OFFICE OF THE

COMMISSIONER INLAND REVENUE, SPECIAL ZONE

REGIONAL TAX OFFICE, MULTAN
No.

Dated:-

Member (Accounting),
Federal Board of Revenue,
Islamabad.
Subject:-

AUDIT PARAS ON M/S HYUNDAI ENGINEERING AND CONSTRUCTION

COMPANY LTD, PRESENTATION OF REPORT TO PAC.

Please refer to Federal Board of Revenues letter No. C.No.3(9)S(IROPERATIONS)/2016/17832-R dated: 11.02.2016 on the above noted subject.
Following Audit Observations were made by the Audit Authorities in the subject
mentioned case.
Para/
PDP #

Tax Year

Loss
of
revenue
pointed out

Audit Observations

1.1/244

2001-02

32,243,730

//
//
1.3/257
3.4/254
4.1/245

2002-03
2003
2003
2003
1997-98

63,280,035
56,763,472
61,499,074
55,349,170
81,679,059

Loss of revenue amounting to rs 252,287,237/- due to

non/proper taxation of exchange loss.
//
//
Non levy of Penalty
Non levy of Additional Tax u/s 205
Excess determination of refund

The answers of the given questions are as under:

a)

Questions
Whether Audit
correct?

Observation is

Answers
No
The Audit Observation whether exchange gain/loss is to be
treated as other income as held by External Audit
Authorities or is part of business income/ (loss as carried
forward) by the taxpayer. Brief such of the case are such that
the External Audit Authorities treated the exchange gain as
declared by the taxpayers as part of other income and proposed
to assess as a separate block. The department initially
contested the audit observation on the ground that in another
similar case of M/s AES Lal Pir (Pvt) Ltd the similar audit
observation was made and the department proceeded to
finalize the same as proposed by Audit. However, the said
treatment could neither with stand the said treatment the test of
the first appeal nor that or ATIR and was ultimately deleted.
The Para in the case of M/s Hyundai Engineering &
Construction Co, Ltd was contested as under:
CONTESTED
The unrealized foreign exchange gain / loss relates to assets
and liabilities of the taxpayer which were receivable / payable
in foreign currency. In case of fluctuation in PKR-USD parity,
the loss or gain is recognized as the case may be on the basis
of year-end translation of assets / liabilities in PKR. This
treatment is in line with the financial reporting framework
envisaged under the corporate laws of Pakistan.
For taxation purpose, the foreign exchange gain or loss is
recognized at the extent it relates to a payment made or
received by the person. The gain or loss resulting from yearend translation of assets is classified as Notional Income
which does not attracts the incident of taxation.

b)

c)

If the Audit Observation is correct,

The above noted treatment adopted by the taxpayer is duly

endorsed by Hoble Income Tax Appellate Tribunal in its
judgment reported as (1997) 76 TAX 137 (Trib.)whereby it
was held that the gain arising to assessee from year-end
translation of assets / liabilities in foreign currency does not
tantamount to real income and is not taxable under the law.
On the pressure of Audit Authorities, thereafter, the department
proceeded to add the amount of exchange gain towards total
income treating the exchange gain as part of business income
instead of other income. The said treatment has been carried
out u/s 66A of the repealed ordinance vide order dated:
30.12.2011 (based on the judgment of M/s Elli Lilly). The
relevant case law has already been discussed in DAC meeting
held on 25.09.2015 and 11.10.2015 and copies of the same
have been handed over to the Audit Authorities. During the
course of instant meeting, the External Audit Authority
proposed to verify the amount of BF losses for period relevant
to the Audit observation as referred to above. The same was
shown to the Audit Authorities in the shape of copies of
respective assessment/appeal effect orders for the years 199596 to 2001-02. The issues were discussed at length and it was
decided in principle that the Audit observation is
recommended to be settled in the light of action already taken
by the department.
Para was contested as above.

whether

has taken

However, amount of exchange gain was added towards total

sufficient measures to retrieve loss

income treating the exchange gain as part of business income

of revenue?

instead of other income, due to BF loss, no demand created.

Whether department has taken

No official/officer involved in mal-practice.

department

cognizance of the mal-practice

involved in this case, and has taken
fixed
d)

responsibility

on

the

officers/officials involved?
Names of the officers/officials
involved and disciplinary action

e)

taken against them; and

Any other matter bearing direct
relevance with the issue, and needs
to

be

explanation/clarification

before PAC.
As regard the Para 4.1/245 excess determination of refund was also contested. During DAC meeting
on 19/04/2010 reply of the department was under examination with Audit Authorities (Copy enclosed).

(MUHAMMAD ABID RAZA BODLA)

Commissioner