I.TAS. NOS.2475/LB, 2412/LB AND 2413/LB OF 1985-86, DECIDED ON 30TH APRIL, 1990. VS I.TAS. NOS.2475/LB, 2412/LB AND 2413/LB OF 1985-86, DECIDED ON 30TH APRIL, 1990.
1991 P T D (Trib.) 8
[Income-tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Accountant Member and Abrar Hussain Naqvi, Judicial
Member
I.TAs. Nos.2475/LB, 2412/LB and 2413/LB of 1985-86, decided on 30/04/1990.
(a) Income Tax Ordinance (XXXI of 1979) -----
----S. 10---Income-tax and super-tax payable by the assessee-company has to be treated as income retained for the purpose of levy of surcharge.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 107---Plant and machinery---Installation charges, held, were not included in cost of plant and machinery unless such concession was given by the Central Board of Revenue.
1987 PTD 116 fol.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 59(1) & 156---Interest---Assessee had not filed any appeal against the disallowance of interest under S.59(1) and thus disallowance gained finality which could not be challenged on the pretext of an order under S.156.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.107 & Third Sched., Item. 5(1)(c)---Income Tax Rules, 1982, R.48(2)(a)(i)-- Tax rebate--Plant and machinery" as defined in R.48(2)(a)(i), Income Tax Rules, 1922 indicates that such plant and machinery has to be directly connected with the actual production Of goods or execution of the main business and does not appear to be meant for a fork lift truck or any other truck which is meant for transporting the, goods from one point to another point either within the factory premises or outside.
Although the legislature has used the term installed in Rule 5(1) of the Third Schedule of the Ordinance the scope appears to have been further enhanced by the mention of ships or motor vehicles in Clause (c) of the same sub-rule. Thus, the provisions of Rule 5(1) (c) of the Third Schedule are distinguished from those of the provisions of section 107 of the Ordinance. The definition of plant and machinery given in rule 48(2) of the Rules appears to be indicative that such plant and machinery has to be directly connected with the actual production of goods or execution of the main business such as construction of roads and dams etc. and it does not appear tot meant for a fork lift truck or any other truck which is meant for transporting the goods from one point to another point either within the factory premises-or outside.
Rule 48(2) while giving a meaning of the term plant and machinery includes such non-fixed or non-installed apparatus and appliances including metering and testing apparatus and those for mechanical and electrical control etc. Not only that but also their components and spare parts which are obviously not installed are also included in the meaning of plant and machinery. Thus, the tax rebate on these items may have been allowed as these may be directly connected with the production and such allowance could not form basis for allowance of rebate under section 107 in respect of fork lift truck as the same has not been made to be directly related with production of goods. Thus, the investment made in the purchase of a fork lift truck is not entitled to tax rebate under section 107 of the Ordinance.
(e) Income Tax Ordinance (XXXI of 1979)----
----S. 107---Reduction of tax credit allowed under S.107 from the cost of machinery for depreciation purposes---Tribunal ordered that such credit should not be reduced from W.D.V.
Arshad Malik, D.R. for Appellants (in I.TA. No. 2475/LB of 1985-86).
Muhammad Iqbal Chaughtai, ITP for Respondents (in I.TA. No, 2475/LB of 1985-86).
Muhammad Iqbal Chughtai, ITP for Appellants (in LT.As. Nos.2412/LB and 2413/LB of 1985-86).
Arshad Malik, D.R. for Respondents (in I.TAs. Nos.2412/LB and 2413/LB of 1985-86).
Date of hearing: 7th April, 1990.
ORDER
The above three appeals arise out of an order dated 28-9-1985 recorded by the learned C.I.T(A), Zone 1, Lahore in the case of a company deriving income from manufacture and sale of pharmaceutical products.
2. The learned representatives of both the parties have been heard and the relevant orders perused. The appeals are decided in the following manner.
Assessment Year 1980-81.
3. In this year the department has preferred an appeal with the following grounds
1. That the learned C.I.T(A), is not justified in holding that Income-tax and Super-tax payable by the company should be treated as income retained for the purpose of levy of surcharge.
2. That the learned C.I.T.(A), has erred in holding that the workers welfare fund is chargeable on company's income after the charge of workers welfare fund."
4. The issue of surcharge in respect of tax liability has been settled by the Karachi High Court. The issue has been decided against the department. This being a decided issue called for no interference on our behalf. On the issue of workers welfare fund we find that the assessing officer computed the same at Rs.238,674 on an income of Rs.11,933,683 before charging of such fund in the following manner;
| Balance income before W.W.F | Rs.11,933,683 |
| W.W. Fund @ 2% | Rs. 238.674 |
| Taxable income | Rs.11,695,009 |
5. The assessee objected to this treatment with the contention that this fund should be charged at 2% of the income not of this fund itself. In other words the assessee was suggesting that the workers welfare fund should be computed by applying the factor of 2/102 instead of 2/100 to the income before levy of dund. This plea was accepted by the learned C.I.T(A), against which the department has come in further appeal. However, we find that the department has itself adopted the same formula in the assessment years 1982-83 and 1983-84. Thus there appears to be no reason for us to interfere in this formula which has been adopted by the department in the subsequent years especialy when there is no change in any rates or rules in this regard. The departmental appeal on this issue is dismissed.
Assessee's appeal for 1982-83.
6. In this year the assessee feels aggrieved against non-allowance of tax credit under section 107 of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) in respect of installation charges and cost of lift truck as well as the reduction of tax credit from the W.D.V. of machinery in respect of other investments where tax credit under section 107 of the Ordinance was allowed. The assessee also feels aggrieved against disallowance of interest amounting to Rs.533,978 as deductible expense.
7. On the issue of tax credit under section 107 of the Ordinance in respect i of installation charges, the learned A.R. of the assessee conceded that the issue had already been decided in favour of the department. However, on the issue of reduction of tax credit under section 107 of the Ordinance from the W.D.V. or the assets for the periods of allowing depreciation, this issue has already been decided in favour of the assessee. The learned counsel of the assessee has cited a case reported as (1987)-PTD-116 in respect of these two issues. As a result the assessee's appeal in respect of installation charges for the purpose of rebate under section 107 is dismissed whereas that on the issue of deduction of tax credit for the purpose of depreciation is accepted. On the issue of interest which was not allowed as an expense it was submitted that the same had been disallowed in the following manner:--
"An amount of Rs.973,818 has been charged to the P&L account, on account of interest expenses. The assessee was specifically called for to allocate the said amount of interest to the pre-operational and post-operational period. The bifurcation of the said expenses as provided is as under:--
| Before use of machinery | Rs.553,978 |
| After use of machinery | Rs.419,840 |
The perusal of above statistics clearly shows that the interest expenses before the use of machinery at Rs.553,978 should have been capitalised being preliminary expenses. The explanation of the assessee on the said issue has no force. Thus the amount of Rs.553,978 wrongly charged to P & L account is added back to the assessee's income declared for the year.'
8. The learned A.R. of the assessee has relied on a case of Supreme Court of India reported as (1966) 60 ITR 52 in support of assessee's contention that the interest expenditure should be allowed in full irrespective of the nature of expenses. It was contended that the expenditure was allowable irrespective of the fact whether the funds have been borrowed for the purpose of fixed capital or working capital requirements. However, we would like to reproduce the order of the learned CIT(A) on this issue which will decide the matter.
"The last objection covers the alleged disallowance as a deductible expense of interest charges of Rs.553,978 on loan used for the business. This objection cannot be admitted in appeal. In the impugned order passed under section 156 the assessee had pointed out that amount of Rs.553,976 on account of interest was capitalized but no depreciation was allowed and thereupon the Income Tax Officer allowed the depreciation admissible. The type of objection raised does not arise from the impugned order. It is to be pointed out that original assessment for the year was made under section 59(1) of the Ordinance on 26-12-1982. An appeal was lodged there against as noted above but no such objection was raised therein. The Income Tax Officer passed the first rectification order under section 156 on 29-3-1983 but no appeal was lodged against that order. The second order passed by the ITO under section 156 was dated 30-4-1983 which is the subject-matter of the present appeal. It is contended by the learned counsel that the earlier orders got merged in the final impugned order under section 156 dated 30-4-1983 and as such the objection raised is admissible. I am unable to accept this viewpoint. The impugned order under section 156 is the final order only in respect of the issues raised therein and the other issues became final in the earlier orders and as such the appellant cannot claim that the objection raised in respect of the disallowance of interest charges of Rs.553,978 which became final in the earlier orders can be raised at this stage. If the viewpoint of the learned counsel were accepted, it will mean that the limit of one month fixed for filing of appeal can be extended to any period of time by virtue of subsequent orders made under section 156. To me this appears to be absurd. The objection raised is accordingly not entertained as the same did not arise out of the impugned order."
9. It appears from the order of the learned CIT(A) as reproduced above that the disallowance of interest had been made .while passing the order under section 59(1) of the Ordinance whereas the present appeal has been filed against an order under section 156 of the Ordinance. It also appears from the order of the learned CIT(A) that the assessee had pointed out to the assessing officer that no depreciation had been allowed against the capitalisation of Rs.553,976 on account of interest. It also appears that the assessee did not prefer any appeal against the order under section 59(1) of the Ordinance in which the disallowance of interest amounting to Rs.553,976 was made. In fact the learned A.R. did not argue this aspect of the issue before us at all. Thus in our view the learned CIT(A) was fully justified in not entertaining the assessee's appeal at this stage. The assessee did not file any appeal against the disallowance of interest under section 59(1) and thus that disallowance gained finality which could not be challenged on the pretext of an order under section 156. The assessee's appeal on this issue is thus dismissed.
10. This leaves us with only one issue to be decided viz. whether the' assesses was entitled to tax rebate under section 107 of the Ordinance in respect of lift truck. As per the assessment order an amount of Rs.755,036 had been "shown on account of investment in lift truck". However, the assessing officer was of the view that this item did not form plant or machinery and did not come under extension. Thus tax credit under section 107 was not allowed on the said investment. This disallowance was upheld by the learned CIT(A) after a detailed examination. The assessee's plea that the truck in fact formed a part of the plant and machinery and that depreciation had been allowed on this lift truck at the rate applicable to plant and machinery did not find favour with the learned CIT(A). The learned CIT(A} held that this did not formed a part of plant and machinery. The learned A.R. of the assessee has argued that although the fork lift truck is a moving item of plant and machinery and is not installed (fixed) it was entitled to tax credit under section 107 of the Ordinance. The learned A.R. of the assessee argued that plant and machinery included various items which are not affixed to place but still qualified for rebate and stated that the assessee had already obtained such rebate in respect of other non-fixed items such as velometer, sampling pump, electronic balance etc. The learned A.R. relied upon a decision of tire Tribunal reported as 1988 P T D 775 in support of his contention. The learned A.R. also referred to the definition of plant and machinery contained in Rule 48(2)(a)(i) of the income Tax Rules, 1982 (hereinafter referred to as Rules) the learned A.R. also referred to the provisions of. Rules regarding clarification for allowances of initial depreciation.
11. First we shall deal with the decision of the Tribunal reported as 1988 P T D 775 (supra) wherein it was held that tax credit under section 107 of the Ordinance was admissible only on amount of investment for the purchase of plant and machinery for installation and if the investment was made for purchase of machinery not intended for installation the concession would not be allowed. In that decision the investment in purchase of plant and machinery was divided into following two categories;
(a) machinery purchased for installation,
(b) machinery purchased not for installation (for sale etc.).
It was held by the Tribunal in the former case that the rebate under section 107 was allowable while in the latter it was not. It was also held that in order to qualify for the concession the investment made in the purchase of machinery should be for installation and not for any other purposes. The learned A.R' appears to he presuming that by making two categories of the investments made in purchase of plant and machinery, viz., for installation and not for installation (for sale etc.) the Tribunal has perhaps laid down the Rule that `not for installation' implies only investments in plant and machinery not meant for own use. However, we do not think that this case law relied upon by the learned A.R. of the assessee is relevant as the term installation has not been discussed in terms of assessee's contention in detail.
12. Next we shall take the provisions of Rule 48(2) (a) (i) of the Rules cited by the learned A.R. of the assessee. Rule 2(a) defines plant and machinery Rule 2(a) (i) reads as follows;
"machinery, operated by power of any description, such as is used in any industrial process, including the general transmission and distribution of power, for use in process directly connected with the extraction of minerals and timber, construction of buildings, roads, dams, bridges and similar structures and the manufacture of goods."
13. This sub-rule 2(a) of Rule 48 goes on further to include certain other apparatus and appliances and their components etc. m the plant and machinery for the purpose of Rule 48. At this juncture we shall also refer to Rule 5 of the Third Schedule to the Ordinance regarding initial depreciation. Sub-rule (1) of Rule 5 of the Third Schedule lays down the categories of assets qualifying for initial depreciation installed during the specified period and the rates of such initial depreciation. Clause (c) of the said sub-rule (1) reads as follows;
| "in the case of machinery or plant other than (X-Ray and electrotherapeutic apparatus and accessories, or) ships or motor vehicles not plying for hire). | Twenty-five percent of the written down value, and in the case of an industrial undertaking commencing commercial production on or after the first day of July, 1981, and before the first day of July, 1988, forty percent of the written down value." |
14. Although the legislature has used the term `installed' in Rule 5(1) of the Third Schedule of the Ordinance, the scope appears to have been further enhanced by the mention of ships or motor vehicles in Clause (c) of the same sub-rule. Thus in our view the provisions of Rule 5(1) (e) of the Third Schedule are distinguished from those of the provisions of section 107 of the Ordinance. The definition of plant and machinery given in rule 48(2) of the Rules appears to be indicative that such plant and machinery has to be directly connected with the actual production of goods or execution of the main business such as construction of roads and dams etc. and it does not appear to be meant for a fork lift truck or any other truck which is meant for transporting the goods from one point to another point either within the factory premises or outside. The learned A.R. of the assessee has cited the names of velometer, sampling pump and electronic balance etc. as examples of non-fixed items on which rebate under section 107 has been allowed and on that analogy has concluded that such tax credit should also be allowed on a fork lift truck although not installed. We again do not find ourselves in agreement with this argument of the learned D.R. of the assessee. Rule 48(2) while giving a meaning of the term of plant and machinery includes such non-fixed or non-installed apparatus and appliances including metering and testing apparatus and those for mechanical and electrical control etc. Not only that but also their components and spare parts which are obviously not installed are also included in the meaning of plant and machinery. Thus in our view the tax rebate on these items may have been allowed as these may be directly connected with the production and such allowance could not form basis for allowance of rebate under section 107 in respect of fork lift truck as the same has not been made to be directly related with production of goods. Thus we are of the considered view that the investment made in the purchase of a fork lift truck is not entitled to tax rebate under section 107 of the Ordinance and we dismiss '` the assessee's appeal on this issue.
15. As a result the assessee's appeal for 1982-83 on the issue of reduction of tax credit from the W.D.V. of the machinery succeeds whereas on the other issues it fails.
Assessee's appeal for 1983-84.
16. The assessee has taken the following grounds of appeal in this year;
(1) The learned CIT(A) has erred in upholding the non-allowance of the tax credit on Rs.431,375 being the cost of installation of the machinery entitled to the tax credit under section 107 of the Income Tax Ordinance, 1979.
(2) The learned Commissioner has further erred in maintaining the reduction of the tax credit allowed from the cost of additions to machinery thereby upholding the curtailment of statutory tax depreciation claim of the appellants.
17. On the first issue the assessee's appeal in 1982-83 has already been dismissed but on the second issue it was accepted in that year. Since the circumstances are similar we are again inclined to accept the assessee's appeal in respect of reduction of tax credit allowed under section 107 of the Ordinance from the cost of machinery for depreciation purposes and direct that such credit should not be reduced from the W.D: J. However, on the other issue we dismiss the assessee's appeal. All the three appeals are decided in the above manner.
M.BA/933/T Order accordingly.