IT Ordinance Section 21(1): PSMA urges FBR to exempt sugarcane purchases

The Pakistan Sugar Mills Association (PSMA) has urged the Federal Board of Revenue (FBR) to exempt sugarcane purchases from the provisions of section 21(1) of the Income Tax Ordinance (ITO) because most of the sugarcane growers are uneducated and are unable to handle the procedure.
"We have written a letter to the Chairman of FBR, taking up the issue relating to cash payment to sugarcane growers during the crushing season and to exempt the sugar industry from provision of section 21(1) of the ITO in view of the peculiar circumstances and dynamics of the sugar industry," PSMA Chairman Javed Kayani told Business Recorder on Monday.
PSMA in its letter titled 'Payment of sugarcane through banking channel has drawn the attention towards the following provisions of section 21(1) of the Income Tax Ordinance is as follows: "21. Deductions not allowed.- Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head "Income from Business" for -
(l) any expenditure for a transaction, paid or payable under a single account head which, in aggregate, exceed 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 Federal Board of Revenue had further issued circular No 1 of 2006 dated July 1, 2006 captioned as Finance Act, 2006 - explanation of important provisions relating to amendment in Income Tax Ordinance, 2001 which states as under:-
" 6. RATIONALIZATION 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, would not be 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.
According to the letter, now the language of the section 21(l) has appropriately been amended to include all 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 exceeding 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.
According to Javed Kayani, members of PSMA purchase sugarcane (agricultural product) from the sugarcane growers. They are facing hardship in complying with the legal provisions for the following reasons: (i) provisions of repealed Income Tax Ordinance, 1979 were restricted to expenditure which is normally chargeable to profit and loss account. The expenditure which is chargeable to trading and manufacturing accounts like wages and purchases fell outside the scope the ambit of the legal provisions of repealed Ordinance. Similarly, purchases of agricultural products and commodities like sugarcane, milk etc being direct part of manufacturing expenses, the provisions of section 24(ff) of repealed Income Tax Ordinance, 1979 were not applied; (ii) agricultural income derived by a person is exempt from tax under section 41 of the Income Tax Ordinance, 2001; (iii) sugar production has considerably dropped in the country and was 3.138 million metric tons for the season 2009-10 as against production of 3.135 million metric tons for the season 2008-09. The country's sugar production was 4.752 million metric tons in season 2007-08, a decline of around 34 percent in last two years, while the country's consumption is estimated at 4.20 million metric tons annually. The sugarcane production has dropped as the growers have opted for cash crops like wheat, cotton, maize, onions, vegetables and fruits in place of sugarcane; (iv) every sugar mill installs a number of depots far away from the mill premises for procurement of maximum cane. The number of such depots range from 50 to 100 depending upon crushing capacity of a sugar mill. The cane supplied at a depot is instantly recorded/acknowledged by issuing a CPR to the grower against it. Most of the growers are illiterate and do not operate any bank account at all. They don't have the capability to open and operate a bank account at all; (v) the crossed banking instrument/cheque are required to be signed by the authorised signatories of an account holder only. Normally, Chief Executive officers or some other trusted Directors are deputed to sign negotiable instruments. Since a number of CPRs (say 400 - 800 depending upon the crushing capacity of a mill) are issued to the growers daily, hence it would become impossible for the authorised signatory to sign each and every crossed banking instrument/cheque at the mills. Besides sugarcane suppliers also take place on carts in small lots, it is not practical to make payments through crossed cheques which the suppliers refuse to accept outright; (vi) the payments of cane supplied by the minors become difficult as the Banks usually do not open accounts of minors; (vii) in case a grower supplies cane to the mills and is deceased before the payment is cleared to his account, the cane payment to his family becomes difficult without a valid succession certificate issued by a court of law, which may take time to obtain. Whereas, provisions of Rule 14 of Punjab Sugar Factories Control Rules, 1950 stipulate payment for cane supplies within fifteen days of the delivery of cane.