monetary items at rates different from
those at which they were translated on initial
recognition during the period or in previous
financial statements shall be recognized in profit
or loss in the period in which they arise, except
as described in paragraph 32.
The said contention has further been
upheld/confirmed in a number of cases finalized
by superior courts. Relevant extracts alongwith
citation are as under:
a. In the case of Gillanders A Rbuthnot &

Company Vs CIT cited as 1966 PTD 71,

it was decided that exchange gain earned
by the taxpayer operating as a selling
agent in Pakistan earned commission

as per law and report compliance

to Audit / FBR by 31.07.2015.

due to devaluation of Pakistan currency.

The issue whether the said exchange
gain is trading/business receipts in the
hands of the taxpayer . Held yes copy
enclosed).
b. In a case Mothay Gangarju V. CIT( 1935) ITR
58(Mad) it has been held
An isolated
transaction can satisfy the description of an
adventure in the nature of trade.
c.

1.1/244

Hyundai
Engineering
Construction
Ltd

2002-03
&
Co,

63,280,03
5

In case IRC V Fraser (1942) 24 Tax

Cas.498(HL) it has been held that Even on
isolated transaction can be treated as an
adventure in the nature of trade, what is
relevant is the nature of commodity dealt in.

d The Supreme Court of India in P.M Muhammad

Meera khan Vs CIT(1969) 73 ITR 735 held that an
adventure in the nature of trade needs not be
business itself. Any activity akin to business may be
taken to be an adventure in the nature of trade. The
Court further held that a single transaction may also
constitute an adventure in the nature of trade. There
needs not be regularity or repetitiveness in the
activity. It is therefore submitted that exchange gain
having accrued to the taxpayer in connection with his
normal business activity was rightly treated as part of
its business income and BF loss adjusted accordingly.
The para may please be settled in view of above
The
unrealized
foreign
exchange
loss
of
Rs.61,517,883/-relates to assets & liability of the
taxpayer which was receivable/payable in foreign
currency has duly been added in the income of the
taxpayer company as per order u/s 66A of the
Repealed Ordinance, 1979 vide DCR No.5 dated
30.12.2011 by the Additional Commissioner Inland Revenue
Audit Range, Zone-II, RTO, Multan and loss is determined
as under:-

The RTO Multan informed that

the case amended u/s 135/66A
vide DCR No.5/30-12-2011
and
added
back
Rs.61517833/- on account of
exchange
loss.
Balance
Rs.79104479 not chargeable
on the plea that un-realized
exchange gain cannot be
considered as taxable income
the amount charged and loss

The DAC directed the RTO to

ascertain the facts of the
case with higher authorities
and submit a detail report
along with supporting
evidence to audit/FBR.
The DAC further directed to
explain the contradiction
regarding the notional/real
income/loss and explain how
come 66/A was invoked.

Assessed Income as per

order u/s 135 dated
15.06.2010
Add foreign exchange Loss
Income assessed as per
order u/s 66A dated
30.12.2011

Rs.193,327,920/-

reduced.
23.04.2015

Rs.61,517,883/Rs.254,845,803/(Rs.701,753,168/-)
(Rs.446,907,365/-)

Less B/F loss

Loss C/F for asstt. year
02-03
Action completed loss reduced.Therefore, para may

be settled.
07-09-2015
Necessary compliance has already been mae in
respet of the said audit para and department in
its earlier written response has already taken a
stance that unrealized foreign exchange gain
could be set off against business income as is
apparent from the order finalized by the
department u/s 66A/132 of the Repealed
Ordinance dated 30-12-2011. Law recognizes all
kinds of receipts connected with a taxpayers
normal cours of business activities as taxable
under the head Income from business. It is,
therefore, once again reiterated that necessary
compliance has already been made in respect of
the said audit para and foreign exchange gain in
part and parcel of the business income/loss as
declared by the taxpayer due to the following
reasons:
The above contention is endorsed through
International Accounting Standard IAS-21. The
relevant extract is reproduced as under:

The department was required

to intimate the reason for
allowing BF loss adjustment
against
other
income,
otherwise it should have been
taxed and demand was to be
created in the year under
consideration. Case is referred
to DAC.
04.09.2015
The case had already been
referred to the DAC. DAC is
requested to examine the fate
of para.

The DAC further directed that

how come the B/F business
losses was adjusted against
income earned as other
income. The report should be
submitted
by the Chief
Commissioner of the RTO
concerned
positively
by
09.08.2012.
DAC 03.03.2014
The RTO informed that the
record is being traced out
which take some time and
sought time in this regard.
The DAC directed the RTO to
provide the relevant record to
audit for verification by
31.03.2014.

DAC
Directive
dated 05.05.2015
The DAC directed the RTO
to complete assessment
proceedings as per law and
report compliance to Audit /
FBR by 31.07.2015.

Para 28 Exchange differences arising on

the settlement of monetary items or on
translating monetary items at rates different from
those at which they were translated on initial
recognition during the period or in previous
financial statements shall be recognized in profit
or loss in the period in which they arise, except
as described in paragraph 32.
The said contention has further been
upheld/confirmed in a number of cases finalized
by superior courts. Relevant extracts alongwith
citation are as under:
a

In the case of Gillanders A Rbuthnot &

Company Vs CIT cited as 1966 PTD 71, it

was decided that exchange gain earned by the
taxpayer operating as a selling agent in Pakistan
earned commission due to devaluation of
Pakistan currency. The issue whether the said
exchange gain is trading/business receipts in the
hands of the taxpayer . Held yes copy enclosed).
b. In a case Mothay Gangarju V. CIT( 1935) ITR
58(Mad) ut gas veeb gekd tgat An isolated
transaction can satisfy the description of an
adventure in the nature of trade.
c.

In case IRC V Fraser (1942) 24 Tax

Cas.498(HL) it has been held that Even on
isolated transaction can be treated as an
adventure in the nature of trade, what is
relevant is the nature of commodity dealt in.

d. The Supreme Court of India in P.M

Muhammad Meera khan Vs CIT(1969) 73
ITR 735 held that an adventure in the nature
of trade needs not be business itself. Any
activity akin to business may be taken to be
an adventure in the nature of trade. The

Court further held that a single transaction

may also constitute an adventure in the
nature
of trade. There needs not be
regularity or repetitiveness in the activity. It
is therefore submitted that exchange gain
having accrued to the taxpayer in connection
with his normal business activity was rightly
treated as part of its business income and BF
loss adjusted accordingly. The para may
please be settled in view of above
submissions.

1.1/244

Hyundai
Engineering
Construction
Ltd

2003
&
Co,

56,763,47
2

Contested. Unrealized Foreign Exchange Gain was

declared as accounting profit and made C/F to the
computation of the income wherein it was set off
against the same notional exchange gain, as
allowable deduction from income automatically
balancing/squaring upto Book entry/book profit. Thus
neither this gain was taxable nor has escaped
assessment because the book profit taken for the
computation of income is in itself the unrealized
Foreign Exchange Gain. Moreover, loss cases can
not be subjected to action u/s 122(5A). After adjusting
the B/F against the income/losses for the current
years, the cumulative effect would be loss; hence
action could not be taken u/s 122(5A).
11.06.2012 to 12.06.2012
The taxpayer company has filed return for the tax
year 2003 on 15.01.2004 declaring income of
Rs.4,198,495/- subject to B/F loss. Later on return
was revised on 27.01.2004 disclosing loss of
(Rs.4,198,495/-) subject to B/F losses. The audit
authority has observed that unrealized foreign
exchange gain which was required to be added into
income, but the taxpayer inadvertently deducted of
Rs.73,609,799/-.
After
adjustment
of
inadmissible/admissible expense total income worked out
by the audit authority i.e to be declared by the taxpayer

05.04.2010

05.04.2010

Under examination with audit.

The DAC directed the

audit
to
verify
the
contention
of
the
department by 30.04.2010

Referred to DAC.
Taxpayer
earned
foreign
exchange
gain
for
the
assessment year 2002-2003 at
Rs 140,622,362 and also
included it into other income.
This means that the gain was
actual and not notional as
reported by department
07.07.2011 to 09.07.2011
The reply of the department
was not in line with the Audit
observation. There was actual
foreign exchange gain (loss)
rather a notional gain (loss) as
contested by the department.
Actually, the department did
confront to the taxpayer
through show cause notice.
Now, the case has barred by
time and no action could be

13.07.2011
The DAC directed the
RTO to re visit the cases
and report compliance to
FBR and Audit within one
month.
09.07.2012
The DAC directed the
RTO to ascertain the facts
of the case with higher
authorities and submit a
detail report along with
supporting evidence to
audit/FBR.
The DAC further directed
to explain the contradiction
regarding the notional/real
income/loss and explain

company of Rs.143,021,103/-. As the taxpayer company

claimed adjustment of B/F losses as per return, if which
was allowed the B/F loss as determined of
(Rs.446,907,365/-) by the Addl.CIR, Audit as per order u/s
66A of the Repealed Ord. 1979 for asstt.year 2002-03, so
no loss revenue is to be arrived which is as under:Profit as per profit & loss a/c

Rs.57,560,960/-

Add inadmissible deduction

Rs.12,950,432/Rs.70,511,392/-

Less admissible deduction

Rs. 1,100,128/Rs.69,411,264/-

Add foreign exchange gain

(inadvertently deducted)

Rs.73,609,799/-

Total income to be declared

Rs.143,021,063/-

Less B/F loss A.Y 02-03

(Rs.446,907,365/-)

Balance loss to be C/F (Rs.303,886,262/-)

Loss of revenue is not involved, so the para may please be
treated as settled. Foreign Exchange Gain was charged to
tax in the cases of M/s. AES Pak Gen (Pvt) Ltd and M/s.
AES Lalpir (Pvt) Ltd as proposed by the audit. However,
the Therefore, the audit paras framed in the said two cases
have been recommended for settlement in the DAC
Meeting held on 19.04.2010 at Lahore. The facts and
circumstances of the case under consideration being the
similar, the proposed action cannot be invoked.
The para may please be settled. `Commissioner (Appeals)
deleted the addition made on that ground. The Appellate
Tribunal also upheld the action of Commissioner Appeals.
However, the Commissioner Legal did not propose
Reference in the said two cases on the plea that unrealized
Foreign Exchange Gain was no income as already held by
the Superior Courts.

taken by the department.

Documentary
evidence
is
support of his view point to be
provided.
23.04.2015
Department itself had charged
foreign exchange gain as other
income for the tax year 200102 and 2002-03. The reason
for not charging in the tax year
2003 may please be intimated.
Matter referred to DAC.

how come
invoked.

66/A

was

The DAC further directed

that how come the B/F
business
losses
was
adjusted against income
earned as other income.
The report should be
submitted by the Chief
Commissioner of the RTO
concerned positively by
09.08.2012.
DAC 03.03.2014
The RTO informed that the
record is being traced out
which take some time and
sought time in this regard.
The DAC directed the
RTO to provide the
relevant record to audit for
verification by 31.03.2014.

DAC
Directive
dated 05.05.2015
The DAC directed the
RTO
to
complete
assessment
proceedings as per law
and report compliance
to Audit / FBR by
31.07.2015.

1.3/257

Hyundai
Engineering &
Construction Co.
Ltd. Multan

2003

61,499,07
4

The DAC discuss the

issue of taxation of
notional exchange gain.
The RTO was of the view
that this gain is not taxable
in the light of decision of
ITAT in parallel cases. On
the other hand the audit
was of the view that the
gain was not notional but
real in nature and hence
07.07.2011 to 09.07.2011
taxable.,
The
DAC
The taxpayer company has filed return for the tax year 2003 on
15.01.2004 declaring income of Rs.4,198,495/- subject to B/F loss. The reply of the department was directed
the RTO to
Later on return was revised on 27.01.2004 disclosing loss of not in line with the Audit reexamine the case and
(Rs.4,198,495/-) subject to B/F losses. The audit authority has observation. There was actual
Non Levy Of Additional Tax For Late Payment Of Assessed
Tax Or Penalty
report to audit by
19observed that unrealized foreign exchange gain which was required foreign exchange gain (loss)
The
DAC
directed
the
audit to verify
Contested:
05.04.2010
5-2010.
5
3.4/254
Hyundai
Tax year Rs.
to be added into income, but the taxpayer inadvertently deducted of rather a notional gain (loss) as
the contention of the department by
Under
examination13.07.2011
Rs.73,609,799/-. After adjustment of inadmissible/admissible contested by the
Engineering
2003
55,349,17
department.
The
taxpayer company has filed return for the tax year 2003 with Audit
5-5-2010.
income worked out by the audit authority i.e to be Actually, the department
directed the
&Construction
0 expense total on
13.07.2011
15.01.2004
declaring
income ofand
Rs.4,198,495/subject to 07.07.2011 todid The DAC
declared by the taxpayer
company
of Rs.143,021,103/loss of
confront
to the taxpayer through RTO toThe
re
visit
the cases
Co, Ltd
DAC
directed
the RTO to re visit
B/F
loss.
Later
on
return
was
revised
on
27.01.2004
revenue is to be worked out @ 43% of Rs.61,499,074/-. As the
09.07.2011
show
causeThe
notice.
Now, the case and report
the cases
and report to
compliance to
compliance
disclosing
of (Rs.4,198,495/-)
to B/F
losses.
taxpayer company
claimed loss
adjustment
of B/F losses assubject
per return,
The
reply
of the
FBRAudit
and Audit
within
one month.
by time
and
no action
if which was
allowed
the B/F
as determined
of has barred
audit
authority
haslossobserved
that unrealized
foreign
FBR
and
within
one
was not in 09.07.2012
taken by department
the department.
(Rs.446,907,365/-)
by the gain
Addl.CIR,
Audit
as required
per order u/s
66Aadded
of could
exchange
which
was
to be
intobe
income,
month.
line with the Audit
The DAC directed the RTO to
Contested. Unrealized Foreign Exchange Gain was
declared as accounting profit and made C/F to the
computation of the income wherein it was set off against the
same notional exchange gain, as allowable deduction from
income automatically balancing/squaring upto Book
entry/book profit. Thus neither this gain was taxable nor has
escaped assessment because the book profit taken for the
computation of income is in itself the unrealized Foreign
Exchange Gain. Moreover, loss cases can not be subjected
to action u/s 122(5A). After adjusting the B/F against the
income/losses for the current years, the cumulative effect
would be loss; hence action could not be taken u/s 122(5A).

05.04.2010
Under examination
With Audit
Referred to DAC.
Taxpayer earned foreign exchange
gain for the assessment year
2002-2003 at Rs 140,622,362 and
also included it into other income.
This means that the gain was
actual and not notional as reported
by department.

the Repealed Ord.

for asstt.year
2002-03, so nodeducted
loss revenue
but 1979
the taxpayer
inadvertently
of Rs.73,609,799/-.
is to be arrivedAfter
which adjustment
is as under:- of inadmissible/admissible Documentary
expense total

ascertain the facts of the case with

observation.
evidence There
is
higher authorities and submit a
was actual foreign09.07.2012
support
of his view point to be
worked57,560,960/out by the audit authority i.e to
be declared
detail
report along
Profit as per income
profit & loss
exchange gain (loss)
The DAC
directed
the with supporting
evidence to audit/FBR.
by the taxpayer company of Rs.143,021,103/-provided.
and loss of rather a notional gain
a/c
toThe
ascertain
the facts
DAC further
directed to explain
revenue is to be worked out @ 43% of Rs.61,499,074/-also (loss) as contestedRTO
by
Add inadmissible deduction
12,950,432/of
the
case
with
higher
the
contradiction
regarding the
worked out additional tax u/s 205 of Rs.55,349,170/-.
As the the department.
23.04.2015
notional/real
income/loss
and
authorities
and submit
a
taxpayer company
claimed adjustment of B/F losses as per Actually, the
70,511,392/explainalong
how come
66/A was
detail
report
with
return, if which was allowed the B/F loss as determined of department did
invoked.
Linked with para 1.1/244 tax
Less admissible
deduction
1,100,128/(Rs.446,907,365/-)
by the Addl.CIR, Audit as per order u/s confront to the
supporting
evidence
The DAC
further to
directed that how
year
2003.
Matter
referred
to
66A of the Repealed
Ord. 1979 for asstt.year 2002-03, so no taxpayer through audit/FBR.
69,411,264/come the B/F business losses was
DAC.
loss revenue is to be arrived which is as under:adjusted against income earned as
show cause notice.
Add foreign exchange gain
73609799
otherfurther
income. directed
The report should be
Now, the case hasThe DAC
inadvertently deducted)
Profit as per profit & loss a/c
57,560,960/submitted by the Chief
barred by time andtono
explain
the contradiction
Commissioner
of the RTO
Total income toAdd
be declared
inadmissible
143,021,063
deduction
12,950,432/action could be taken
regarding
the notional/real
concerned
positively by 09.08.2012.
by the department.income/loss
DAC 03.03.2014
Less B/F loss A.Y 02-03
(446907365)
70,511,392/and explain
Balance loss toLess
be C/F
admissible(303,886,262
deduction

1,100,128/-

As no tax liability is chargeable in the light69,411,264/of above

mentioned facts.
So the
additional
205 is not
Add foreign
exchange
gaintax u/s73609799
applicable and
inadvertently
no loss of
deducted)
revenue is involved, thus
the para may
please
be
treated
as settled.
Total income to be declared
143,021,063
Less B/F loss A.Y 02-03

(446907365)

Balance loss to be C/F

(303,886,262

As no tax liability is chargeable in the light of above

how

come

66/A

was

The RTO informed that the record is

Documentary
invoked.
evidence is support of being traced out which take some
The DAC
directed
time further
and sought
time in this regard.
his view point to be
The
DAC
directed
that
how
come
the
B/Fthe RTO to
provided

providelosses
the relevant
record to audit
business
was
for verification by 31.03.2014
adjusted against income
23.04.2015
earnedDAC
as other
income.
Directive
dated
The report
should
be
05.05.2015
Linked with para submitted
by the
Chiefthe RTO to
The DAC
directed
1.1/244 tax year 2003.
Commissioner
the RTO proceedings
complete of
assessment
Matter referred to
as per positively
law and report
concerned
bycompliance to
09.08.2012.

DAC 03.03.2014
The RTO informed that the
record is being traced out

mentioned facts. So the penalty is not applicable and no loss

of revenue is involved, thus the para may please be treated
as settled.

DAC.

Audit / FBR by 31.07.2015.