Name of Taxpayer: XYZ (PVT.

) LIMITED
NTN: 1234567
Tax Year: 2015
Date of Final Hearing 19.05.2021
Date of Order 19.05.2021

ORDER UNDER SECTION 122(4)(5) OF THE INCOME TAX ORDINANCE, 2001

The taxpayer namely M/s XYZ (PVT.) LIMITED bearing NTN 1234567 is engaged in
principal activity of distribution of electricity within the defined geographical territory of Lahore
Division. The taxpayer furnished return of income for TY 2015 on 22.01.2016 declaring business
loss at Rs. (38,324,495,052)/-. The said return deemed to be an assessment order in terms of
section 120(1) of the Income Tax Ordinance, 2001(hereinafter referred to as ‘the Ordinance”).

2. The proceedings u/s 122(5A) was initiated and culminated by way of following manner:

Net sales Rs. 192,359,211,573/-

Other income/receipts excluding amortization
Of deferred credits Rs. 4,142,468,126/-
Amortization of deferred credits Rs. 2,589,742,596/-
Total Turnover Rs. 199,091,422,295/-
Minimum Tax u/s 113 @1% Rs. 1,990,914,223/-

3. Later on the taxpayer case was automatically selected for audit u/s 214D of the Ordinance
and intimation in this regard was sent to the taxpayer by this office letter bearing bar
code100000032678537 dated 30.04.2018. Consequently Information Documents Request
(IDR) /Notice u/s 177(1) of the Ordinance was issued by this office vide this office letter bearing
bar code No. 100000033352097 dated 21.05.2018 for compliance on 29.05.2018 requiring you
to furnish documents, record and books of accounts but on the due date no compliance was made
by the taxpayer. However during the course of proceeding following notices were issued:

Sr. Particulars Event Dated Remarks

No
1 Reminder issued 08.11.2018 Compliance till
15.11.2018
2 Audit report u/s 177(6) was 14.06.2019 Compliance till
issued 21.06.2019
3 Request for adjournment 02.07.2019 Adjournment
submitted allowedtill15.07.2019
4 Request for further 17.07.2019 Adjournment allowed
adjournment submitted till 24.07.2019
5 Show cause notice u/s 17.03.2021 Compliance till
122(9) with 111 notice was 01.04.2021
issued
 6 Request for adjournment 01.04.2021 Adjournment allowed
submitted till 12.04.2021
7 Request for adjournment 15.04.2021 Adjournment allowed
submitted till 20.04.2021
8 Request for adjournment 20.04.2021 Adjournment allowed
submitted till 04.05.2021
9 Request for adjournment 05.05.2021 Adjournment allowed
submitted till 19.05.2021
10 Taxpayer submitted the 19.05.2021 Reply Considered and
reply placed on file/ record

Hence in the light of the above, considering all the facts available with this office and
reply with documents submitted by the AR, the confronted issues are decided as under:
1. Issue Confronted

Purchases under the Head of Cost of Sales

You declared purchases in the return are at Rs. 177,232,771,127/- and as per note No. 25.1 of
audited account, you declared that electricity purchase during the year have been
incorporated according to invoice issued by NTDC. The average rate of the year was Rs. 9.33
(2014 Rs. 10.71) per Kilo Walt Hour (KWH). Further, the inadmissible purchase expenses in
terms of section 20(1) on account of huge line losses beyond the approved limit of NEPRA
are not added back by you in your declared income. The purchases at 2.5 per cent are
therefore intended to be disallowed in terms of section 20(1) read with section 174(2) of the
Ordinance.

Reply of the Taxpayer

We would like to submit here that your goodself alleged head “Purchases under the head Cost of
Sales” under section 120(1) read with section 174(2) of the ordinance. It is pertinent to mention
here that under section 174(2) read as follows,

“The Commissioner may disallow or reduce a taxpayer’s claim for a

deduction if taxpayer is unable, without reasonable cause, to provide a
receipt, or other record or evidence of the transaction or circumstances
giving rise to the claim for the deduction”
It is submitted here that under section 174(2) the commissioner may disallow or reduce claim for
a deduction when upon requiring by the officer, the evidence or receipt or other record of the
transaction and the taxpayer fails to provide that. Your goodself neither required any evidence
nor asked the taxpayer for any record and intended to disallow the 2.5% of purchases without
any reasonable cause.
Owing to the nature of electricity and inherent limitation on part of transmission and distribution
system, such loss actually exists and is a common phenomenon across the DISCOs. Although,
NEPRA being regulator for tariff determination also determines these losses and sets a lower
limit of these losses to bring/promote efficiencies. However, actual losses are usually more than
the approved losses due to various factors and this is also a common phenomenon in DISCOs.
Pertinently, there is no provision in the Ordinance that bars the taxpayer to claim an actual
expense irrespective of the limit set by the regulator. Both NEPRA and FBR work in their own
spheres and there is no nexus between the two. So disallowing an actual loss/expense mere on
the basis of limit set by the regulator is illegal and no provision of the Ordinance supports this
illegal treatment. Therefore, it is crystal clear from the above fact that the taxpayer is eligible to
claim the deduction of whole actual losses and the invocation of section 174(2) read with section
120(1) is not justifiable at all.

Findings

The above reply of the taxpayer was perused and found unconvincing as the taxpayer has
claimed in his reply that actual losses are usually more than the approved losses by the NEPRA
due to various factors and this is also a common phenomenon in DISCOs. However in this
regard the taxpayer has failed to provide the detail with documentary evidences of various
factors due to which losses occurred from which it could be ascertained that whether these are
allowable deductions as per Ordinance or not. Hence the taxpayer has failed to submit the
satisfactory reply to verify his stance thus the purchases at 2.5 per cent at Rs. 4,430,819,278 are
found to have not been used/ consumed for the business activity of the taxpayer in a normal
permissible manner as per limit set out by the regulator (NEPRA). Therefore, consumption of
purchased electricity of Rs. 4,430,819,278/- is not an admissible expense in terms of section
20(1) of the Ordinance and is ordered to be added back in the income of the taxpayer.

2. Issue Confronted

Claim of Profit & Loss Account Expenses:

Apart from above, you also claimed profit & loss account expenses under different heads.
Detail of which is as under,

i) As per note No. 26 of audited accounts, you claimed distribution cost aggregating to
Rs. 22,690,850,523/-.
ii) As per note No. 27 of audited accounts, you claimed administrative expenses
aggregating to Rs. 9,667,677,555/-.
iii) As per note No. 28 of audited accounts, you claimed customer services cost
aggregating to Rs. 2,406,012,454/-.
iv) As per note No. 30 of audited accounts, you claimed finance cost at Rs. 437,608,188/.

It is observed that you have failed to substantiate the aforesaid claims with supportive
vouchers and books of accounts. Compliance of the withholding tax provisions is also not
 shown. As such, the entire claims are found unverified and inadmissible. The undersigned,
therefore, intends to reduce 20 per cent of the claims u/s 174(2) read with section 21(c) of the
Income Tax Ordinance, 2001,

Reply of the Taxpayer

Under this heading, your goodself alleged that expenses claimed under different heads
namely, Distribution Cost, Administrative Expenses and Customer Services Cost are not
substantiated with supportive vouchers and books of accounts.

We would like to submit here that the expenses declared under different heads in audited
financial statement accounts are properly disclosed in income tax return for the subject tax year.
These expenses breakup are properly disclosed in financial statements as well which are audited
as per legal requirements and auditing standards. In order to scrutinize the relevant vouchers and
books of accounts, it is requested before your good self that, due to voluminous data in nature, let
us know on sample basis to provide documentary evidences of that in order to comply under the
law. For the purposes of sampling, we will share the relevant ledgers through email with your
goodself shortly.

Findings

The above confronted expenses are examined in the audited accounts and it is found that
detail head wise segregation of these expenses is available in the audited accounts. The expenses
are examined on sample basis and are found verified. However, expense of Rs. 15,916,532,595/-
claimed under the head Post Retirement Benefits is admissible only the extent of Rs.
2,583,099,072/- which is actually paid during the said tax year as detail given below.

Post Retirement Benefits claimed (As per note28.1) 15,916,532,595/-

Less: Benefit paid during the year (As per note 18.1 to 18.4)

Benefit paid under the head pension 1,960,094,513/-

Benefit paid under the head medical benefits 192,142,600/-
Benefit paid under the head free electricity benefits 307,303,202/-
Benefit paid under the head accumulated
compensated absence 123,558,757/-
Total 2,583,099,072 2,583,099,072
Balance amount 13,333,433,523/-

Thus the balance amount of Rs. 13,333,433,523/- represents that it has been claimed on provision basis
and the provisions are not allowed as expense as per section 34(3) of the Ordinance thus the same is being
disallowed and added back in the taxable income of the taxpayer.

3. Issue Confronted

BALANCE SHEET:
 i) LONG TERM SECURITY DEPOSIT:

As per Note No. 17 to the audited account, you claimed long term security deposit at Rs.
8,939,425,560/- . As no documentary evidence and reconciliation is furnished in support of
this claim, therefore, the undersigned intends to add this amount in your income from other
sources in terms of section 111(1)(a) of the Income Tax Ordinance, 2001. (Specific Notice
u/s 111 is separately issued)

ii) Employee Retirement Benefits:

As per note 18 to the audited accounts, filed for the year under consideration, you have
shown an amount of Rs. 8,939,425,560/-- under the said head. As no documentary evidence
and reconciliation is furnished in support of this claim, therefore, the undersigned intends to
add this amount in your income from other sources in terms of section 111(1)(a) of
theIncome Tax Ordinance, 2001. (Specific Notice u/s 111 is separately issued).

iii) Deferred Credits:

As per note 19.1 to the audited accounts, filed for the year under consideration, you have
shown an amount of Rs. 2,589,742,596/-- under the said head. As no documentary evidence
and reconciliation is furnished in support of this claim, therefore, the undersigned intends to
add this amount in your income from other sources in terms of section 111(1)(a) of the
Income Tax Ordinance, 2001. (Specific Notice u/s 111 is separately issued).

iv) Trade & Other Payables:

As per Note No. 20 to 20.4 to the audited account, you claimed creditors and other payables
at Rs. 19,489,069,188/-. As no documentary evidence and reconciliation is furnished in
support of this claim, therefore, the undersigned intends to add this amount in your income
from other sources in terms of section 111(1)(a) of the Income Tax Ordinance, 2001.
(Specific Notice u/s 111 is separately issued).

v) Receipts against deposit work and accrued interest as per Note No. 21 to the account, you
claimed receipts against deposit work and accrued interest respectively at Rs.
8,056,884,845/- and Rs. 1,004,799,727/-. As no documentary evidence and reconciliation
is furnished in support of this claim, therefore, the undersigned intends to add this amount
in your income from other sources in terms of section 111(1)(a) of the Income Tax
Ordinance, 2001. (Specific Notice u/s 111 is separately issued).

Reply of the Taxpayer

We would like to submit here that your goodself has wrongly alleged following balance sheet
items under section 111(1)(a) as the person’s income credited in his books of accounts are
properly disclosed about its nature and source in notes to the audited financial statement
accounts,
 (i) Long term Security deposits
Under this head, it is properly disclosed in the financial statements that it represents security
deposits against amounts due from consumers on account of electricity sales. These are
refundable/adjustable on disconnection of electricity supply and have been accumulated over the
past many years. Every year, these financial statements are audited as per legal requirements and
auditing standards and the figures have been properly disclosed in each year’s return. Section
111(1)(a) is attracted only if an amount has been credited to the person and the person doesn’t
disclose that amount in its return and doesn’t offer any explanation about the nature and source
of that amount. While in our case, the audited financial statements are very vocal about the
nature and source of this amount and the same has been properly disclosed in the return.
Therefore, invoking the provisions of section 111(1)(a) is grossly illegal and not sustainable. It is
therefore requested to drop this point.

(ii) Employee Retirement Benefits

It is pertinent to mention here that Post retirement benefits is the future liability of the taxpayer
and the breakup and the movement is properly disclosed in the audited financial statements.
Every year, these financial statements are audited as per legal requirements and auditing
standards and the figures have been properly disclosed in each year’s return. Section 111(1)(a) is
attracted only if an amount has been credited to the person and the person doesn’t disclose that
amount in its return and doesn’t offer any explanation about the nature and source of that
amount. While in our case, these are not even credited to the taxpayer, this the future liability
which has to be paid to its employees after their retirement. Therefore, invoking the provisions of
section 111(1)(a) is grossly illegal and not sustainable. It is therefore requested to drop this point.
(iii) Deferred Credits
In this regard, we would like to explain a brief accounting treatment of the amount alleged.
Whenever, a customer requests for a new power connection, an amount is received from
potential customer as the cost of meter, labor and overhead charges for installation of new
connections. This advance received by the taxpayer is credited as liability in company’s books of
accounts under the head “Receipts against Deposit Work”. Amount of cash received is utilized
for purchase/installation of related assets and incurring of other expenses i.e. labor and overhead
charges which are accumulated as “Capital Work in Progress (CWIP)” head. Same treatment is
made for amounts received from Government of Pakistan. Following entries are passed in the
books of accounts to this effect:

1. Dr: Bank(Asset)
Cr: Receipt against Deposit Work (Liability)

2. Dr: Capital Work in Progress (CWIP) (Asset)

 Cr: Bank(Asset)

When the asset is constructed/completed, related amount is transferred from CWIP to fixed
assets. An equivalent amount is transferred from “Receipts against Deposit Work” to “Deferred
Credits”. Further the above said deferred credit is amortized over estimated useful lives of
related assets as per International Accounting Standard IAS-20 and depreciation on the related
assets is charged as to write off the depreciable amount of an asset over its estimated useful life.
Following entries are passed in the books of accounts for above,

3. Dr: Fixed Asset (Asset)

Cr: Capital Work in Progress (CWIP) (Asset)

4. Dr: Receipt against Deposit Work (Liability)

Cr: Deferred Credit(Liability)

5. Dr: Depreciation Expense

Cr: Accumulated Depreciation (Fixed Asset)

6. Dr: Deferred Credit(Liability)

Cr: Amortization Income

The same nature has been disclosed in the financial statements briefly and the amounts have
been properly disclosed in the returns of each tax year. Keeping in view of the above, invoking
the provisions of section 111(1)(a) is grossly illegal and not sustainable. It is therefore requested
to drop this point.

(iv) Trade and other Payables

The breakup and nature of this head hasalso been properly disclosed in the audited financial
statements of the Company. These are the amounts which are payable at the yearendon account
of various expenses the nature of which has been mentioned in the note No. 20 of the financial
statements. Section 111(1)(a) is attracted only if an amount has been credited to the person and
the person doesn’t disclose that amount in its return and doesn’t offer any explanation about the
nature and source of that amount. While in our case, the audited financial statements are very
vocal about the nature and source of this amount and the same has been properly disclosed in the
return. Therefore, invoking the provisions of section 111(1)(a) is grossly illegal and not
sustainable. It is therefore requested to drop this point.

(v) Receipts against Deposit work and Accrued Interest

We would like to submit here that the alleged head” Receipt against deposit work” emerges
when an amount is received from potential customer as the cost of meter, labor and overhead
charges for installation of new connections. This advance received by the taxpayer is credited as
liability in company’s books of accounts under this head. Further, the accounting treatment is
already briefed above under heading “Deferred Credits”.

In addition, accrued interest head is self-explanatory and represents the interest payable at
yearend on the long term financing obtained by the Company as mentioned in note No. 16 of the
financial statements. Again, it is apposite to mention that Section 111(1)(a) is attracted only if an
amount has been credited to the person and the person doesn’t disclose that amount in its return
and doesn’t offer any explanation about the nature and source of that amount. While in our case,
the nature of these heads has been mentioned in the audited financial statements and the same
has been properly disclosed in the return. Therefore, invoking the provisions of section 111(1)(a)
is grossly illegal and not sustainable. It is therefore requested to drop this point.

Findings

i) LONG TERM SECURITY DEPOSIT:

As per Note No. 17 to the audited account, the taxpayer was confronted the long term security
deposit at Rs. 8,939,425,560/- u/s 111(1)(a) of the Ordinance. In this regard the taxpayer
submitted that he has properly disclosed the amount of long term security deposit in the financial
statements and it represents security deposits against amounts due from consumers on account of
electricity sales. These are refundable/ adjustable on disconnection of electricity supply and have
been accumulated over the past many years. Every year, these financial statements are audited as
per legal requirements and auditing standards and the figures have been properly disclosed in
each year’s return and hence the does not attracts addition u/s 111(1)(a). The explanation given
by the taxpayer found convincing and no adverse inference is drawn under this head.

ii) Employee Retirement Benefits:

As per note 18 to the audited accounts, the taxpayer was confronted with amount of Rs.
8,939,425,560/-- under the said head. In this regard the taxpayer submitted that Post retirement
benefits is the future liability of the taxpayer and the breakup and the movement is properly
disclosed in the audited financial statements and hence it does not attracts the addition u/s 111(1)
(a) of the Ordinance. It is found that the taxpayer is claiming expense of Post Retirement
Benefits on provision basis and is booking the unpaid portion as liability. The said expense to the
extent of un-paid provision for the year has been rejected in terms of section 34(3) of the
Ordinance as mentioned at issue No. 2 above. Hence, corresponding liabilities do not attract any
adverse inference. Thus, no negative inference is drawn to this extent.
 iii) Deferred Credits:

As per note 19.1 to the audited accounts, the taxpayer was confronted the amount of Rs.
2,589,742,596/-- under the said head in terms of section 111(1)(a) of the Income Tax
Ordinance, 2001. It is found that this amount was liable to be offered for taxation as income /
other revenues but only an amount of Rs. 1,096,451,189/- is included in the income. Balance
amount of Rs. 1,493,291,407/- is thus ordered to be added in the income of the taxpayer.

iv) Trade & Other Payables:

As per Note No. 20 to 20.4 to the audited account, the taxpayer was confronted with the
creditors and other payables at Rs. 19,489,069,188/-. In this regard the taxpayer submitted
that these are the amounts which are payable at the year end on account of various expenses
the nature of which has been mentioned in the note No. 20 of the financial statements. The
reply of the taxpayer is examined and found satisfactory. No negative inference is drawn to
this extent.

v) Receipts against Deposit Work and Accrued Interest:

As per Note No. 21 to the account, the taxpayer was confronted receipts against deposit work
and accrued interest respectively at Rs. 8,056,884,845/- and Rs. 1,004,799,727/-. In this
regard the taxpayer submitted that the alleged head” Receipt against deposit work” emerges
when an amount is received from potential customer as the cost of meter, labor and overhead
charges for installation of new connections. This advance received by the taxpayer is credited
as liability in company’s books of accounts under this head. The issue is found linked with
the matter regarding Deferred Credits and Amortization of Deferred Credits. The extent to
which the declaration was prejudicial to the interest of revenue has already been adjudged
against the taxpayer at issue No, iii above. Therefore, no negative inference to this extent
under this head is warranted.

Further, in respect of accrued interest head the taxpayer submitted it represents the
interest payable at year end on the long term financing obtained by the Company as
mentioned in note No. 16 of the financial statements. In the wake of long term financing
declared by the taxpayer no negative inference is drawn to this extent.

Keeping in view of above discussed facts, the deemed assessment for the year under
consideration is amended in terms of section 122(1)/(5) of the Income Tax Ordinance, 2001
in the following manners:-