I.T.A. NO.39/LB OF 1990-91, DECIDED ON 25TH NOVEMBER, 1990. VS I.T.A. NO.39/LB OF 1990-91, DECIDED ON 25TH NOVEMBER, 1990.
1991 P T D (Trib.) 1075
[Income Tax Appellate Tribunal Pakistan]
Before A.A. Zuberi, Accountant Member
I.T.A. No.39/LB of 1990-91, decided on 25/11/1990.
(a) Income Tax Ordinance (XXXI of 1979)---
----Third Sched.---Scope and application of Third Schedule.
The Third Schedule does not aim to create any income by fiction of law and simply prescribes rules for the computation of depreciation allowance in respect of "any building, machinery, plant or furniture owned by an assessee and used for the purpose of any business or profession carried on by hi in". Therefore, whatever computation is made should strictly pertain to the "business or profession carried on by an assessee' in which that particular building machinery, plant or furniture is use.
(b) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R.7(b)(i)---Gain resulting from disposal of assets even though such disposal was due to compelling-T reasons, would be `gain' creditable to the Profit and Loss Account of the tax exempt business of manufacture and sale of goods.
(c) Income Tax Ordinance (XXXI of 1979)---
---Third Sched., R. 7(b)(i)--Where any asset was sold after the closure of business, the business (though closed) was to be deemed to have continued even after the closure of the account and the expiry of the income year---Gain or loss arising on sale of assets used in a particular business was to be treated as gain or loss relating to such business.
(d) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R.7(b)(i)---Once manufacture and sale of goods by assessee had been accepted by the Department as exempt under C1.125 of the Second Sched., the gain arising out of the sale of asset(s) used for the business of manufacture of goods was also to be treated as part of profit/loss of such business, hence entitled to exemption.
Sanaullah Naik for Appellant.
Mian Masood, D.R. for Respondent.
Date of hearing: 17th October, 1990.
ORDER
This appeal has been filed at the instance of a private limited company who are manufacturers and vendors of children's garments. The appeal is directed against order dated 28-6-1990 passed by the learned C.I.T. (Appeals), Zone I, Lahore in respect of the assessment year 1989-90.
The learned counsel for the Appellant explained that they were manufacturing garments for the last few years and in the assessments (such as 1988-89), it was accepted that they were entitled to exemption granted vide clause 125 of the Second Schedule of the Income Tax Ordinance as all the prescribed conditions were fulfilled. In the year under consideration, the Appellant was forced to give up the business activity due to losses. The declared loss was accepted by the assessing officer. However, gain on sale of assets at Rs.62,699 was worked out under clause (i) of sub-rule (b) of rule 7 of the Third Schedule to the Income Tax Ordinance and was treated as business income for charge of tax. On appeal, the learned Commissioner (Appeals) concurred with the view that sale of assets was not covered by the exemption for running an `industrial undertaking engaged in the manufacture of garments from cloth manufactured in Pakistan'. It was argued by the learned counsel that their income from manufacture of garments was to be computed, as in the past, under the head `income from business or profession' falling under section 22 of the Income Tax Ordinance. While computing this income, allowances and deductions were to be made as per section 23 of the Ordinance which at clause (v) of subsection (1) authorise deduction `in respect of depreciation of any such machinery, plant ...being the property of the assessee' as per rules for the computation of depreciation allowance. Of these rules, rule 7 prescribes treatment in respect of `gain or loss on disposal of assets'. It so happened that the business of manufacture of garments was given up during the year under consideration. This necessitated disposal of assets also which fell under clause (b) (i) of rule 7. Therefore, the "gain" was to be treated as "income from business or profession" from the business for which the asset was installed and used. This was to be clubbed with the operating profits as per the manufacturing-cum-trading account. The assessing officer, however, treated the sale of Assets as a separate business and taxed it, though the operating profit and the resultant income which fell under clause 125 of the Second Schedule was held to be exempt, as in the past. It was emphasized by the learned counsel that the two officers below did not appreciate that the only business which th Appellant carried on was that of garments, and the assets the sale of which resulted in a `gain' as worked out under rule 7 of the Third Schedule, belonged only to this business i.e. manufacture and sale of garments.
The D.R. on his turn heavily relied on the wording of clause (b) (i) of rule 7 which read as a whole, would be as under:
"7. Disposal of assets and treatment of resultant gains or losses:- Notwithstanding anything contained in this Ordinance or the repealed Act, where, in any income year ...any class of assets is disposed of by an assessee ....if the sale proceeds thereof exceed the written down.........value, the excess shall be deemed to be the income of the assessee of that year chargeable under the head 'income from business or profession'."
It was canvassed by the D.R. that this provision aimed to deem income by fiction of law which is evident from the words "excess shall be deemed to be the income;" which was to be placed under the head "income from business or profession" but not necessarily from that business or profession for which the asset was used.
Evaluating the rival arguments addressed to me I feel that the interpretation by the Department is too far-fetched and misdirected. It is to be remembered all the time that the Third Schedule does not aim to create any income by fiction of law and simply prescribes rules for the computation of depreciation allowance in respect of "any building, machinery, plant or furniture owned by an assessee and used for the purpose of any business or profession carried on by him". Therefore, whatever computation is made strictly pertain to the "business or profession carried on by an assessee" in which that particular building, machinery, plant or furniture is used as an asset. In the present case, the tax exempt business of garments was being carried on. For this business certain machinery was purchased. This machinery, due to compelling circumstances, had to be sold and yielded some gain, which cannot be divorced from the business for which the asset was used. The 'gain' is, thus, clearly creditable to the P&L Account of the business of manufacture and sale of garments. I feel fortified in my view when I read Rule 7 as a whole as under:--
"7. Disposal of assets and treatment of gains or losses. Nothwithstanding anything contained in this Ordinance---where, in any income year,---
(b) any class of assts is disposed of by any assessee,--
(i) if the sale proceeds thereof exceed the written down value, the excess shall be deemed to be the income of the assessee of that year chargeable, under the head `income from business or profession';
and the business or profession for the purposes of which the said class of assets was used before its disposal, shall be deemed to be carried out by the assessee during that year and all the provisions of the Ordinance shall apply accordingly "
There seems little scope for doubt that where any asset is sold after the close of business, the business (though closed) is to be deemed to have continue even after the closure of the accounts and the expiry of the income year. It is manifest from the language of the enactment that the gain (or loss) arising on sale of assets used in a particular business is to be treated as gain or loss relating to `such business'. In the present case the Department has nowhere attempted to show that the appellant was a vendor of machinery and the gain was attributable to that business. In this view of the matter vacate the order of the learned Commissioner (Appeals) and undo the treatment meted out by the assessing officer to hold that once manufacture and sale of garments by the appellant has been accepted to be exempt under clause 125 of the Second Schedule, the `gain' arising out of the sale of asset(s) used for the business of manufacture of garments is also to be treated as part of Profit/ Loss of that `such business', hence, entitled to exemption. The appeal succeeds in consequence
M.B.A./1206/T appeal allowed.